A DIAGNOSIS OF PRODUCT AND FACTOR MARKET COORDINATION IN THE BEAN INDUSTRY! OF NORTHEAST BRAZIL Thesis far the Degree of Ph. D. MICHIGAN STATE UNIVERSITY DONALD WALTER LARSON 1968 j" ‘ ,, . ' -" 2.13 RA '2 3? Michigan SL5: A? University {L an a «:21 This is to certify that the thesis entitled A Diagnosis of Product and Factor Market Coordination in the Bean Industry of Northeast Brazil presented by Donald Walter Larson has been accepted towards fulfillment of the requirements for Ph.D. Ag. Econ. degree in Major professor [hm June 18, 1968 0-169 ABSTRACT A DIAGNOSIS OF PRODUCT AND FACTOR MARKET COORDINATION IN THE BEAN INDUSTRY OF NORTHEAST BRAZIL by Donald Walter Larson The major purpose of this dissertation was to describe and analyze the organization and operation of product and factor markets in the bean industry of Northeast Brazil. This was part of a larger study of the role of marketing in the process of economic deveIOpment. A major concern has been to identify means of inducing more rapid rates of growth through improved coordination of the marketing System linking rural and urban areas. Improving market coordination may, therefore, encourage firms to expand output and improve productivity leading to agricultural deveIOpment and to economic growth and deveIOpment generally. The field work for this study was conducted in Northeast Brazil by a joint Michigan State University- SUDENE task force. Three sources of data were used. Secondary sources provided information on the historical development of the Northeast, agricultural institutions and agricultural production. Field surveys conducted with input distributors, bean producers and bean assemblers Donald Walter Larson were used to obtain information on the economic rela- tionships, attitudinal and communication characteristics of the marketing participants. Case studies of selected market activities provided additional insights on the nature of the system. A traditional agriculture still predominates in the Northeast Brazil bean industry. Bean producers and assemblers have low levels of education and literacy. Exposure to radio, newspapers and magazines is also low. A high percentage of the producers and assemblers hold traditional attitudes toward the modern world. Most producers have little knowledge of modern agricultural practices and inputs. Low bean yields and soil fertility indicate a great need for these inputs. High input prices relative to product prices discourage greater use of these inputs on bean farms. Factor markets supplying modern inputs lack coordina- tion with the industrial sector. Modern inputs are usually not available in rural trading centers. Currently, low farm buying power limits the size of this market for new input forms. Poor linkages between assemblers and urban markets prevent effective market coordination. A poor transpor— tation system, little market information and the absence of operational grades increase assembler costs of Donald Walter Larson distribution. The same items reduce the competitive behavior of assemblers even though large numbers of firms do exist. Since assembler margins are not large, vertical integration or coordination which reduces the number of transactions and increases scale of Operations seems the most liekly way to reduce the cost of marketing. From these observations a strategy for change emerged wherein marketing becomes a dynamic element of a compre- hensive plan for accelerating economic growth and deveIOpment. High priority needs to be placed on the introduction of modern farm inputs into traditional agriculture through the factor market. Input and output pricing policy may be adjusted to speed the ad0ption rate of these new inputs. As this occurs, it becomes necessary to stabilize and modernize farm product markets. Improving market information, roads and increasing credit availability for producers and assemblers will contribute to better product market coordination and lower costs. Effective product market coordination is necessary to transmit market demands to producers or little will be accomplished through greater farm output. Improving product and factor market coordination can therefore be a dynamic element for accelerating agricultural deveIOpment. A DIAGNOSIS OF PRODUCT AND FACTOR MARKET COORDINATION IN THE BEAN INDUSTRY OF NORTHEAST BRAZIL By Donald Walter Larson A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics I968 I" u u I” .4 (I 5 32 3:: 9! //»'5/‘> ACKNOWLEDGMENTS The research for this study was carried out during the period September, I966, to December, I967, while the author was located at Recife, Brazil. The financial support for this study came from the Latin American Market Planning Center at Michigan State University. Special appreciation is due Professor Harold M. Riley, thesis advisor, for his patience, liberty of time and helpful suggestions throughout the deveIOpment and completion of this study. Through his guidance and assistance, the author became interesmdin the present field of study. Sincere thanks are expressed to Professor Lawrence W. Witt, major professor, for his suggestions and criticisms of earlier drafts. These added immeasurably to the final manuscript. Appreciation is also due to the other members of the committee: Professors Charles C. Slater and James D. Shaffer for their comments and suggestions. Sincere thanks are due to Dr. Kelly M. Harrison, Chief of Party, who contributed in numerous ways to the completion of this study and to Ferdinando Neves, Brazilian Chief of Party, who helped solve many technical problems of the research. Thanks are also expressed to Joseph Weiss and Jaime Terencio each of whom contributed to questionnaire devel0pment, translation and to the collection and processing of the data used in this study. The author is indebted to Dr. Lawrence Boger and the Department of Agricultural Economics for financial and other assistance during my graduate study at Michigan State University. Finally, loving thanks are due the author's wife, Karen, who not only typed earlier drafts of this study but also exhibited remarkable confidence and patience throughout the graduate study period. Any errors of fact or logic are the sole responsibility of the author. TABLE OF CONTENTS Acknowledgments List of Tables. List of Illustrations Chapter I Introduction The Research Program. The Problem . Objectives. Procedures. Producer Sample . Assembler Sample. Input Distribution Sample . Plan of Thesis. II Some Theoretical Concepts Concerning The Role of Marketing in Economic Development. Introduction. Marketing and Economic DeveIOpment. Marketing and Agricultural DeveIOpment . Market Performance Under Conditions of Risk and Uncertainty. Product Market Risk and Uncertainty . Factor Market Risk and Uncertainty. Summary . Page ii ix XV l0 ll l2 IN IS IS I8 l8 20 26 33 35 to us Chapter Page III Overview of the Northeast Economy, Its Agriculture and The Bean Industry . . . . . . . . . . . . . . . . #8 Geographic Setting. . . . . . . . . . A8 Northeast Economy . . . . . . . . . . SI Northeast Institutions. . . . . . . . 56 Northeast Agriculture . . . . . . . . 60 Income Characteristics of Surveyed Farmers . . . . . . . . . . . . . . . 6h Personal Characteristics of Surveyed Farmers . . . . . . . . . . . . . . . 66 The Bean Industry . . . . . . . . . . 73 Selected Survey Areas . . . . . . . . 79 Summary . .. . . . . . . . . .. . . 80 IV Food, Nonfood and Factor Input Distribution in Rural Areas . . . . . . . . . . . . . 83 Introduction. . . . . . . . . . . . . 83 Urban Industrial Structure. . . . . . 8h Food and Non Food Distribution. . . . 87 Food Consumption. . . . . . . . . . . 95 Non-Food Consumption. . . . . . . . . 99 Factor Input Distribution . . . . . . l03 Types of Distributors . . . . . . . . IOA Inputs Sold . . . . . . . . . . . . . IOS Insecticides and Fungicides . . . . . IO7 Flows and Tractors. . . . . . . . . . IO7 Chapter Good Quality Seed . . . . Transaction Size. Marketing Margins Summary . Production and Marketing Activities of Bean Growers Introduction. Organization of Farm Production Land Use. Area Planted. Yields. Producer Response to Prices Other Products Produced . Labor . Total Cash Sales. Capital Investment. Cultural Practices. Adoption of Modern Production Practices Input Availability. Producer Attitudes Toward Fertilizer. Sources of Credit Amount Borrowed . Length of Loan. Page IOB IO9 IO9 II2 llS IIS ll6 ll6 II7 ll9 I2I l23 IZA I26 I29 l3l I32 I35 I36 l39 IAO IAZ Chapter Page Cost of Borrowing . . . . . . . . . . th Possible Uses of Additional Credit. . IAB Non Borrowers'Attitude Toward Credit . Ihh Description of Producer Marketing Activities. . . . . . . . . . . . . . Ih6 Quantities Harvested and Sold . . . . Ih6 Average Farm Price. . . . . . . . . . lh9 Number of Timing of Sales . . . . . . I52 Summary Diagnosis of Market Related Barriers in Bean Production . . . . . IS9 VI The Bean Assembly Market System. . . . . I65 Introduction. . . . . . . . . . . . . I65 Structural Characteristics. . . . . . I66 Description of Market Channels. . . . I78 Analysis of Market Performance. . . . I88 Prices and Margins. . . . . . . . . . I90 Competitive Behavior. . . . . . . . . I95 Market Information. . . . . . . . . . I98 Grading and Quality Improvement . . . 202 Bean Storage. . . . . . . . . . . . . 205 Storage and Handling Losses . . . . . 209 Transportation Barriers . . . . . . . 2l3 Credit Barriers . . . . . . . . . . . 2I6 Input Barriers. . . . . . . . . . . . 220 Chapter Page Attitudes of Assemblers . . . . . . . 22I Summary and Diagnosis of Barriers in Bean Assembly Markets . . . . . . . . 228 VII Conclusions and Recommendations. . . . . 236 Introduction. . . . . . . . . . . . . 236 Conclusions . . . . . . . . . . . . . 238 Agricultural Setting. . . . . . . . . 239 Traditional Production. . . . . . . . 2A3 Consumer Goods and Factor Markets . . 2&5 Product Market. . . . . . . . . . . . 2A7 Recommendations . . . . . . . . . . . 25l Seed Improvement Program. . . . . . . 252 Fertilizer Response Program . . . . . 25h Fertilizer Pricing Program. . . . . . 256 Input Credit Program. . . . . . . . . 257 Price Stabilization Program . . . . . 258 Village to Market Center Roads. . . . 26l Market Information Program. . . . . . 262 A Concluding Comment. . . . . . . . . 263 List of References. . . . . . . . . . . . . . . . . 26S viii Table 3.l LIST OF TABLES Percentage Distribution of Rural and Urban Population in the Northeast and Brazil, I9 0. Indices of Real Value of Agricultural and Livestock Production in Northeast Brazil, l952-62 Average Yield in Kilograms Per Hectare of Selected Crops in Various Countries Size of Farm, Cash Farm Income and Land Values by Commodities Studied in Northeast Brazil, I966. Some Personal Characteristics of Producers by6Types of Farming, Northeast Brazil, 19 7. . . . Literacy and Comprehension Test Among Producer Groups, Northeast Brazil, I967 . Percentage Distribution of Birthplace Among Producer Groups, Northeast Brazil, I967. Percentage Distribution of Land Tenure Arrangements in Farm Survey, Northeast Brazil, I967. Per Capita Consumption and Income Ela- sticity of Demand for Basic Foods, I960 . Estimates of Supply and Demand of Beans in Brazil . . . . . . Bean Production in Each Region of Brazil I960/I965 . Bean Production, Area Planted and Yield for Selected States I960/I965 . Page 60 62 63 65 67 70 7T 72 7A 75 77 78 :Ji AIS 7.. ‘ I ll. ul- Table 1.. .l0 .ll .I2 .I3 .Ih .15 Number of Firms in Selected Recife Industries, I967. Food and Non Food Goods Sold in a Typical Rural Feira in Bean Areas . Weekly Feiras in Bean Area: Location and Distance Traveled by Farmers, I967. Frequency of Feira Attendance by Bean Producers, I967 . Types of Transportation Used by Bean Producers, I967 . . Types of Roads Passing Farms of Bean Producers, I967 . Monthly Food Expenditures, Percent Gross Farm Sales Spent on Food and Number of PeOple Fed by Bean Producers, I967. Scores on Innovation Index by Mont'IIy Food Expenditures, I967. . . Percentage of Bean Producers Buying Selected Food Items Distribution of Scores on Innovation Index by Scores on Food Purchase Index. Percentage of Bean Producers Owning Selected Non-Food Consumption Items, I967 . Distribution of Scores on Innovation Index by Ownership of Consumer Goods. Percentage of Bean Producers Willing to Buy Selected Goods as a Result of Higher Incomes, I967 . . . . . . . . . Distribution of Scores on Innovation Index by Scores on Investment PrOpensity Index. Percentage of Distribution Firms Selling Selected Farm Input Items in Areas Studied, I967 . . . Page 85 87 9] 92 92 9A 96 96 98 99 I00 IOI I02 I03 I06 Table 5.I2 Selling Price of Selected Farm Inputs by Firms in Areas Studied, I967. . . Kilos of Rice Required to Purchase One -Kilo of Fertilizer. Land Utilization on All Bean Farms, I967. Hectares Planted Per Farm to Beans in Irece, AI-Pe, and Combined Areas, I965-l967 . Score on Innovation Index by Perception of Credit as a Factor Limiting Bean Area Planted . Bean Yields Per Hectare in Irece, AI-Pe and Combined Area, I96S-l966. Relationship of Scores on Innovation Index to Scores on Output Response Index. Relationship of Farm Size to Use of Hired Farm Labor. . . . . . . . Total Cash Farm Sales of Bean Producers and Percentage Composition of Sales by Areas Studied, I966 . Relationship of Scores on Innovation Index to Total Cash Farm Sales, I966. Relationship of Scores on Output ReSponse Index to Total Cash Farm Sales, I966. Average Value of Farm Land Per Farm and Eagg Value Per Hectare by Areas Studied, 9 . . . . . . . . . . . Percentage of Producers Using Selected Farm Inputs by Areas Studied, I966. Relationship of Scores on Literacy Education Index to Scores on Innovation Index . Relationship of Scores on Innovation Index to Source of Innovation Information . Page III II2 lI7 II8 II9 l20 I23 I25 I26 I28 l28 I30 I32 I33 I35 Table Relationship of Scores on Innovation Index to Knowledge of What is Fertilizer. Scores on Fertilizer Pr0pensity Index by Bean Production Area Studied. Relationship of Scores on Innovation Index to the Percentage of Bean Producers Who Borrowed Money, I966. Percentage of Bean Producer's Loans Obtained From Different Sources in Areas Studied, I966 Relationship of Scores on Innovation Index to Quantity Borrowed on First Loan. Bean Production and Sales Characteristics Per Farm by Areas for I965 and I966 Monthly Distribution of Sales Transactions and Farm Prices, I966 Relationship of Scores on Index of Output Response to Farm Price of Beans, I966 . Percentage of Producers Choosing Each of of the Three Alternative Payoffs. Relationship of Scores on Literacy- Education Index 9 Fatalism Index. Estimated Number of Assembly Firms by Categories for the Two Areas Under Study, I967 . . . . . . . . . . . . . Structural Characteristics of Average Bean Assembly Firms, Alagoas-Pernambuco Area . Structural Characteristics of Bean Assembly Firms, Irece. . Percent of Total Beans Moving Through Various Numbers of Market Transactions Between Producers and Retailers Page I37 I39 Ihl Ihl IAZ I47 ISO ISI '56 l58 I67 I69 l7l I89 Table Page 6.5 Differences in Prices Received by Bean Assemblers in Two Assembly Markets. . . . . l9l 6.6 Distribution of Sales Transactions and Average Transaction Size, Buyer Types, I966. . . . . . . . . . . . . . . . . . . I93 6.7 Relationship of Scores on Modernity Index to Credit Advancement . . . . . . . . I95 6.8 Relationship of Scores on Modernity Index Toward Assembler Belief in Social anctions Against Price Competition . . . I97 6.9 Assembler and Producer Exposure to Mass Media Information . . . . . . . . . . . . . I99 6.I0 Relationship of Size of Firm to its Market Information Advantage Over Suppliers . . . . . . . . . . . . . . . . . 20l 6.II Relationship of Scores on Output Response Index to Frequency of Producer-Buyer Contact . . . . . . . . . . . . . . . . . . 202 6.I2 Assembler Awareness of Quality Signals. . . 206 6.I3 Storage Capacity and Actual Quantity Stored by Bean Assemblers and Growers, I966. . . . . . . . . . . . . . . . . . . . 207 6.Ih Relationship of Scores on Innovation Index to Farm Storage Capacity, I966 . . . . . . . 207 6.IS Relationship of Scores on Storage Barrier Index to Size of Firm . . . . . . . . . . . 208 6.16 Stora e and Handling Losses for Beans in the A -Pe and Irece Market Channels . . . . 209 6.I7 Types of Storage Used by Bean Assemblers and Producers . . . . . . . . . . . . . . . 2l0 xiii Table Annual Bean Storage Costs per Kilogram in Northeast Brazil, I966 . Predominate Modes of Farm to Assembly Market Transportation in Bean Areas, I966 Assembler Response to Questions Identifying Major Factors Which Limit Their Expansion Monthly Interest Rates Paid by Bean Assemblers by Source of Credit. Criteria Used in Making Supplier Loans as a Function of Firm Size. The Variation in Willingness to Assume Risk by Size of Firm. Page 2I2 2Ih 2I6 2I8 2I9 227 LIST OF ILLUSTRATIONS Page Inducing Internal National Market Development . . . . . . . . . . . . . . . . 2% Scale Economies as a Function of Increasing Firm Size. . . . . . . . . . . . 37 Producer Demand Curve for Purchased Factor Inputs . . . . . . . . . . . . . . . A3 Map of Brazil . . . . . . . . . . . . . . . #9 Northeast Brazil Drought Polygon. . . . . . 52 Bean Channel Map AI-Pe. . . . . . . . . . . I79 Bean Channel Map Irece, Bahia . . . . . . . I80 XV "Somente Uma Agricultura PrOSpera Pode Fazer Um Povo Realmente Feliz"l "Only A Prosperous Agriculture Can Make People Truly Happy” ”Markets And Competition Now Must Be The Hand That Speeds The Flow Making, In One Rostovian Leap Corn Dear, And Fertilizer Cheap”2 IA Brazilian proverb found on the wall of a restaurant- Ian the dusty road toward Santanado Ipanema, Alagoas. zStanza v of "The Old Agricultural Lag" by Kenneth E. Boulding in No Easy Harvest, Maz F. Millikan and David Hapgood (Boston: Little Brown and Co., I967) p. xii. xvi CHAPTER I INTRODUCTION The Research Program This doctoral dissertation was carried out as part of a more comprehensive study of marketing institutions in develop- ing countries. Michigan State University (MSU) has carried out this study through two interrelated contracts financed by the Agency for International DeveIOpment (USAID). The first contract, made in April, I965, initiated the Latin American Food Marketing Study for the purposes of studying the role of food marketing in economic deveIOpment. The second contract, made in February, I966, created the Latin American Market Planning Center which broadened the scope of work to include the marketing of industrially produced consumer goods and farm inputs as well as food products. The main purpose of the second contract was to provide information directly useful to market planning activities in deveIOping countries. The first phase of this research work was carried out in Puerto Rico during I965. Two other countries, Brazil and Bod hue, were selected for study in the second phase of the project during I966-67. In Brazil, the project was carried forward through a three party agreement including USAID, MSU and a Brazilian government agency called SUDENE -- (Superintendencia Para 0 Desenvolvimento do Nordeste do Brasil). The program of work contained in this agreement identified the need for a study of the market processes in Recife, Brazil, and its foodshed. In the first two master plans for deveIOpment of the Northeast, SUDENE had placed a great deal of emphasis upon the need for a build-up of agricultural and industrial production with little or no emphasis upon improvements in the distribution system. Because production increases did not attain the levels that had been expected, a need for greater concern about the role of marketing appeared. In the third master plan, SUDENE made provisions for the concomitant build-up of marketing organizations and infrastructure. The AID mission in Brazil also expressed an interest in a marketing research project because most of the mission's emphasis had been upon the deveIOpment of production-oriented projects with little or no regard as to where the production nfiqht be sold. On some occasions, projects were said to have failed because no one had given adequate attention to tlm marketing problems. Thus, favorable conditions existed for a study of the marketing system in Recife, Brazil, during I966-67. An interdisciplinary approach to the research on this project was chosen in order to analyze more effectively the diverse problems of marketing in a deveIOpmentaI setting. The academic disciplines of marketing, agricultural economics, communications, and systems engineering were used to make possible an integrated approach in problem solving research. Such an approach made it possible to view the macro- marketing relationships of an entire system as Opposed to the more conventional micro or firm approach to marketing problems. Thus, the relevant problem is not how the firm can change to increase its sales at the expense of its competitors, but rather how the marketing system can be changed to increase its output of goods and services for the welfare of society. The first question is in the category of a "zero-sum" activity, whereas the second is a “positive-sum" activity. Survey instruments were deveIOped which included questions from each of the disciplines identified above in an attempt to evaluate the performance of a marketing system in a deveIOping country. As such, the analysis dealt with the basic economic relationships as well as socio-psychol0gical and communications variables. The Problem The Northeast of Brazil is an extremely poor area of the world and the poorest region of a deveIOping Brazil. About one-third of the total population of Brazil lives in the Northeast under extreme conditions of poverty. Over half of the consumer's I960 per capita income of $lh0 was Spent on food.I Illness, malnutrition, and a high infant mortality rate are characteristic of the region. Even under these conditions there exists a high birth rate, resulting in a high rate of population growth (2.h% annually). This also means a rapidly increasing labor force in a region with high levels of unemployment. The increasing population and growing per capita incomes give rise to a rapidly increasing demand for food. A low absolute level of food consumption further complicates the issue. In I963, the average daily caloric intake was only I,h72 calories per person based upon actual surveys of what people said they consumed, while a more aggregate estimate of 2,000 calories per person per day is based upon regional production and IStefan H. Robock, Brazil's Developing Northeast: A Stud of Re ional Plannin and’ForéTin Aidfi (Washington, D.C.: Ihe arooEings Institution, I923) p. A6. Ill I'l‘ lino population data.2 Thus, improved food production and distribution is essential to any plans for regional development. In addition there is a high rate of rural to urban papulation migration presently occurring in the Northeast. Nearly two-thirds of the 22.h million people living in the Northeast during I960 were in rural areas. Most of the increase in rural population is channeled into the urban population centers within the Northeast and Southern Brazil. Low income levels, poor living conditions and a highly unproductive agriculture all contribute to a high rate of out-migration from or within agriculture. Those who migrate to the urban centers are usually illiterate, uneducated and were previously under-employed in the rural areas. High urban unemployment levels make it difficult for these people to find productive employment in the urban area. The result is a transfer of unemployed human resources from the rural to the urban areas. Once in the urban centers, these peOpIe become dependent upon it, but contribute nothing productive to it. They increase the demands upon an already inadequate food distribution system, because they 2Northeast Brazil Nutrition Survey March-May I963. A Report by the Tnterdepartmental Committee on Nutrition for National Development, Department of Defense, May, I965, p. 93. no longer produce and consume their own food. They must have schools, medical facilities, etc., all of which require large sums of capital. Maintenance of migrants in the urban centers is more capital intensive than maintenance in the rural areas. Thus, efforts to improve the rural areas may also relieve some of the pressures upon the densely pOpulated urban centers by reducing the rate of papulation flow to urban areas. Since urban-rural income dISparities seem to be widening over time rather than narrowing, the problems discussed above will continue to persist in the future unless a means is found to link the urban-rural sectors together more effectively. Walter Rostow's diagnosis that present marketing systems are not providing the necessary linkages so that each sector can fully share in the output of the other seems to apply in Northeast Brazil. Rostow and others have observed that the deveIOpment of national markets which would connect the various sectors together into an integrated market economy could prevent further widening of this rural-urban gap. Rostow argues that: "There are four major tasks that must be done, and they should be done simultaneously as part of a conscious national strategy; shared by the public and private authority. The four major tasks are these: a build-up of agricultural productivity; a revolution in the marketing of agricultural products in the cities; a shift of industry to the production of simple agricultural equipment and consumers' goods for the mass market; and a revolution in marketing for such cheap manufactured goods, especially in rural areas. What is involved are two distinct revolutions in marketing and distribution — one urban, the other rural; plus a shift in the direction of industrial output."3 In this way, the rural-urban sectors will become members of the same market economy. 'h>throw light upon these four major tasks, the Michigan State Ihfiversity research group undertook a diagnostic study of the food marketing system in both urban and rural areas. In a similar manner a study of the industrial production and Ifistribution system for consumer goods and agricultural inputs was completed. The structure and Operation of the existing marketing system was studied in order to identify the barriers to increased productivity and reduced costs \ H 3W. W. Rostow View From the Seventh Floor: (New York; arper and Row I961I), p. T36. I - o l‘rq n}. K oi ' n! ,— (in u OC"! 'vv'. in the marketing process for food and selected non-food items. The conditions in agricultural product and factor markets which retard the adOption Of new technology and the expansion of agricultural output were explored. Attitudes, and communication behavioral characteristics of market parti- cipants that limit or condition the kinds of changes that can be successfully introduced into the production-marketing system were also examined. The final step was to design nmrketing reforms that likely would stimulate growth and resource use efficiency in the production-marketing system. In the urban areas systematic surveys were conducted with various market sub-groups (consumers, retailers, wholesalers and industrial firms), while in the rural areas thhin the food-shed of Recife, systematic surveys were conducted with producers and assemblers Of five commodities (rice, beans, manioc, cotton, and milk) in order to describe the structure and Operation Of the existing system. As a member of the task force, the author had primary reSponsibility for the systematic surveys conducted in the rural areas for these five commodities. Only one Of these commodities is, however, the subject of this dissertation. 4h: The great variability in the data collected across commodity groups indicated that production and marketing practices differ significantly among commodities. This suggested that such variance could be reduced by using a commodity approach. Within each commodity the emphasis was then placed upon the entire vertical system from the urban area backward tO the rural area and vice-versa. This included not only the product market but also the factor markets as they function in the rural areas. The analysis, therefore, attempted to identify the barriers within this vertical system. In addition to those general considerations, beans were selected for this doctoral dissertation, because they are one of the principal foods in the Brazilian diet. About 28 kilograms are consumed annually by the average person. Since beans are relatively high in protein, they are an important daily source of this nutrient among persons who (:annot afford other protein foods such as meat on a l-egular basis. For the agricultural sector, beans are also a very important source of farm income. As recently as I963, beans thanked fourth among all farm commodities in value of farm F>roduction for the Northeast. Thus, beans are a staple food fr: the Brazilian diet and a basic income generator for the F3 rm sector . l0 Another reason for selecting beans for this thesis investigation was that the study Of marketing in the twO Aareas sampled reveals some interesting contrasts. At the producer level, some differences in production and sales practices and use of modern technologies exist between the two areas. By using a simple commodity approach, it is believed that valid comparisons can be made while at the same time minimizing differences which could arise due to the inherent characteristics of the crop. Objectives The general Objective Of this thesis is to analyze product and factor market coordination in the bean industry Iof Northeast Brazil. More specific thesis Objectives include the following: (a) To conceptualize the role of product and factor market coordination in the process of agricultural development. (b) TO describe and compare the product and factor markets for beans as they are organized in two rural communities both serving a common market area. (c) TO identify conditions in these product and factor markets which act as barriers tO output expansion and the adoption of technologies and organizational changes that would reduce costs Of production and distribution. (d) TO make reform recommendations directed toward the elimination or reduction of market barriers. I II‘IIIOC :I‘Iect HMFE leoI air I" With these objectives in mind, three hypotheses were deveIOped to guide the conceptual development, data collection and data analysis phases Of the research. These hypotheses are: l. Highly uncertain and poorly coordinated product and factor markets reduce the firm's incentives for increasing output and improving productivity. 2. Existing knowledge levels, traditional attitudes and value orientations of producer and/or assembler groups may limit their willingness to adOpt new production and marketing practices and to expand output. 3. Institutional reforms and technological innovations are more likely to be successful if they are reasonably consistent with the attitudes and value orientation of market participants. The nature and direction of the hypothesized relationships tuas tested to determine which variables function as barriers in the production and distribution system. In other words, the testing of the hypotheses will attempt to isolate the important barriers which prevent improvements in the raerformance of the marketing system. Procedures The data used in conducting this analysis was primary oo m.__~mcm .xoonom .1 cmmOum "occ30m oo~ omm omm._ om~.m 0mm.m neumum opu_c: mm 00. oaN on“ osm._ n_cc_ mm - cm~._ o-.~ o~c.a cnann cm om: ocm o_m omo.~ opmxpz km om. cam omo.~ ok_.m nc_acpmc< as ea. mmc mm~.. mom._ __~ncm N: no. omm om“ oom._ __~ncm annpcccoz AmCOhV cOquu ou_m comam Ocmu uc_4 mcmom ecoo OO___Ec: co_mo¢ co >cucaou mo_cuc:Ou m:o_cm> c_ moOco opuuo_om mo Ocmuuo: coo mEoLmo_Dx c. O_o_> ommco>< .mim o_nm» 6A Thus, where rainfall and soil conditions permit, fertilizers are essential to increasing the productivity of Brazilian agriculture. Income Characteristics of Surveyed Farmers The five basic commodities selected for study in the over-all project were rice, beans, cotton, manioc, and milk. Four of these commodities are very important in the agricultural sector of the Northeast. In I963, cotton ranked second behind sugar, manioc was third, beans fourth and rice fifth in terms of value of production for Northeast agriculture. For milk, the rank data was not available. The following section compares the general survey results of all these producers so as to place bean producers in the proper perspective among all producers in the region. Hopefully, this will provide the setting for the remainder of the thesis which deals only with the bean industry. Much variation exists in the size and level of gross farm sales among producers. (See Table 3-A). Milk producers have significantly higher gross incomes than any other group of producers, nearly four times the average for all producers. The highest reported cash farm income in the survey was NCr$Al2,000 (U.S.$l87,272) by a milk producer.37 37The I966 exchange rate was NCr$2.20 to U.S.$l.00. 65 Table 3.A. Size of Farm, Cash Farm Income and Land Values by Commodities Studied, Northeast Brazil, 966. Type of Ave. Farm Ave. Total Ave. Value Farming Size in Cash Income of Land Hectares per Farma per Farmb 4NCr$ “NCrS Rice Codo w: 2,100 12 ,8IIO $56 Francisco 96 6,255 55,767 Beans Irece 7A 2,803 ll,286 Pe. - Al. 8i I,835 ll,030 Manioc l9 I.505 7.09“ Cotton lOA l,A63 ll,08A Milk I70 ll.593 37,383 All Producersc 90 2,607 I8,262 aAverage total cash income per farm was obtained by asking farmers their sales of the major crOps which they produce, sales of livestock, sales of livestock products and sales of other crops produced. The income figure is limited to those farms selling more than NCr$lO0.00 in I966. bValue of land was determined by asking producers for how much they would be willing to sell their farm at the time of the interview. cMilk excluded The exchange rate was NC$2.20 to $l.OO in I966. One hectare equals 2.5 acres. Source: SUDENE/MSU Farm Survey, I967. 66 The next highest income group are the $56 Francisco rice producers, who have average cash farm incomes of NCr$6,255 (US$2,8A3). Cotton producers have the lowest income of all producers. The income distribution is skewed considerably in favor of small producers. However, there is tremendous variation in income for the same commodity between the areas. Average size of farms varied from the l9 hectares for the manioc producers to AAA hectares for the Codo rice producers. The largest farm contained 3,000 hectares, but the median farm was less than lOO hectares. However, large farms do not always mean higher levels of farm income. (Table 3.A). Geographic location and type of farming are also very important determinants of farm income. The most valuable farm land is in the $56 Francisco rice area, and the least valuable is in the manioc production area. The most valuable farm land per farm in all the areas studied was worth NCr$800,000 in I967. The median value was about NCr$6,000. The least valuable land per hectare was in Codo, where it was worth only NCr$28/hectare. Personal Characteristics of Surveyed Farmers In general, there is very little variation in the average ages of the producer groups studied. (Table 3.5). .Acm_ .>p>cam ecnc :mz\wzuo=m uputaom .mmm. c_ ___ Ocoz On: omozu co» >_co mumoo .ooo:_oxo x__zm 67 ow um m: o.m mm n: omcouaoocm __< NN mm RN o.m mu m: x_mz 5. mm on :.~ mm m: cauuou Kw :: m: m.~ mm m: oo_cmz m. m: _: m.m N: m: ._< . .om om :5 mm m.~ .N m: moo;— memom mN mm mm 0.: On m: oum_ocmEu me mm a: 0m ~.~ mm :4 _wo0u pp_¢ enamozi .o>< mom. I... Amcoo>v .oo;um commas 28.... BMW“ awmuwwu “RB“? wmfim mubumchHOmcmcu bchmcok som_ . .mnmcm ammozucoz .mc_ELmu co moo>p >n mcou3o0cm mo mu_um_c Ouomcmco .chmcom oEOm .m.m o_amb 68 There is a relationship (correlation 0.l5) between formal education and level of farm income. Milk producers who had the highest incomes in I966 had completed more years of school than any other group of producers; the second highest income group (556 Francisco rice producers) ranks second in years of school completed. The least educated group are the cotton producers, and they also had the lowest farm income of any group. (See Table 3.5). About A5% of producers said they were sick and unable to work during all of I966. (Table 3.5). The frequency among farmers varied from the 27% of milk producers to the 57% of rice producers. Those who said they were sick, were unable to work an average of 57 days. Milk producers who were sick were unable to work the least number of days (38) while Irece bean producers were unable to work the most number of days (7A). The median number of days sick is considerably less (26) than the average (57) for all producers. Thus, illness may be a factor limiting farm output and productivity for those who were ill. The reader is reminded that 55% of all producers never reported being sick in I966. Illness, is, therefore, an important but not a critical factor limiting farm output and productivity. A literacy test was given during the farmer interviews. They were asked to read the following sentence in Portuguese: "The man moved his hand quickly in a farewell gesture." 69 As a test of their comprehension those producers who read the sentence were then told to “do what the man did". On the basis of this test the milk producers were the most literate group -- 7l% could read the sentence, while among the other producers, approximately one-half could read. About lA.2% of those who read did not understand the sentence. (Table 3.5). In general, the results of the literacy test are related with education levels as presented in Table 3.6. The extent of personal migration was ascertained by a question asking producers where they were born. (See Table 3.7). Most of the Codo rice producers were born in another state and had migrated to Codo: Cotton producers were the least mobile group. In general, producers are not a very migratory group, with 70% living in the same municipio where they were born and more than 90% living in the same state where they were born. This is not surprising, since out migration has been fairly large to employment Opportunities in the South; those interviewed are the people left behind. Most of the interviews in this study were made with land (aners. (Table 3.8). One reason for this is that the garoperty lists of IBRA (Brazilian Land Reform Agency) were . used as a basis for the sample. Interviews with the land (muners were chosen for this study, since the owners generally 70 Ram. .>p>cam ecnc =mz\uzuo=m u836m ~.:. m.mm _.m~ m.n~ ~.m: chOJOOLm __< ..m_ :.mm m.o: o._m m.m~ x__z m.m_ :.:m o.o~ m.- _.~m cOuuoo N.:_ m._m o.- o.:~ :.mm oo_cmz ~.m_ m.w~ o.m_ _.m~ m.mm ._< I .0¢ m.~_ o.w: w.m~ ~.om m.:m oup... mcoom 0.5 ~._m m.~m m.w~ n.o: OOm_ucmcm me _.__ o.~m m.m_ o.m~ m._m .mOOu ou_m I- ucOOcoo I- ocmumcooc: mocmumcooc: ixaxu_:d, N—30_m boom Quota OPMMOOD mmmom ukmmb cooao0cm boom 0:3 >ooLOu_4 Om03b co» covmcmmoLoEOu “cm. .__~ncm annpcacoz .maaoco couaoocm chE< Damp co_mcocoEoEOO ocm >omc0u_4 .w.m o_nm» 7l “cm. .>p>cam Etna :mz\uzuo:m .ppcaom ooo:.uxo x..2k 0.00. 0.. ..0 m..~ 0.00 kmcooaoocm ..< 0.00. 0.. 0.m 0.0N ~.Nn x..: 0.00. I ..0 m.:. :.m~ cOquU 0.00. ..0 m.. m.- 5.0“ uo.coz 0.00. m.~ N... m.m. :.00 ..< . .00 0.00. - ..0 m.:m ~.mm oooc. mcmom 0.00. 0.0 m.~ m.m. :.- oom.ocmcu mwm 0.00. m.m ..0: ~.- m.m~ .0000 oo.m II uc00coo I- .muoh Lozuo Oumum owm.o.c:z O.o.u.c:z cosuo cozuo n.0hi 030cc cooauocm oom.a;uc.m ~00. ...~ocm ammozucoz .ma:Oc0 Looonocm 0:054 moom.o£uc.m mo co.u:n.cum.0 ommucooLom .u.m 0.0mp .00. .>p>cam ecnc amz\uzuo=m "ppcaom 72 0.00. 0.0 0.0 m.~ 0.0 m..0 mc0030ocm ..< 0.00. 0.. I I 0.0 0.m0 x..: 0.00. 0.0 ~.. 0.0 0.0 ..N0 cOuuou 0.00. m.0 5.0 0.~ 0.0 :..0 00.00: 0.00. I I i 0.0 ~.00 ..< I .00 0.00. 0.~ I I I 0.00 move. mcmmm 0.00. - - 0.. 0... 0.00 oum.ocmcu me 0.00. m.m I «.0 0.00 0.00 .0000 00.0 I ucmucoo I .000» comocmz 0cmzm OLmLm mLOucmm mcoczo cc_cki 0_m:, pen; aaoco coua0ocm ucoEomcmcc< OcacO» ~00. ...~mcm ummmzucoz .>0>c:m Ecmu c. mucosamcmcc< Ocaco» 0:04 00 co.u:n.cum.0 ommucOULOm .0.0 0.00» 73 make the important marketing decisions affecting the farm sales and purchases. Only in rice, manioc and cotton production are renter or share-cropper arrangements common in the areas studied. The most common share-cropper arrangement is equal shares. The usual agreement also requires that the share-crOpper sell to the landowner any part of his share which is not consumed, and he must sell this part at harvest time when prices are lowest. If he fails to do so, he will generally be removed from the land the following year. Thus, the plight of the share-crOpper is serious, complex and merits study, but is beyond the scOpe of this investigation. The Bean Industry This last section presents a brief introduction to the current situation in the bean industry. This includes bean consumption and production trends for Brazil and, in addition, a brief description of the areas which were interviewed. Among Brazilian foodstuffs, beans are a primary commod- ity. Because of their nourishing quality, they are considered "vegetable meats” by some and ”Meat for the poor” by others. These names have evolved because the protein content of beans (l6-l7%) is the only regular source of protein for the large masses of the pOpulation which are 7A too poor to buy meat regularly. ”Beans are used at least once daily by almost l00 percent of the families and are the most important single source of protein in the diet.”38 Beans, rice, and manioc serve as the staple foods in the Brazilian diet. (Table 3.9). In I960, the annual per capita consumption of beans was estimated at l9.6 kilos in the urban areas and 3A.8 kilos in rural areas. In addition, the income elasticity of demand for beans in the Northeast is positive at O.l8 (Table 3.9). Thus, growing populations and incomes mean that total demand will continue to expand. Table 3.9. Per Capita Consumption and Income Elasticity of Demand for Basic Foods, I960 Per Capita TncomefiElasticity Consumption in Brazil of Demand (Kilograms) in Northeast Commodity Urban Rural Combined Beans l9.6 3A.8 28.0 O.l8 Rice 3A.8 AO.3 39.A 0.53 Manioc A0.0 l99.6 l2A.6 -O.lO Corn A.0 29.6 l7.6 0.66 Potatoes IA.8 7.9 ll.0 l.O9 Source: Getulio Var as Foundation, Projections of the Su l and emand for Farm Products inRBfaziT, Voi. I, I966, pp. 86 ff. 3392, cit., Nutrition Survey, p. 97. 75 Nearly all the beans are used for human consumption. The most widely purchased type of bean in Recife is "mulatinho”, followed by ”macassar”. The "mulatinho” bean is very similar to the pinto bean which is grown in Michigan. The pinto is a brown bean mottled by shades of dark brown or black. Macassar is consumed by persons who have lower incomes, because its prices are usually less than the ”mulatinho“. The estimates of supply and demand as presented in Table 3.l0 indicate that production and consumption will remain in balance through l975, but that output will need to increase by more than 2A% to satisfy demand expansion. The internal supply estimate is net of seeds and losses in the marketing system. A loss coefficient of three percent was used, while the SUDENE/MSU research results indicate a much higher figure (lO-l5%) for the market channels studied in the Northeast. (Futher information on market losses is contained in Chapter VI, p.209). Table 3.lO. Estimates of Supply and Demand of Beans In Brazil 1,0007tonsfiActual InternaT’ Year Demand Supplyg I965 2,520 2,520 I975 3.290 3,290 Source: FundacéO Getulio Vargas, Projections of the SuPply and Demand of Farm ProdUcts infiBrazil, V61. I, I956, p. ISItISS. 76 In I965, more than 70% of the beans were produced in the Center-South of Brazil, with the Northeast producing about 28% (See Table 3.ll). In the five-year interval, I960-6S, total Brazilian output increased 32% with no significant change in the relative proportions produced in the different regions. There are sizeable inter- regional movements of beans between the Center-South and the Northeast region. The size of this movement is unknown; however, 23% of the established Recife wholesalers did buy beans from the Center-South during I967. There is no significant movement from the Northeast to the South. Thus, an expansion in regional production would first displace beans purchased from the South. Three important bean producing states in the Northeast are Pernambuco, Bahia and Alagoas. The production, area planted, and yield per hectare for these states are compared with similar data for Minas Gerais and $56 Paulo in Table 3.l2. From I960 to I965 production increased 2h% in Pernambuco, 23% in Bahia, l3% in Minas Gerais and 9 percent in $56 Paulo. Production decreased slightly (3 percent) in Alagoas. Bean yields are relatively high in Bahia, averaging 693 kilos per hectare in the l960-6S period. This compares with 588 kilos in $56 Paulo, 566 in Minas Gerais, #58 in Pernam- buco, and h7l in Alagoas. There was no significant trend in 77 .mO. .q .oo-mom_ .xoontmm> u_um_umum cm__,~mtm .mum. "mutaom m.~m o.oo_ amk.mm~.~ 0.00. mas.0m~._ __~mtm m.~m ~._N mmm._mo._ m.o~ m~m.-~.. guaom-toucmu :.om ..m~ mmm.m:o m.m~ .mm.:m: ummmgutoz o.mm ~.o oom.~_ o.o mmo.m notoz mm\omm_ __~mtm oesoe< __~mtm “c2054 coemum ommocuc. Lo undocon, mo ucoULon undocod mom. oom— Amcouv mom.\oom_ __~mtm to co_mm¢ zumu c_ co_uu=not¢ cmom .__.m 0.3m» 78 .mc 00. .aa .mm-mmm_ .xoontmm> u_um_umum m.__~mtm .mmg. u330m smo “.0 mm~.mm~ -:.mm~ ~o~.~o_ mm:.m~_ o_=m¢ .m .mm mum mma.o_m mam.on amm.mom mom.omm .u mmc_z «me we“ .mu.mm_ _m~._~_ _m~.:__ m:_.mm m_;mm “mm mm: .Nm.om o_~.- .mm.~m o_m.mm mmomm_< :m: :.m ::~.~_~ omm.oo_ moo.~o_ m-.~m ou:92mctma Amo_.M. mam. com. mam. com. mom. cam. muumum co_uo:ooca ocmuoox com b.m_> poucm_m mucmuuuz «Lo mcmb mmm_\omm_ - mmumum bayou—om to» o_o_> ocm Dayan—m moc< .co_uu:b0cm comm .~_.m o_nmh 79 bean yields over the five-year period, I960-6S, in the important bean producing states. Selected Survey Areas Recife is supplied by several production areas from Pernambuco and other states, depending on harvest time. Since Pernambuco's production is not sufficient to supply the demand in Recife, it is necessary to buy beans from Alagoas, Bahia, Rio Grande do Sul and $56 Paulo. The county which has the greatest production in Bahia is Irece, located in the "Agreste" region of the “Chapada da Diamantina" (Diamantina Tableau). It is one of the principal bean producing centers supplying the Recife market. Since rainfall is only l0 inches annually, irrigation may have considerable potential. Plantings are usually alter- nated with corn, castor beans, sunflower or cotton. There is a relatively highly mechanized agriculture in the area. Tractors are the principal source of farm power. (The state of mechanization is further discussed in Chapter V). The municipios selected in Alagoas were $56 Jose da Tapera, Canapi, Agua Branca, Santana do Ipanema, Inhapi, P56 de Acucar, Olho d'Agua das Flores, Poco das Trincheiras, Maravilha and Olivenca. These municipios represented 56% of total bean production in Alagoas in I966. Cultivation is 80 concentrated in the "Agreste" area where rainfall is about l6 inches annually. Beans are usually planted jointly with corn and sometimes with cotton. Mechanization is slight, so most of the soil is plowed either by animal power or manually. Planting and harvest are manual. Improved seeds, lime and insecticides are occasionally used. There is little technical assistance for most farmers. The municipios selected in Pernambuco (Altinho, Tacaratu and Aguas Belas) ship to Recife. These municipios accounted for l3% of bean production in °ernambuco during I966. Cultivation is concentrated in the "Agreste" (dry area of the Northeast) and the ”Mata" (a humid zone of the Northeast) of the state of Pernambuco. Beans are usually planted jointly with corn and sometimes with cotton. There is very little mechanization of production, and cultural practices are quite primitive. Modern farm technologies are rarely used. Manual labor is the primary source of farm power. Summary The Northeast's widely varying climate and geography have been major constraints upon the region's deveIOpment. The climate varies from a humid coastal zone with plenty of. rainfall to a semi-arid interior with little rainfall poorly 8| distributed throughout the year. Half of the region's area lies within the semi-arid Drought Polygon. The Northeast is a large pOpulous region which, at one time, provided the economic leadership for Brazil. As the sugar industry declined, the prosperity of the North- east became depression and poverty. Climatically, the Northeast is plagued with periodic droughts which cause great suffering among its peOple. Early efforts to assist the region focused on fighting the drought and paid little or no attention to the region's economic ills. When this approach did not solve the problems, the emphasis was redirected toward solving the general problems of economic underdevelopment in this region. Low per capita income levels ($lh0 in I960) and employment levels are characteristic of the region. Labor has low productivity, because education and skill levels are low. The industrial sector, small but growing, is unable to provide sufficient employment to absorb the growing labor force. The Northeast has several institutions which could support the production and distribution system. However, the agricultural colleges in the Northeast do not have integrated programs of teaching, research and extension. 82 Very little research and extension is carried out in these colleges. Most of the research programs of the state and federal departments of agriculture lack competent researchers and are not focused on the needs of rural peOple. The extension service does not have adequate financial support and reaches only a limited number of farmers. A shortage of financial and human resources seems to seriously impair the level of effectiveness of all these institutions. Agriculture -- the most important sector -- accounted for h6% of regional income in I960. Production per capita is increasing, but productivity levels remain very low. Soil fertility is low and fertilizer use is also low. Among the surveyed farmers, total cash sales per farm averaged NCr$2,607 in I966. These farms averaged 90 hectares in size. They were selected to be representative of landowners in five commodity producing areas. Nearly half the farmers are illiterate. The 58% who attended school had an average of three years of education. Beans are a staple food in the Brazilian diet. Con- :sumption is high and will continue to grow as incomes increase and the pOpulation grows. Production increases in Brazil are estimated to be sufficient for consumption Iflwrough I975. The Northeast, however, is a deficit production area, requiring imports from Southern Brazil. CHAPTER IV FOOD, NONFOOD AND FACTOR INPUT DISTRIBUTION IN RURAL AREAS Introduction The most underdeveloped but potentially significant market channel in developing nations is the urban to rural flow of industrialized goods. Since about 66% of the population in Northeast Brazil is employed in agriculture, the largest single market for industrial goods is the rural area. The purchasing power of this pOpulation is low, but its sheer numbers make it an attractive market for selected industrial goods. In fact, there are two basically differ- ent types of markets which exist in rural areas. The first is the market for consumer goods, and the second is for farm inputs. Both markets are composed of uniquely distinct items, while at the same time they are highly competitive for the farmer's cash income. This chapter focuses on the role which rural mar- kets can play in a further linkage of the urban-rural econ- (unies. The specific linkages to be considered here are those between the urban industrial sector and the rural market for consumer goods and factor inputs. The rural areas 83 8h can serve as the mass consumer market which makes possible the scale economies so frequently absent among ”infant industries" in deveIOping countries. The availability and sales of consumer goods can provide the additional moti- vation for earning higher incomes among rural consumers. In addition, the sales of modern factor inputs are the mechanism through which higher incomes become possible. Urban Industrial Structure The food processing, agricultural input, and non- food consumer goods industries shown in Table h.l represent that part of the Recife industrial sector which is most complementary to the agricultural sector. It is indicative of the agri-related industrial capacity already developed in Recife which helps promote agricultural develOpment. The three types of industries shown contain firms which have forward and/or backward linkages that are capable of drawing the rural areas more fully into the market economy. Some of the firms have been much more successful than others in deveIOping an efficient, effective distribution network in rural areas so as to utilize their entire capacity. The beverage industry is an example of successful ciistribution in rural areas of the Northeast. Deliveries are made on a regular basis to almost every little village. . Most village retailers have soft drinks for sale; hence, 85 Table “.I. Number of Firms in Selected Recife Industries, I967 Number arr Industry Firms A. Food Processing Industries l. Wheat processing #00 2. Beverages: soft drinks, beer liquor 3. Vegetable oils h. Fruit processing l 5. Meat processing 6 . Milk processors CDN-L‘O-PNV 7. Packaging materials 8. Agricultural Inputs Industries 8. Fertilizers m 9. Farm implements 3 l0. Irrigation tubes 2 C. Non-food Consumer Goods ll. Textiles l2. Furniture l3. Electrical appliances Ill. Soap outwoooo l5. Consumer goods Sanrce: MSU/SUDENE Industrial Survey, I967. 86 beverages can be bought in villages where there are almost no other industrial products for sale. At the other extreme are the agricultural input industries some of which have not developed even a skeleton distribution system in rural areas. For all practical purposes, these items are only available in the urban industrial center and in the narrow coastal ”Zona da Mata.” These factor input industries generally have not attempted to devel0p a viable sales and distribution system in the principal food produc- tion areas. The non-food consumer goods industry seems to fit between the success of the beverage industry and failure of the agricultural input industry. Through its reliance on the rural feira and small-town retailers, a fairly affective sales and distribution system has been established. Many consumer goods can be bought in the feiras and from the large villaqe retailers. These examples indicate that successful marketing in rural areas is possible. Although the initial market deveIOpment costs may be high, there can be definite long run benefits to the firms involved. The marketing successes of the beverage industry have made it one of the fastest growing industries in the Northeast. On the other hand, the fertilizer industry which has not achieved any marketing successes is also troubled with excess industrial capacity. Food and Non-Food Distribution The most important market outlet existing in the rural areas of Northeast Brazil is the feira. The feiras are composed of large numbers of small operators who sell their wares from small portable stalls. The feiras are operated on a weekly basis and generally last for l to 2 days. At this weekly feira, farmers will sell much of their production and buy most of their food and non-food items. The importance of the feira as a distributor of consumption goods in rural areas should not be underestimated. Some of the goods commonly sold at the rural feiras are shown in Table “.2. Table h.2. Food and Non-Food Goods Sold in a Typical Rural Feira Cereals and Starches Beans Manioc Flour 5 Manioc Corn, corn meal, flour Rice Sweet & English Potato Yams Wheat flour Meat and Fish Dried 8 fresh beef Other fresh meat Dried 5 fresh fish Chickens Eggs in Bean Areas Fruits Oranges, Lemons Papaya Banana Pineapple Cashew Mangos Pinha Watermelon Avocados Jaca Cantalope Cocoanut Guava Vegetables Squash Onions Parsley Cabbage Tomatoes Lettuce Green peppers Other peppers Carrots Miscellaneous Brown 8 white sugar Coffee Bread 8 biscuits Spaghetti 8 macaroni Cookies Manioc gum Peanuts Salt Spices Vinegar Beverages Tomato extract Dende oil Edible oils Fruit juices Tobacco Clothes Pants Shoes Hats Sandals Socks Underclothing Dresses Sl1irts 88 Hardware Axes Saws Hammers Nails Pliers Screwdrivers Hinges Files Shovels Hoes Knives Machetes Scythes Guns Screens Sundries Cheap jewelry Toys Suitcases Cosmetics Drugs Rope 8 cord Tables Chairs Soap Sponge Ceramics Leather Kerosene Flashlights Batteries Razors Toothbrushes I. F 'U'Ll) (I “I 89 Kitchen Utensils Pots Pans Dishes Cups Silverware Small stones 8 grills Meat grinder Scrapers Ink Paint Sunglasses Kerosene lantern Bridles Saddles Hammocks Beds Clothes Iron Source: SUDENE/MSU Cast Studies, I967. 9O Bean producers usually attend a feira within their municipio (Table h.3). In general, most producers showed little geographic mobility in their buying habits. Less than lS% buy outside of the muncipio in which they live. The county seat of the municipio is, therefore, the principal market in which these people make their purchases. Closely related to this is the distance travelled to the feira. Over 65% of them travel less than 20 kms. to attend the weekly feira. Thus, travel to markets on a regular basis is restricted to a small area. Infrequent travel to urban centers is possible, however, because of low cost bus transportation in these areas. Bean producers attend the feira frequently (Table 4.“). Most striking is the fact that a very high percentage of the producers go to the feira every week. When one considers the difficulties involved in getting to the feira in the interior, it is rather surprising to see the proportion who go every week. Producer contact with this main market is, therefore, on a very regular basis. The tranSportation used to go to the feira can be seen in Table h.5. Animal back is the most important of all means of transport for AI-Pe bean producers. Walking on foot is also a very important means of going to the feira. Mechanized transportation is used by about 23% of the producers. 9| Table h.3. Weekly Feiras in Bean Area: Location and Distance Traveled by Farmers, I967 Location of Area Studied Feira Attended Areas Irece AI-Pe Combined 7% 7% % Seat of Municipio 22.“ 7l.8 58.h Village of Municipio 77.6 5.5 26.“ In city - Other Municipio -- 2l.l lh.O Village of Other Municipio -- 0.8 0.6 Other State -- 0.8 0.6 Total IO0.0 lO0.0 lO0.0 Distance Traveled O - lO km 22.h 29.7 27.0 ll - 20 l8.h h6.l 38.0 2l - 30 6.l 8.7 6.7 3l - plus -- 0.8 l.l Reside in Town or Non Response 53.l I3.9 27.0 Total IO0.0 lO0.0 lO0.0 Source: SUDENE/MSU Farm Survey, I967 92 Table h.h. Frequency of Feira Attendance by Bean Producers, I967 (in percent) Area Studied Attendance Time per Month Irece Al-Pe Combined Area I - 3.I 2.2 2 2.0 3.9 3.h 3 8.2 5.5 5.6 h 3h.7 67.2 57.9 5-8 - h.7 3.h Reside in Town or No Response 55.l 15.6 27.5 Total l00.0 lO0.0 100.0 Source: SUDENE/MSU Farm Survey, I967 Table h.5. Types of Transportation Used by Bean Producers, I967 (in percent, Area Studied Type of Transportation Irece Al-Pe Combined Area Walk lh.3 l0.2 l0.7 Back/animal l8.h h5.3 37.6 0x cart - l.6 l.l Motorized Vehicle l2.2 28.l 23.6 Other 2.0 -- -- Live in City or No Response 53.l lh.8 27.0 Total lO0.0 l00.0 lO0.0 Source: SUDENE/MSU Farm Survey, I967 93 The most common type of road passing by the farms interviewed is one over which only an ox cart can travel. (Table 4.6) The type of roads passing by farms was not significantly related to innovativeness. Thus, the innovative producers, as well as the less innovative producers, tend to be confronted by the same transportation problem. In summary, accessibility to the marketplace is limited by the types of transportation used by producers and by the roads on which they must travel. Hence, the selling of crOps or the buying of inputs on a large scale (cost reducing transactions) would be facilitated by an improved system of transportation. It has been shown that the market visited by a majority of producers is the market within their own municipio. Very few are able to go to large urban markets to do their purchasing. The local markets are visited by the producers on a regular weekly basis, which proves that they have frequent contact in the local towns. Therefore, to increase sales of industrialized goods in these areas, it is necessary to make the goods available in the local trading centers. Since very few producers are in regular contact with a large urban market, only the local trading center can stimulate their desire for 9h Table h.6. Types of Roads Passin Farms of Bean Producers (in percent I967 Type of Road Combined Areas Concrete or asphalt 3.8 Gravel or graded dirt 9.9 Ungraded dirt l9.8 Ox road 63.2 No response 3.3 Total lO0.0 Source: SUDENE/MSU Farm Survey, I967 95 industrially produced consumer and/or production goods. Once this exposure exists, it may lead them to produce more in order to be able to buy the things they want. Food Consumption To determine with accuracy the extent of farm parti- cipation in the market economy, questions pertaining to food purchases were asked. The level of food expenditures determines the amount of discretionary income available to purchase non-food consumption goods and modern farm inputs. Table h.7 shows the average monthly food expenditure by producers and the percentage of their income spent on food. The poverty of the people in these areas is indicated by the high percentage of money (income) which they spend on food. Even though they are able to grow much of their own food, it is still possible that the money being Spent on food by these people is not enough for a nutritionally balanced diet. The level of monthly food expenditures was significantly related to innovativeness.39 Those who scored highest on the innovation index also spent more money on food (Table h.8). Although the data are not presented here, gross farm income was significantly related to innovativeness. The number of 39The innovation index is the percentage of all innovations adOpted by bean producers. See Chapter V, p.l32 for a list of the items which make up the index. 96 Table “.7. Monthly Food Expenditures, Percent Gross Farm Sales pent on Food and Number of PeOple Fed By Bean Producers, I967 (in NCrS) Question Area Studied Item *Comanedi Irece Al-Pe Area Monthly Food Expenditures l36.l0 I05.90 llh.63 Percent Income Spent on Food 58.30 8h.h0 65.00 Number of People Fed Regularly 7.l5 7.59 7.50 Monthly Food Expenditure per Capita l9.03 l3.95 l5.28 Source: SUDENE/MSU Farm Survey, I967 Table h.8. Scores on Innovation Index by Monthly Food Expenditures, I967 Percent lnnova- Monthly Food Expenditures, I967 tions AdOpted NCr$ l-6O 6l-IOO IOI or more %I % 7% O - 25 #5 hO IS 26 - 33 “3 38 I9 3“ plus 28 30 #2 Source: SUDENE/MSU Farm Survey, I967 97 persons eating regularly in the household however, was not significantly related to innovativeness. The least innovative are, therefore, attempting to feed the same number of persons as the most innovative but on less money. Farm size was also significantly related to food expenditures per month. A significant correlation of 0.3l between these two variables reveals that producers on large farms (greater than 90 hectares) also have higher monthly food bills. The percentage of farmers who said they purchased various food items can be seen in Table h.9. Bread and meat are purchased by the greatest number of producers, while powdered milk and beverages are purchased by the least number of producers. An index of these food items was constructed to determine the variety of food items being purchased regularly. Such an index also indicates in an ordinal manner the dietary level of the peOple. High income farmers were not asked about their food purchases, because it was assumed that income is not the limiting factor in their dietary level. This food purchase index was significantly related to the innovation index. The more innovative producers scored highest on the food purchase index (Table h.l0). This means they purchase a wider variety of the food items needed in the average diet. Since the more innovative spend more money on a wider variety of food items to feed the same numbers of people, they therefore have better diets than the less innovative. 98 Table “.9. Percentage of Bean Producers Buying Selected Food Items (in percent) Food I tems Comaned Irece Al-Pe Area Rice 6“.6 53.l 56.2 Beans IO.“ “.7 7.7 Manioc 56.3 59.“ 59.0 Powdered Milk 6.l 7.0 7.3 Fluid Milk l“.3 l0.2 7l.8 Dried Beef 20.“ 59.“ “9.“ Dried Cod 20.“ 58.6 “8.9 Bread 6l.2 82.0 76.“ Beverages 8.2 l0.9 l0.7 Fresh Meat 70.8 82.8 79.2 Spaghetti 3“.7 32.0 33.l Source: SUDENE/MSU Farm Survey, I967 99 Table “.lO. Distribution of Scores on Innovation Index by Scores on Food Purchase Index (Percent) Percent Innova- Number of Food Items Purchased Regularly tions AdOpted l - “ 5 - 6 7 - ll 0 - 25 “3 “0 I7 26 - 33 “I “l l8 3“ plus 20 37 “3 Source: SUDENE/MSU Farm Survey, I967 Non-Food Consumption The second half of the consumption goods survey dealt with the non-food itemsowned by producers (Table “.ll). The most widely owned item for all producers is the sewing machine. Jeeps or other vehicles are the least commonly owned items on this list. Radios are owned by 55 percent of the bean producers. Irece producers own more of these goods than Al-Pe producers. All these items were used to construct an index of consumer goods owned in which a high value indicates a high level of the goods owned. This index was significantly related to age, income and innovativeness. Those who scored highest on the innovation index also own the greatest number of these non-food IOO Table “.II. Percentage of Bean Producers Owning Selected Non-food Consumption Items, I967 Percentage Ownership by Area Studied Non-food Item Combined" Irece AI-Pe Area Jeep or Other Vehicle l0.“ 6.3 7.3 CrOp Sprayer 28.6 6.3 I2.“ Scale “6.9 30.5 36.0 Sewing Machine 79.2 72.7 7“.2 Refrigerator 16.3 5.5 7.9 giggsggz'L§Xtern l“.3 l“.8 I“.6 Functioning Radio 65.3 50.8 5“.5 Electricity -- l.6 l.l Source: SUDENE/MSU Farm Survey, I967 consumption items (Table “.l2). A correlation coefficient of 0.“0 between farm size and ownership of selected consump- tion items was also significant. In agriculture one of the real choices that farm families have made is whether to spend a certain amount of money for consumption goods or to invest it in productive assets on the farm. When these decisions are made, the future productivity of the farm is determined. lOl Table “.I2. Distribution of Scores on Innovation Index by Ownership of Consumer Goods Percent of Percent of Consumer Goods Owned #— Innovations Adopted I- l7 l8 - 33 3“ plus %’ % %? 0 - 25 “7 32 2l 26 - 33 “0 3“ 26 3“ plus 25 35 “O Source: SUDENE/MSU Farm Survey, I967 Producers were asked how they would spend their money if this year's harvest produced NCr$500.00 more (a 25% increase in gross farm income) than they expected. The alternative consumption and investment items among which they were asked to choose are in Table “.l3. The most -obvious conclusion to be drawn from the table is that all producers have very high propensities to Spend additional income in the market place. The desire to Spend the money is very high for nearly all goods. The table contains four items which are consumption goods and four which are invest- ment goods. An investment prOpensity index was constructed to evaluate the substitutability between these consumption and investment goods. A high index value indicates a greater preference for investment goods and vice-versa. I02 Table “.l3. Percentage of Bean Producers Willing to Buy Selected Goods as a Result of Higher Incomes l967 (in percent) Item Area Studied CombTfiea’ Irece Al-Pe Area Better food for family 89.6 85.2 86.5 Medicine 93.9 86.7 89.3 Clothes 95.8 90.6 92.l Home Improvements 98.0 88.3 9l.0 Fertilizers l6.3 “9.2 39.9 Cattle 7i.“ 83.6 80.3 Land 73.5 68.8 70.2 Better Seed 89.6 70.3 75.8 Source: SUDENE/MSU Farm Survey, l967 This investment prOpensity index was significantly related to the innovation index. The more innovative producers scored higher on the index, which means they are more investment oriented than the less innovative producers (Table “.l“). These results are consistent with earlier analyses which indicated that the more innovative already have better diets and thus have greater Opportunity to Spend money on investments. The other possibility is that since they are more innovative, they would prefer to spend any additional income on investments even if their diets were not better. I03 Table “.l“. Distribution of Scores on Innovation Index by Scores on Investment Propensity Index . S r ' ‘ Percent Innovation co es on Investment PropenSIty Index Adopted Lower Middle U per :é ii 26 - 33 2| 33 “6 3“ plus 20 37 “3 Source: SUDENE/MSU Farm Survey, l967 Producers in general, however, prefer to buy more consumer goods than investment goods. One could expect that a greater proportion of additional income earned will be spent on goods to improve their well-being before they Spend on farm investments. The potential market demand for these goods seems to exist, but the market has not effectively distributed these goods to the rural areas. Factor Input Distribution The important question for the agricultural sector is to what extent Northeast industry has lagged in the deveIOp- ment and distribution of modern agricultural inputs. This section considers some of the problems associated with the IO“ rural distribution of these inputs. The inputs selected for emphasis in this phase of study were those which appear to have the greatest potential for increasing farm productivity. This included fertilizers, insecticides, improved seeds and farm machinery. The rural surveys investigated the avail- ability of these inputs to producers in the area where they live. Because of the lack of transportation in these areas, most producers are unable to go to the large urban trading centers to buy these items. Therefore, these inputs must be made available in local trading centers where the farmers go to do their buying and selling if they are to be widely used. Because the sample of input distributors was too Small to permit analysis of input distribution only in the bean areas, this last section presents the results of the input survey for all the production areas sampled for the five major commodities. This is in contrast to the rest of the thesis which deals only with the bean areas. Types of Distributors In nearly all cases (93%) one of the managers of the distributing firm was interviewed. In 63% of the firms there was more than one owner. Most of the firms were family- owned stores. They had been in business an average of l3 years. I05 Sixty-three percent of the firms were hardware stores and 26% were government stores. The remaining firms were c00peratives (7%) and others (“%). Inputs Sold The availability of modern farm inputs was determined by a series of questions on items being sold. The frequency with which firms sold these selected farm input items is found in Table “.IS. Not one of the firms interviewed sold chemical fertilizers. Seventy-eight percent sold insec- ticides and ““% sold fungicides. Only l8% of the firms sold good quality varieties of seeds. Seven percent of the firms sell and IS% rent tractors to producers. A more detailed analysis of tractor rental and sales reveals that availability is concentrated in two areas, and they are not available in the remaining areas. Hence, availability of all but a few modern farm inputs is very limited in these rural areas. The traditional farm inputs are easily available in the stores and feiras. In addition to lack of availability of farm inputs, another major barrier is lack of machine parts and repair facilities. Only 33% of the firms interviewed handled the Spare parts for the machines which they sell. The problem lO6 Table “.IS. Percentage of Distribution Firms Selling Selected Farm Input Items in Areas Studied, l967 Percentage Selling mmm Insecticides 78 Crop Spraying machine “8 Fungicides ““ Barbwire h] Cr0p Dusting machine 33 Machine parts 33 Plow 30 Selected seed l8 Scale l8 Tractor rental l5 Tractor sale 7 CrOp harvesting machine “ Chemical fertilizers 0 Traditional 52.19.222.53 Hoe 85 Scythe 78 Axe 7“ Hand Planter 52 Source: SUDENE/MSU Input Survey, I967 IO7 of spare parts was emphasized by a bean grower during an interview conducted by the author. The grower had a small corn sheller (most shelling is done by hand) which had not been used for many months because of a broken gear. A new gear was not available locally, and the grower was unable to go to Recife to purchase it. Insecticides and Fuggicides The major supply sources of the firms which handled insec- ticides and fungicides was Recife (“2%) or 556 Paulo (2l%). The remainder came from other towns. Most of the firms (52%) purchased directly from the factory. Other common suppliers were wholesalers in Recife or salesmen from other cities. Most of the firms interviewed agreed that they did not have any real buying problem, although a few said that insecticides were sometimes not available from the suppliers when they wanted them. Only l0% of the interviewed firms have used any kind of mass media advertising, yet they agree that lack of farmer's knowledge is their major selling problem. Another serious problem is lack of farmers' buying power for the goods. Flows and Tractors The distribution channel for firms handling plows and tractors was slightly different from that of insecticides. I08 The two firms which sold tractors said they purchased the tractors in $56 Paulo dlrectly from the factory. Both firms agreed that there were no real buying problems for them. The firms selling plows bought from $56 Paul0(57%), Rio de Janeiro (29%) and others (l“%). The other category includes an interior town, Garanhuns, in which plows are manufactured. In all cases, the firms purchased directly from the factory. Their major buying problem was lack of local salesmen with whom they could make regular contact. Two selling problems were most important for these firms. The first is that producers are not aware of their product, and the second is that producers lack the cash purchasing power needed to buy. At the same time, only I“% of these firms had used the newspaper or radio as means of advertising their product. Good Quality Seed Eighteen percent of the firms said they sold ”good quality" seeds. This generally means selling clean, reason- ably pure strains of traditional varieties. It does not mean the availability of hybrid seeds. There are no commercial seedhouses specialized in the development, reproduction and distribution of improved seed varieties. Thus, availability of improved seeds is a serious problem in the Northeast. The good quality seed which producers are now buying may not be IO9 by better than what they have been producing. Indeed, it may even be what they sold a few months earlier. Transaction Size Transaction sizes are very small. The average size of sale was about seven liters or II kilos of insecticides. Fungicides are bought on a smaller scale. The average size of sale was one liter or 3 kilos of fungicides. Tractors and plows were both bought and sold in individual units because of their high value per unit. Seeds are also sold on a very small scale. The author was once asked for and gave NCr$0.50 to a farmer who wanted to buy two kilos of cottonseed. The producer immediately bought it and went home to plant the seed. Thus, transaction size is small and results in high handling costs on low volumes. Marketing Margjns Operating margins on all these items were found to be quite high because of the low volume of goods handled. Gross margins for insecticides were “5% and for fungicides “0%. 0n tractors and plows, the firms showed a gross margin of 25% and 26%, respectively. The net result of these margins is higher prices for the agricultural inputs needed by producers. The terms of trade between agricultural products and purchased farm inputs are not favorable because of these llO high margins and low sales volumes. An example of this is a tractor which sells for about NCr$l5,000. With an average total farm income of NCr$2,600 for all groups of producers, it would take all the income on the farm for slightly over five years to buy a tractor. In the United States, a similar tractor can be bought for less than one year's gross farm income. Farm prices of selected farm input items as determined by the survey are listed in Table “.I6. Tractors are the most expensive items on the list. Increased competition and higher volumes on insecticide sales could reduce the gross margins and therefore prices of insecticides to farmers. Improved varieties of seeds appear to be reasonably priced but, as already mentioned previously, their avail- ability is limited. Fertilizers are another important indication of these terms of trade. Table “.I7 shows the kilos of rice needed to buy one kilo of fertilizer. Compared to most other countries, the ratio for Northeast Brazil is unfavorable. Since the selling price of fertilizer in Recife was used, the cost of tranSportation to rural areas would make farm price higher or a minimum of three kilos of rice to buy one kilo of this fertilizer. III Table “.I6. Sellin Price of Selected Farm Inputs by Firms In Areas Studied, l967 Input Item Price in NCr$ Valmet tractor l3,“00.00 Massey Ferguson 50-X I“,O70.00 Paraguassu Plow* 85.00 Sans Plow* 90.00 Gezerol 33 (insecticide) l.l8 per kilo Shell insecticide l.I5 per kilo Cottonseed 0.20 per kilo Bean seed 0.50 per kilo Corn seed O.“O per kilo Cottonseed meal 0.l“ per kilo *The plows are a one moldboard walking plow pulled by a team of oxen. Source: SUDENE/MSU Input Survey, l967 ll2 Table “.l7. Kilos of Rice Required to Purchase One Kilo of Fertilizer (Super PhOSphate More than 25% 9205) _KiTOS Country of Rice Pakistan 0.89 Japan l.00 U.S.A. l.02 India 3.l9 Northeast Brazil* 2.Il *SUDENE/MSU Input Survey, l967 Source: A. T. Mosher, Getting Agriculture Moving, Frederic A. Praeger: NeinOrk, I966, p. lOS Summary The Recife industrial sector already has developed a certain amount of industrial capacity which could link farmers to the market economy. The basic problem confronting these industries is the development of their marketing and distribution system in the rural areas. The beverage industry is an example of a successful approach to solving the rural marketing problem for a consumer item. The local feiras sell a wide variety of food and non- food consumption goods. The local feiras at rural trading centers are attended weekly by a very high percentage of the ll3 farmers who come to purchase both food and farm supplies. Transportation linkages between the farms and rural trading centers are generally poor. Seventy-five percent of the farms are located on ox-cart roads or ungraded dirt roads. Only 23% of the farmers travel to the trading centers by some form of motorized transportation. Forty-nine percent come on a horse, burro or on foot. Bean producers Spend 65% of their cash income on food purchases. The more innovative producers spend more money on food and buy a greater variety of food items than the less innovative producers. Farm family ownership of non- food consumer goods is low, but the more innovative pro- ducers do tend to own more of these goods than other producers. Hence, even with low incomes there is a limited market for non-food consumer goods. All producers Show a high propensity to Spend additional income for both con- sumer goods and additional farm production items. The more innovative producers show a stronger desire to invest additional income in farm production items, while the less innovative expressed a stronger desire for consumer goods. Modern farm supplies such as fertilizer, improved seeds and machinery are not readily available in rural trading centers. Fertilizer is notably absent in the trading centers surveyed. The retail margins on modern farm supplies are ll“ relatively high, and sales volume is low with little effort being made to expand sales. The result is high factor input prices which reduce profitability and, therefore, size of the market. In conclusion, bean producers are rather poorly linked to the urban industrial market at the present time. A lack of buying power in rural areas and a lack of imaginative market deveIOpment programs are major reasons for this weak linkage with the urban market. The stronger linkage of the more innovative producers, however, is positive evidence of the potential for greater economic exchange between the urban and rural areas. CHAPTER V PRODUCTION AND MARKETING ACTIVITIES OF BEAN GROWERS Introduction This chapter is divided into four sections. The first describes the organization of farm production; the second, producer marketing activities. The third presents the attitudinal characteristics of bean growers; the fourth, diagnoses market barriers among bean producers. The cross-sectional analysis will utilize primarily two independent variables -- an index of innovativeness and an index of output response -- in an effort to describe and analyze the production and marketing activities of bean growers. These two variables were chosen because both are able to reveal in greater detail the nature of the farm firm's linkages to the money economy in both the product and factor markets. The greater use of these linkages is part of any plan designed to strengthen urban-rural ties and narrow the income gap. If improved food distribution leads to increased food consumption, producers must have the incentive and capacity to expand output. A weak producer response to rising consumer demand means food prices will rise. The indices of innovativeness and output response are intimately related lI5 ll6 to revealing the ability of the farm firm to increase output, improve productivity and to make greater use of modern technologies. Thus, the major focus will relate these two variables to both the descriptive and analytical variables to assess these market linkages. Organization of Farm Production Land Use One of the most important factors affecting farm output is the quality and quantity of land available for use. At the present time, only about 20% of the land in farms is under cultivation. (Table 5.l) Most of the remaining land is either in pasture or idle land covered with trees and brush. It is impossible to say how much of this land could be brought into cultivation, but the indications are that additional crop land is available on these farms. However, the problem is the Quality rather than quantity of land. Soils tests by SUDENE/MSU staff members in the bean areas revealed that soil fertility is generally low. A shortage of nitrogen and either phosphorus or potassium was common, and sometimes all three basic elements were in short supply. The marginal productivity of additional land brought into production may be prohibitively low under present conditions. ll7 Table 5.l. Land Utilization on all Bean Farms, l967 Average Area Percent in Hectares of Total Area planted to beans or corn ll.“5 l“.“ Area planted to other crOps 5.“l 6.8 Area in planted pasture 3.06 3.8 Area in natural pasture “0.98 Sl.7 Idle land area l“.50 l8.2 Other “.lO 5.l Total 79.50 l00.0 Source: SUDENE/MSU Farm Survey, I967 Thus, quality rather than quantity of land available may be the limiting factor in bean production. Area Planted The area planted per farm increased in Irece from I965 tr) I966 then dropped sharply in I967, Table 5.2. In Al-Pe, average planting continued upward over the three years. . Bean area planted has averaged around l2.“ hectares during I966, but this area is widely distributed around the mean. ll8 Table 5.2. Hectares Planted per Farm to Beans in Irece, AI-Pe, and Combined Areas I965-l967 Area Hectares Planted to Beans % Change I965 I966 I967 '965'67 Irece l2.6 l3.5 9.2* -2.7% AI-Pe l0.3 l2.0 I2.3 l9.“ gozggned ll.0 l2.“ ll.“ “.0 *The respondents' estimate of area to be planted since actual planting time had not arrived. Source: SUDENE/MSU Farm Survey, I967. The factors causing bean producers to change the area planted were identified by a series of questions related to natural and economic factors. Sixty-seven percent of bean producers said they plant the same amount of land every year. Only 33% said they regularly change the area planted to beans. If it does not rain, 57% will plant less land. Thus, it appears as though bean producers tend to plant the same area to beans each year with some change if it does rust rain. No significant relationship was found between those who plant the same area every year and the index of iruwovativeness. If tractors were available for rent, 79% would plant more beans, l8% would not plant more, and 3% did II9 not know. With less credit, 83% would plant less bean land and l7% would plant the same amount. All bean producers said they were willing to plant more if such items as credit and tractors were more easily available. Credit was found to be significantly associated with innovativeness. The more innovative as well as the less innovative perceive lack of credit as a factor limiting their ability to expand production (Table 5.3). Table 5.3. Score on Innovation Index by Perception of Credit as a Factor Limiting Bean Area Planted Score on Innovation Credit is Credit is not Index Barrier Barrier % %' Lower 80 2 Middle 75 25 Upper 9l 9 Source: SUDENE/MSU Farm Survey, I967 Yields Bean yields for selected states of the Northeast were presented in an earlier chapter. (The low yields of the Nomtheast relative to Brazil were noted. The average bean yield based upon the farm survey data from both areas is also l20 quite low (Table 5.“). In both areas, the yields have increased from I965 to I966. The median bean yield, “90 kilos per hectare, is much less than the average for I966. In fact, 70% of bean producers have yields which are less than the average for I966. The more innovative do not have higher yields than the less innovative. Table 5.“. Bean Yields per Hectare in Irece, Al-Pe and Combined Areas, I965-I966 Area Bean Yields in Kg/Ha I965 I966 Irece “88 5l6 Al-Pe “6“ 658 Combined areas “7l 6l9 Source: SUDENE/MSU Farm Survey, l967. Thus, average yields are low and most producers are below the average. No bean growers at the present time are using the technologies which are able to improve yields. Variation in soil fertility rather than technology appears to account for present variations in bean yields. Traditional methods and varieties produce equally low yields for all producers. Low yields mean that profitability is low, which means that production is not stimulated. l2l Because of the obvious need for higher yields, bean producers were asked how they could increase bean yields. Forty-nine percent did not have suggestions on how to improve yields. Twenty-four percent would use fertilizers, 9% would use farm machinery to improve cultivation, 7% would quit planting crops jointly, 3% would use better seeds, “% would irrigate their crops, and “% suggested a variety of other items. A test of these responses against the innovativeness scale revealed no significant relationship. However, over one-third of bean producers mentioned factor market items not now available in these areas but which are potentially available with improved coordination of the factor markets. Producer Response to Prices The output responsiveness for beans was determined by asking producers how they would adjust production in response to hypothetical price increases and decreases. The I966 average bean price was NCr$l8.60 per 60 kilo sack. If this year's price of beans increased to NCr$20.00 per 60 kilo sack, 69% of bean producers said they would plant more beans; 2“% would not plant more, and 7% did not know what to do. On the average, these bean producers would plant an additional 9 hectares per farm to beans. I22 However, if this year's price of beans would fall to NCr$l“.OO per 60 kilo sack, only 3l% of bean producers said they would plant fewer hectares of beans next year. Sixty-six percent would plant the same area to beans, while 3% did not know. Those bean producers who would plant less would decrease area planted by an average of 7.8 hectares per farm. Thus, producers appear to be more responsive to price increases than to price decreases even though the latter price changes were larger. Thirty-two percent of the producers said they would plant more hectares in response to a minimum price program which guaranteed before planting time to buy all production at the present minimum price of NCr$l5.30 per 60 kilo sack. However, 60% would not plant more beans and 9% did not know. The 32% planting more beans said they would plant an average of 8.6 more hectares per farm to beans. Thus, it is reasonable to expect that a minimum price program actively carried out at this price level would result in some increased bean production, but not an unusually large amount. An index of output responsiveness was constructed by combining the affirmative-negative responses with the amount by which area planted would be changed in response to a price change."‘0 This index was significant when tested against hoAffirmative responses were given a value of three and negative responses a value of one. The amount of change in area planted was then quantiled so that the largest change In area planted received the highest value of four and the least change a value of one. High values indicate greater output responsiveness. l23 the innovation index. The higher the respondent Score on the innovation index, the higher the score on the supply response index (Table 5.5). Table 5.5. Relationship of Scores on Innovation Index to Scores on Output Response Index Score on Output Response Index Score on Innovation Index Lower Middle Upper % %* 3% Lower “2 “ l0 Middle 38 33 29 Upper 3“ 22 ““ Source: SUDENE/MSU Farm Survey, l967 Marketing reforms which influence farm price structures will, therefore, have the greatest impact upon the most innovative producers. Other Products Produced Bean producers also generally plant a variety of other crops along with the main crOpS. In the Irece area, nearly 75% of bean producers also plant corn. They do not plant either tree or annual cotton. About l5% plant palma for their livestock and another l0% plant small patches of manioc, which is probably only for home consumption. Other l2“ craps being planted with increasing frequency are oil crops such as safflower, peanuts, sunflower, etc. Corn and beans combined are the most important of the crops planted amounting to 85-90% of crOpland planted. In the Al-Pe area, corn is always intercropped with beans. Annual cotton is planted by about 26% of bean producers in this area. Tree cotton is also planted by about l0% of these producers. About 20-25% also plant manioc which is used mainly for home consumption. Another 20% also plant palma. Again beans and corn are by far the most important craps amounting to about 80% of total crOp- land planted. In summary, the Irece producers are more specialized in their production of crOps than are Al-Pe producers. Irece producers have tended to specialize more in their production as a response to the demands of the market whereas Al-Pe producers have not yet responded to this demand and, therefore, are more diversified in their production. Leas; Among bean producers, the labor input for the farm could come from three possible sources -- sharecrOppers, family and hired labor. Since the bean farnsstudied were generally individually owned and operated, farm sharecroppers were i not an important source of labor. l25 The individual family members supply the major por- tion of the work force on the bean farms. An indicator of this labor source is the number of family members of l2 or more years of age. For all bean farmers together, this averaged “.3 (Irece “.7, Al-Pe “.l) on each farm. Since these individuals are not in school, there is a sizeable labor force in the family for the entire year. Even with this labor supply, 78% of all been producers hired labor during I966. In Irece 7I% and in Al-Pe 8l% hired additional labor. The use of hired labor was significantly related to Size of farm. As one might expect, large farms hired labor more frequently than small farms (Table 5.6). Table 5.6. Relationship of Farm Size to Use of Hired Farm Labor Farm Size Percent Hiring in Hectares Farm Workers I - 25 57 26 - 89 79 90 or more SI Source: SUDENE/MSU Farm Survey, l967 Those who did not hire additional labor were asked if they could cultivate more land without hiring additional l26 labor. Among AI-Pe and Irece bean producers, 9% and 6%, reSpectively, would have to hire additional labor to cultivate more land. Farm size was not related to the need for additional labor to expand output. All farms could expand output; however, labor is a greater barrier to expansion in the Al-Pe area than in Irece. Total Cash Sales Total cash sales of bean producers is a measure of their success as producers and their buying power for farm inputs and consumption goods. The average gross farm sales of been producers isshown in Table 5.7 along with the rela- tive composition of sales. The reader should keep in mind that average gross farm sales does not include inputed val- ues for consumption of home-grown foods and housing rental. It reflects only what has been sold into the money economy. Table 5.7. Total Cash Farm Sales of Bean Producers and Percenta e Composition of Sales by Areas Studied 966 Average Total Percent Percent Percent Sales per From From From Farm NCr$ Bean Sales Livestock Other Area Sale Sales Total Irece 2,802 63 27 IO l00.0 Al-Pe l,835 52 “2 6 l00.0 Combined Areas 2,l03 57 37 6 l00.0 Source: SUDENE/MSU Farm Survey, l967. l27 It is evident that the Irece producers have about 50% high- er sales than producers in Al-Pe. In addition, most of this income is earned from bean production and not other sources. The largest bean producer, located in the Al-Pe area, had total farm sales of NCr$33,000 in I966. The lar- gest producer in Irece had total farm sales of NCr$I6,000. Farm incomes in Irece are more evenly distributed than in Al-Pe. About “I% of Irece producers and 60% of AI-Pe bean producers had sales under NCr$l,000. Further analysis of cash farm sales demonstrates that it is significantly related to innovativeness (Table 5.8). Total cash farm sales is also significantly related to the index of output responsiveness (Table 5.9). The most output reSponsive producers also tend to earn higher farm incomes. Thus, linkages with the product markets and the money economy appear to be strongest among the more innovative producers. There is also evidence to indicate that those who Show the greatest adaptability to changing product market conditions tend to earn the highest incomes as well. Total farm sales per hectare of farm land is a measure of intensity of land use. All bean producers together sold an average of NCr$266 per hectare. Irece bean producers' sales averaged NCr$379 per hectare, while Al-Pe producers' sales averaged NCr$277 per hectare in I966. A chi-square l28 Table 5.8. Relationship of Scores on Innovation Index to Total Cash Farm Sales, I966 AA Total Cash Farm Sales, I966 in NCr$ Score on Innovation Index I - 800 80l - l500 I500 or more %’ 7% %* Lower 65 23 l2 Middle 53 I7 30 Upper 26 29 “5 Source: SUDENE/MSU Farm Survey, I967 Table 5.9. Relationship of Scores on Output Response Index to Total Cash Farm Sales, I966 Score on Output Total €35“ Farm Sales, I966 in NCr$ ReSponse Index l - 800 80l - _500 I500 or more A *3? %’ Lower 56 20 2“ Middle 45 27 28 Upper 30 2h “6 Source: SUDENE/MSU Farm Survey, l967 l29 test of sales per hectare against innovativeness revealed no significant relationship. However, a simple correlation of 0.l9 between these two variables was significant. Thus, the more innovative do tend to have greater gross farm sales per hectare even though a relationship is not strong. Not one of the Irece producers worked off the farm last year. Furthermore, none of the other members of their families worked off the farm in I966. For these reasons, the analysis of non-farm income is restricted to the Al-Pe area. The 8% of been producers in the Al-Pe area who worked off the farm worked an average of 6.6 months in I966 and earned a total of NCr$286. Most of them worked as farm laborers in agriculture for a wage, while a lesser number worked in town for wages. The farm, non-farm income of these bean producers averaged NCr$2,l2l in I966. Off farm work contributed to about l5% increase in their total income; thus, it is significant. No other family members worked off the farm in the Al-Pe area during I966. Capital Investment The farm's capital assets are an indication of its economic viability and its ability to undertake expansion in the future. The average land value per hectare is about I30 l2% higher in Irece than in the Al-Pe area. Average value per farm, however, is almost equal between the two areas (Table 5.l0). Table 5.l0. Average Value of Farm Land er Farm and Land Value per Hectare by Areas tudied, I966 Total Value Land Value Area of Farm Land Per Hectare Irece NCr$ ll,282 NCr$ ISI Al-Pe ll,030 l3“ Combined Areas ll,l03 I39 Source: SUDENE/MSU Farm Survey, I967 The most valuable farm in the Irece sample was worth NCr$l20,000, while the most valuable farm in the Al-Pe area was wordINCr$“00,000. Land value was much more normally distributed in Irece than in Al-Pe as was also found to be true for cash income. In summary, the analysis of capital assets on farms in these two areas demonstrates the basic similarity of their stock of assets. There is a basic difference, however, in that producers in Irece earn a significantly higher income than in Al-Pe and a higher rate of return on capital assets. l3l Cultural Practices Irece producers generally used only one variety of beans. Bage Roxa is the only pOpular variety. Other varieties are not widely used in the Irece area. In the Al-Pe area a greater number of bean varieties are used. Bean producers reported using the following percentage distribution of varieties: Rime de Porco (“l%), Bage Roxa (S“%), Preto (3%), and Sul de Leu (2%). The greater number of varieties in use indicates less consensus about what is best for the Al-Pe area. In both areas there is a need for new and improved varieties which are highly responsive to the use of modern farm technologies. Even present varieties could be more productive with improved seed selection on farms. In addition, new Strains of the present varieties might be more productive than what is presently available. The interplanting of complementary crOps like beans and corn is technically advantageous if done in a proper way, but can be a very real barrier to mechanization of bean production in the AI-Pe area. When crops are planted jointly, it is quite common to find them completely unorganized. AS a result, mechanization is nearly impossible and even hand labor is more difficult to apply. I32 Adoption of Modern Production Practices The rate of adoption of modern production practices is a measure of the effectiveness of the market system as a supplier of modern farm inputs. Table 5.ll shows the rate of use of some market supplied farm inputs. Fertilizers are not used by any of the producers in Irece. Some non-chemical fertilizer is used by Al-Pe producers. Good seeds, fumi- gants and insecticides are all used more intensively in the Irece area. The most surprising items of all are tractors which are widely used in Irece area and not used in the Al-Pe area. The ox-drawn plow iS widely used in the Al-Pe area and not in the Irece area. Table 5.ll. Percentage of Producers Using Selected Farm Inputs by Areas Studied, I96 Percentage of Producers Using Inputs COmEinea’ Irece Al-Pe Area Non-chemical fertilizer 0 9 7 Chemical fertilizer 0 O 0 Good seeds 65 56 59 Insecticides “5 I“ 23 Fumigants 92 73 73 Ox and plow l“ 95 72 Hand planter “9 8l 7l Tractor 65 2 20 Pesticide dusting machine 25 8 l3 Source: SUDENE/MSU Farm Survey, l967 I33 The use of these inputs was the basis for construction of the innovation index used throughout this report. The index indicates the percentage of selected farm inputs currently in use by the individual respondent. One indication of who adOpts these innovations was Shown earlier by the positive relationship between income and innovativeness. Another indication is shown by the relationship between scores on the literacy-education index and innovativeness. As can be seen from Table 5.l2, the more literate, educated bean growers also have adOpted more innovations. Thus, innovators earn higher incomes and have more formal education than non-innovators. Table 5.l2. Relationship of Scores on Literacy Education Index to Scores on Innovation Index Score on Literacy Percent Innovations Adopted Education Index 0 - 25 26 - 33 3“ - 77 Lower 26 “2 32 Middle 2“ 32 ““ Upper l2 IS 70 Source: SUDENE/MSU Farm Survey, I967 l3“ The most recent.lnnovations which Irece producers said they adopted were as follows: tractor (5l%), fumigants (25%), good seeds (“%), ox plow (“%), and hand planters (“%). The remaining innovations were adopted by small percentages of Irece producers. A very different order of adoption can be found for the AI-Pe producers. A state- ment of their most recent innovations reveals the following order: hand planter (5“%), fumigants (2l%), ox-drawn plow (l6%), insecticides (3%), and fertilizer (2%). Other innovations were adopted by small percentages of Al-Pe producers. The Al-Pe bean producers learned about their latest innovation from neighbors (52%), relatives (I“%), peOple from other places (l2%), businessmen (9%), and agronomists (9%). The remaining “% is composed of others and non- responders. Less than I% learned about innovations from the mass media. Irece producers learned about their latest techniques from neighbors (5l%), relatives (25%), agrono- mists (l0%), businessmen (“%), and mass media (2%). Non- response and others make up the remaining 8%. A signifi- cant relationship was found between innovation and source of the innovation. It is apparent that the more innovative learn about new ideas from agronomists more frequently than do the less innovative (Table 5.l3). Neighbors and relatives are, however, the most important sources of new ideas. l35 Table 5.l3. Relationship of Scores on Innovation Index to Source of Innovation Information From Whom Learned About Innovation Score On Innovation Index Relatives Neighbors Agronomist %' 3% ‘7% Lower 36 58 6 Middle 32 65 3 Upper “2 “3 l5 Source: SUDENE/MSU Farm Survey, l967 Input Availability A further test of the availability of selected inputs was carried out to determine the degree to which the market sector is supplying new production items. Bean producers were asked if they could buy the following items in counties where they live. They gave the following responses: Don't (I) Chemical fertilizer Yes No Know '7%- '7% % Irece 8 59 33 Al-Pe l2 58 3O Combined areas IO 58 32 (2) Rent tractor Irece 98 l l Al-Pe 29 6| lO Combined areas “8 ““ 8 (3) Buy insectlcides Irece 9“ 2 A Al-Pe 7O 22 8 Combined areas 76 I6 8 l36 The input items which have been made available by the marketing system are also the input items most frequently used by bean producers. Tractors are easily available in Irece and are widely used. Insecticides are easily avail- able in both areas and are widely used in both areas. Chemical fertilizers are not easily available in either area and are not used by producers. Thus, a significant causal relationship appears to exist between factor availability and factor use by bean producers or vice-versa. The less innovative producers are as well aware of what can be bought in the marketplace as the more innovative producers. Neither a test of the individual input items nor a test of an index combining these input items was significantly associated with innovativeness. Thus, perceived availability does not vary by innovativeness. Producer Attitudes Toward Fertilizer One of the reasons why modern agriculture is so highly productive is because of its high rate of use of chemical fertilizers. The level of producer knowledge and their attitudes toward chemical fertilizer can be an important factor affecting the rate of adOption and the potential success of a fertilizer distribution program. Slightly over half, 52%, (Irece 50%, Al-Pe 5“%) know what fertilizer is. I37 A test of these responses against innova- tiveness was significant. The more innovative were aware of fertilizer more frequently than the less innovative (Table 5.l“). Table 5.l“. Relationship of Scores on Innovation Index to Knowledge of What is Fertilizer Knowledge of What is Fertilizer Score on Innovation Index Knows Doesn't Know 7% %7 Lower “ 5 Middle “3 57 Upper 63 37 Source: SUDENE/MSU Farm Survey, I967 The attitudes toward fertilizer use for those who know about fertilizer are revealed by the statements below: (I) It is difficult to use Agree Disagree Irece l8 33 Al-Pe 2“ 28 Combined areas 22 29 I38 Agree Disagree (2) This land is good and does not need fertilizers. Irece 39 IO Al-Pe 22 32 Combined areas 26 26 (3) It does not pay to use fertilizer Irece 35 l2 AI-Pe II “I Combined areas I7 32 (“) Would use fertilizers if they were cheaper Irece 8 “2 AI-Pe 36 I5 Combined areas 28 22 (5) The neighbors think it is foolish to use fertilizer. Irece 39 6 Al-Pe 28 I9 Combined areas 3l l5 (6) I would buy fertilizer if I could borrow more money. Irece 6 ““ Al-Pe 3l 20 Combined areas 2“ 26 In general, Al-Pe producers are more favorable toward the use of fertilizer than Irece producers. This is also consistent with the fact that market availability is slightly greater in the Al-Pe area than in the Irece area. The better quality land in Irece is also a reason for their less favor- able attitude toward fertilizer use. I39 Using statements l-6, a fertilizer prOpensity index was constructed. This index was not significantly related to innovativeness and modernity. The more innovative producers did not score higher on the index, which means they do not have a more favorable attitude toward fertilizer use. However, the AI-Pe bean growers do Show a significantly greater willingness to use fertilizers than do the Irece producers (Table 5.l5). Table 5.l5. Scores on Fertilizer Propensity Index by Bean Production Area Studied Area Studied Score on Fertilizer Propensity Index Lower Middle Upper %' 7%3 % Irece 25 55 20 Al-Pe “5 SI “ Source: SUDENE/MSU Farm Survey, l967 Use of Credit Sources of Credit This section presents an analysis of the credit situation in the two bean areas. As such, it attempts to shed some light on the sources and costs of credit along with some of I the problems associated with borrowing money for those who borrow and those who do not. l“0 In I966, “9% (Irece 5I% and Al-Pe “8%) of bean pro- ducers borrowed money. They received an average of l.2 loans during that year. The more innovative producers borrowed money more frequently in I966 than did the less innovative (Table 5.l6). The sources of loans are very similar for both areas (Table 5.l7). The government banks account for about 60% of the loans and are the predominate credit institution in the bean areas. Farm c00peratives are the second most important source of loans. Bean farmers' neighbors are next in importance in Al-Pe, but not in Irece. Private banks are not an important source of direct loans to producers in either area. Amount Borrowed The average amount of money borrowed was NCr$955 for all producers who borrowed. Irece bean producers borrowed an average of NCr$l,“60, while AI-Pe producers borrowed an average of NCr$738 during I966. The Irece producers are using nearly twice as much credit in their farming Operations as are the AI-Pe bean producers. The amount borrowed was significantly related to innovativeness. The more innovative producers do use more credit than the less innovative producers (Table 5.l8). The largest loan made to a bean producer in Irece was NCr$l0,000 and the largest in AI-Pe was NCr$5,000 during I966. l“l Table 5.l6 Relationship of Scores on Innovation Index to the Percentage of Bean Producers Who Borrowed Money, I966 Score on Borrowed Didn't Borrow Innovation Index Money; I966 Money, I966 Lower 37 63 Middle 36 6“ Upper 66 3“ Source: SUDENE/MSU Farm Survey, l967 Table 5.l7. Percentage of Bean Producer's Loans Obtained From Different Sources in Areas Studied, I966 Area Studied Source ’_CombThed Irece AI-Pe Areas %’ % %' Relatives 6.3 l.“ 2.9 Private bank 6.3 I.“ 2.9 Government bank 65.5 5“.5 57.9 Neighbor 3.I l2.8 9.8 Land owner 0 7. “.9 Businessmen 6.3 8.6 7.8 Buyer 0 l.“ l.0 Credit co-Op l2.5 l2.8 l2.7 Other sources 0 O 0 Total IO0.0 lO0.0 lO0.0 Source: SUDENE/MSU Farm Survey, l967. l“2 Table 5.l8. Relationship of Scores on Innovation Index to Quantity Borrowed on First Loan Score on Inno- Quantity Of Money Borrowed I966 vation Index NCr$l-“OO “OI-990 SOI-IOJOOO 7% 7? 7? Lower 73 I3 I“ Middle 32 “I 27 Upper 36 30 3“ Source: SUDENE/MSU Farm Survey, l967 Length of Loan Irece bean producers generally borrowed the money during August through October and repaid the loans during May, June and July. The usual length of the loan was about nine months. The loans received by Al-Pe bean producers were generally made during the months of March, April and May and repaid in December and January. These loans were also about nine months in length. The loan is generally made before the planting season and repaid at or Shortly after the harvest season. Cost of Borrowing Bean producers paid an average of NCr$88 for interest charges on a loan averaging NCr$955 for nine months. This l“3 amounts to an interest charge of l% monthly which is a very low rate for Brazil when inflation averaged about 3.9% monthly in I966. There was no significant difference in the interest rates charged between these two bean producing areas. The standardized farm loan of the govern- ment banks keeps interest charges similar between areas. The important point here is that the low interest charges for farm loans are a type of federal subsidy and other things being equal should make borrowing money very attractive for farmers. Because the interest rates are low, however, it becomes necessary for the banks to ration farm credit. Possible Uses of Additional Credit The “9% of bean producers who borrowed money were asked why they did not borrow more money in I966. Eighteen percent out of the “9% said banks do not make larger loans available to farmers, l5% were not willing to risk taking a larger loan, 8% did not have the assets to guarantee a higher loan and 6% do not have anything on which to use a larger loan. Bean producers generally agreed that, if they had more money, they would either plant more beans or buy livestock. A few would buy more land. Other items were seldom mentioned. Producers were asked how much money they would like to borrow at a 20% annual interest rate on a year-long loan. l““ Irece bean producers said they would borrow an average of NCr$5,l96, while Al-Pe producers would borrow NCr$2,583. Producers seem willing to borrow much more money at this higher rate of interest. However, the 20% rate is Still less than the average rate of inflation in recent years. A simple correlation of 0.26 between innovativeness and the amount of credit desired at the 20% interest rate was statistically significant. Thus, not only do the more innovative borrow more at the present time than the less innovative, but they also have a greater demand for additional credit. Non-Borrowers' Attitudes Toward Credit Bean producers who did not borrow in I966 were asked why they had not tried to borrow. 0f the SI% who did not borrow in I966, l“% were afraid to risk borrowing money, l6% had tried to get a loan and could not, l6% said they did not need to borrow, and 5% did not know why they had not tried to borrow. There were no differences between the two areas in the percentage distribution of the reasons for not borrowing. Thirty-four percent of all bean producers have never tried to borrow money. The reasons given for never having tried to borrow are: borrowing is too risky (l9%), I have never needed to borrow money (5%), it is very difficult for l“5 farmers to borrow money (l2%), and there is too much red tape (“%). Some non-borrowers gave multiple reasons. Thus, non-borrowers are kept from the bank mainly by their own fear of borrowing money. This is consistent with the conservative reactions of been producers to the risk game posed during the interview and discussed later in this chapter. Thus one-half of the bean producers make use of credit in their farm Operations. Irece producers borrow larger sums of money than do Al-Pe producers. Interest rates are low for bean producers borrowing from the government banks. Major barriers seem to be the maximum limits which any one producer can borrow and the fear associated with the risks of borrowing money. In conclusion, since bean producers only cultivate about 20% of their land at the present time, there is additional land available for expanding output. The low quality of land available is a limiting factor. The low bean yields are a reflection of the low level of soil fertility. The availability of credit is an important factor affecting the bean area planted. The most innova- tive firms have the most adaptability to changing price conditions. Family members are the primary source of farm labor, although large producers do hire additional labor rnore frequently than small producers. Producers who are the l“6 most innovative and output responsive earn the highest farm incomes. Several varieties of beans are used at the present time which all yield about the same results. New or improved higher yielding varieties are needed for commercial distribution. Modern farm technologies are seldom used on farms, but the more educated producers do make greater use of these technologies than the less educated producers. Local availability is an important factor determining input use. The more innovative producers Show greater knowledge of fertilizers than do the less innovative. Innovative producers borrow more frequently and in larger quantities than the less innovative. Description of Producers Marketing Activities Quantities Harvested and Sold The quantity of beans harvested by producers is shown in Table 5.l9 for the areas of Irece and Al-Pe. From I965 to I966, the increase in average quantity harvested was l3.6% in Irece and 36.“% in the Al-Pe area. Based upon the farmer survey, the quantity produced in the total Irece area was estimated to be l“.6 million kilos of beans in I965 and I6.6 million kilos in I966. The amount harvested by bean producers in the Al-Pe area was 26.8 million kilos of beans in I965 and 36.5 million kilos in I966. These l“7 .kom. .>m>t=m etmu =mz\uzuc=m "mutaom -- aka -- -- NNm -- -- Nmm -- mm_mm seam .mu0p mo ucooL6m mm mO_mm comm -- mo_~ -- -- mmm_ -- -- mom~ -- “Luz .mom. mo_mm Eme .mu0h -- mm__ -- -- Jam -- -- ~k~_ -- “Luz owm_ m0 _ mm cmom ~.m ..au :.o~ ~.N m._~ m.:@ N._ :.ow o._m emumm>tmz mcmOm mo ucOOLOm mm O_Om mcmOm o.mm mo_m mmNN ~._m som~ o_m_ m... m_om om~m Amo__¥e a_om mcmmm >u_ucm:o m.m~ ~m_: ~m~m 3.6m moo: ommw o.m_ mom: :omm Amo__xv nuumm>tmx mcmOm >u_ucm:o, omcmgo mom. mom. mmwmgo oom— mom_ mmcMLO mom. mom. mu_ummtouumtm;o mec< ooc_nEOo men—4 move. Lo» mmOL< >n Econ 0mm. Ocm mom. can mu_ummLOuumLmsu mo_mm ocm co_uO:OoLm comm .m_.m O_nmh l“8 production estimates are based upon an expansion of the data in Table 5.l9 using the estimated numbers of bean producers in each area. It was estimated that there were 3,720 producers in Irece and 9,000 in the AI-Pe area. Total beans marketed for Irece was estimated to be ll.9 million kilos in I965 and I3.“ million kilos in I966. Total beans marketed in the AI-Pe area was estimated to be l7.3 million kilos in I965 and 26.l million kilos in I966. The estimate of quantity marketed is based upon the average quantity sold per farm. The quantity sold in the combined areas increased at a rate slightly larger than the quantity harvested from I965-66 (Table 5.l9). This indicates that producers have a relatively stable on-farm demand for their production and that any given increase in production would lead to a prOportiOnately greater increase in quantity sold. Irece producers sell a much higher percentage of their production than the Al-Pe producers, Table 5.l9. Roughly 25-30% of the beans produced were not sold. This amounts to about 900-l,000 kilos per farm annually which are used for family consumption, seed, or are lost in storage. Bean sales per producer for the combined areas was NCr$l,l95 during I966. Irece producers sold an average of NCr$l,772 while the producers in the AI-Pe area sold an average of NCr$96“ (Table 5.l9). The lower sales volume l“9 per farm in the Al-Pe area is a result of both lower prices received and less bean production available for sale. For all bean producers combined, bean sales account for about 57% of total farm sales. The higher percentage for the Irece area (63%) than for the Al-Pe (52%) indicates the Irece producers are more specialized in bean production. Average Farm Prices Since much of the variation in income is due to price variation, it is necessary to compare prices in both areas. The over-all average bean price was NCr$O.3“ per kilo. The price in the Irece area averaged NCr$O.“l per kilo, and in the Al-Pe area it averaged NCr$O.3l per kilo. Bean prices received by farmers in this sample survey ranged from NCr$0.l3 to NCr$O.67 per kilo during I966. The higher average price received by bean producers in Irece is, as will be discussed later, a result of better quality beans, improved market coordination, and more timely sales practices. Seasonal and annual price variations are probably the single most important factors contributing to product market instability. Such instability may seriously affect production and marketing decisions which determine firm output and growth. As can be seen from Table 5.20, there was Table 5.20. I50 Monthly Distribution Of Sales Transactions and Farm Prices, I966 Percent of Sales in: Combined Average Price Month Irece Al-Pe Areas Farm PriceI Index 7% 7% %’ %T 7?— January “.2 ll.2 8.8 30.33 l00.0 February 6.9 5.0 5.5 32.59 IO7.“ March 3“.6 2.9 l0.“ 38.90 l28.2 April 2“.8 3.5 8.l “0.““ l33.3 May l0.3 l.7 5.8 “2.6l l“0.“ June “.2 - l.0 “0.502 l33.3 July 1.5 - 0.3 20.002 65.9 August - “.6 6.8 22.“0 73.8 September l.5 l9.6 l5.7 22.l5 73.0 October l.5 l7.5 10.7 3l.6l lO“.2 November - l9.2 l“.9 3l.67 l0“.“ December l.5 l5.0 l2.0 3l.58 l0“.l Total IO0.0 IO0.0 lO0.0 lAverage Farm Price for the combined areas are in centavos of new cruzeiros per kilo. 2Months with less than ID Observations. Data may be biased. Source: SUDENE/MSU Farm Survey, l967. l5l considerable seasonal variation in the farm price. The September price is slightly more than 50% of the month with the highest price, May. Data on annual price variation is not available, although it is believed to be significaht. Although innovativeness was not significantly related to the actual price received, the index of output responsiveness was related to the farm price received. Those who scored highest on the index of output response also received a higher price for their output (Table 5.2l). On a more general level, it seems as though those who Show the greatest adaptability to changing market conditions are also those who receive the highest farm price. Table 5.2l. Relationship of Scores on Index of Output Response to Farm Price Of Beans, I966 Farm Price of Beans, I966 Score on Tndex of Output Response NCr§l - 30 3l-33 3“-67 %7 7%» % Lower 36 “3 2l Middle “6 29 25 Upper l8 36 “6 Source: SUDENE/MSU Farm Survey, l967 l52 Number and Timing of Sales Producers were asked detailed information on up to four transactions which included time of sale, price, quantity, and to whom sold. In total, there were 3l2 sales transactions completed. There were 72 transactions recorded in Irece and 2“0 recorded in Al-Pe. Bean producers in the Al-Pe area made an average of 2.7 sales during I966, while in Irece the average was l.6 sales. Producers ranged from 0 - 20 sales during I966. There are two important marketing periods which appear in these data (Table 5.20). The first period begins in March and ends in May. In this period, Irece producers make 79% of their sales transactions. The second major marketing period begins in September and continues through January. In this period, 82% of the sales are made in the Al-Pe area. Thus, there is a great deal of seasonal complementarity in the movement of beans from the two areas. In the aggregate, the months of September to December are the most important marketing periods. The single most important marketing month for bean producers is the month of September. This is also one of the months with the lowest farm price of the year. March is the month of greatest sales for Irece bean producers and September '53 for Al-Pe producers. The months of June, July and August are months during which the local market is not being supplied by beans from these two areas. A comparison of the major marketing periods with the monthly farm price data demonstrates clearly that most farm sales are made during the period of lowest farm prices. This problem is more serious for the AI-Pe producers than for Irece producers. It is also apparent that farm prices did increase in the post-harvest period during I966. Furthermore, additional increases occurred for a period Of 6 to 7 months after the harvest season. Thus, seasonal variation in farm prices has created considerable product market instability in bean producing areas. As was demonstrated by the question on a minimum price program, removal Of this instability may significantly affect production decisions. Attitudes of Producers This last major section analyzes the attitudes Of producers in an attempt to determine the extent to which these attitudes may act as barriers to change. The attitudes of bean producers were tested by a series of questions referring to modernity, trust, risk, familism, and business orientation. The results of these questions l5“ are indicative of producers' adaptability or receptive- ness to new ideas. Reactions to the first two statements below indicate that most producers tend to have a low time preference for income. Agégg Disagree (I) It's better to receive NCr$90 one year from now than NCr$30 today. Irece 22 7I Al-Pe 27 6“ Combined areas 26 66 (2) It's better to live for today because tomorrow will work itself out anyway. Irece 35 57 Al-Pe 63 32 Combined areas 55 39 (3) One can trust equally in relatives and in other peOple. Irece 5l “3 AI-Pe 57 3“ Combined areas 56 37 (“) One can join a partnership with other people, even if they are not members of our family. Irece 82 l“ Al-Pe 68 2l Combined areas 73 18 (5) One may lose much money when working with others. Irece “0 52 Al-Pe 33 56 Combined areas 36 55 l55 Statements three, four, and five were used to construct an index Of interpersonal trust. There were no significant differences found between interpersonal trust and innovativeness or literacy-education. All groups of individuals seem to have about the same level of trust. Many are reluctant to trust peOple outside of their own family as much as family members. Nevertheless, a very high percentage would participate in a business partner- ship with people outside of their family. When bean producers were asked to play the risk game, the results were as follows: Willin Unwilling % %' Irece “l 55 AI-Pe “9 “9 Combined areas “7 5l The game involved paying a Small fee (Ncr$0.50) for a chance to choose three alternative payoffs: (l) 75% chance of winning NCr: 5.00 (2) 50% chance of winning NCr 20.00 (3) 25% chance of winning NCr$50.00 The highest percentage of those playing chose the third alternative, which indicates a preference for the high risk, high payoff alternative, but many also chose the other extreme -- low risk, low payoff. (Table 5.22) The scores on this risk game were not Significantly related to innovativeness or literacy-education. l56 Table 5.22. Percentage of Producers Choosing Each of the Three Alternative Payoffs lst 2nd 3rd N/A 75 3% 7% % Irece I“ 6 22 58 Al-Pe I“ 6 29 SI Combined area I“ 6 27 53 Returning to attitude measurement, it was found that a very high proportion of the farmers put a high value on family ties when considering alternative employ- ment opportunities. Opinions were more evenly divided on the desirability of a small versus a large family. Agree Disagree (6) It is better to have a job which pays little close to our parents than to earn more in a distant place. Irece 8l l7 Al-Pe 86 I3 Combined areas 8“ l5 (7) Toda it is better to have a smal family than a large one. Irece “8 38 Al-pe 53 “l Combined areas SI “0 l57 Agree Disagree (8) Local farmers would not like to see me progress more than they. Irece ““ “2 Al-Pe 38 “3 Combined areas 39 “3 (9) To make more money, it is better to know how to do business than to be lucky. Irece 69 43 Al-Pe “5 52 Combined areas “7 “9 (l0) Nowadays the farmer alone can't do much to improve his life. Irece 98 2 Al-Pe 7“ 22 Combined areas 82 I6 (ll) Farmers may count on the gover- nment to solve their problems. Irece 77 IO Al-Pe 8“ 9 Combined areas 83 l0 (l2) We would be in a better situation today if the scientists left things as they are. Irece l3 77 Al-Pe 23 67 Combined areas 20 70 (I3) The real barrier to an increase in farm production is lack of know-how. Irece 80 l“ Al-Pe 8“ l0 Combined areas 8“ ll l58 From statements nine, ten, and eleven an index of fatalism was constructed. This index was not significantly related to innovativeness; however, it is significantly related to literacy-education. The more literate-educated producers are less fatalistic than the less literate- educated producers. (Table 5.23). This suggests that self-help programs should be directed at the more literate- educated producers because they have the most confidence in their own abilities to get ahead in the world. Table 5.23. Relationship of Scores on Literacy-Education Index to Fatalism Index Literacy Education Fatalism Index Index Lower Half’ “Upper Half7 % % Lower 6l 39 Middle “3 57 Upper 3“ 66 Source: SUDENE/MSU Farm Survey, l967 A general index of modernity was constructed using statements l-l3. The more innovative and output responsive producers do not have more modern views than the less innovative as revealed by a comparison of the modernity index between these groups. Neither age nor literacy- l59 education was significantly related to scores on the modernity index. Those bean growers with the highest farm sales did not hold more modern views toward the world than other bean growers. In a similar way, scores on the mass media index were not Significantly related to scores on the modernity index. These results imply two alternative conclusions. One is that the questions are not testing the attitudinal relationships for which they were designed. This seems unlikely, however, because of the care which went into adapting these statements to the language of an illiterate producer. In addition, these attitudinal relationships had already been success- fully tested in the Puerto Rican phase of this research. For these reasons, it is most likely that bean growers are traditional in their views toward the modern world. The little variation which does exist is not an important indication of social and economic behavior. Summary Diagnosis of Market Related Barriers in Bean Production In summary, bean producers are rather poorly linked with the market economy. Bean producers could expand output by putting more land into bean production. Area planted has been expanding at the rate of about “% annually from I965-67. Additional land is available I60 because only 20% of the land in farms was being cultivated in l967. Bean production could expand without a con- comitant reduction in the output of another farm crop. Low bean yields in the Northeast (6l9 kilos per hectare) could probably be increased by improving soil fertility and adOpting new, higher yielding varieties. Less than l0% of producers said they would have to hire more labor in order to expand output. Bean producers averaged “.3 family members l2 or more years of age. More labor is hired to supplement family labor on large farms. Hence, more labor appears to be available for expanded production. Bean farms averaged 79 hectares in size, and total cash sales averaged NCr$2,lO3 in I966. The capital investment in farm land per farm averaged NCr$ll,lO3 in I966. Irece producers are more specialized in bean production and also grossed higher incomes than AI-Pe producers. Farmers appear to be responsive to possible changes in product price levels. On the basis of hypothetical survey questions it appears that a price slightly higher than I966 prices would encourage a considerable increase in bean production, while a price much lower than the I966 prices would cause only a slight reduction in bean production. A minimum price program actively carried out I6I at the present support price would encourage 32% of producers to plant more beans. Thus, producers indicated that they would respond positively to price signals if they are given the Opportunity to do so. Bean farmers are following relatively primitive production practices. Several varieties of beans are used at the present time, none of which seems to be highly productive. Less than l0% of the producers use fertilizers. Insecticides are quite widely used. The ox and plow is used much more frequently than the tractor, especially in the Al-Pe area. Thus, traditional technologies are more widely used by bean farmers than are modern technologies. Some of the traditional land and labor resources needed to expand output are available. The problem is to identify the barriers to greater use of modern inputs so that all resources can be more fully utilized to expand farm output. The knowledge level of farmers is generally low. Slightly over half of them (52%) knew what fertilizer was. Education and literacy levels are also low. Very little technical and economic research has been done to develop new farm technology and to indicate the apprOpriate combinations of this technology under varying soil and I62 rainfall conditions. Bean producers have little contact with the local extension Offices. The extension offices have a greater need for research results than what is currently available for use. Bean producers hold very traditional views of the modern world. Family ties are very strong, but producers are very trusting of others. Some producers want to change and believe that it is possible. Most producers feel they cannot change by themselves but that the govern- ment and science can help. An index of modernity was not significantly related to innovativeness, literacy- education, age, and other important indicators of economic behavior. Thus, very few signs of modernization can be detected from analysis of producer's attitudes. It is likely that very little change has taken place in their attitudes. The forces of change at work in the Northeast have not yet penetrated to the producer level in sufficient degree so as to materially affect their attitudes. One problem is a lack of availability and incentive to use the new technology which could greatly improve the output of the system. The modern inputs most widely available (e.g. insecticides) are also those most widely used. The modern inputs least available (fertilizers and tractors) are used I63 by small numbers of producers. Farm product and factor markets are important determinants of the incentive to use the new technology. The high price of modern inputs relative to farm product prices discourages greater use of modern technologies on these farms. The costs of fertilizers and teactors relative to farm prices and incomes is much higher than in developed countries where they are widely used. A great deal of price instability exists in the bean market. The lowest monthly price of the year was only 50% of the highest monthly price in I966. The major marketing periods are such that most producers sell when prices are at their lowest levels of the year. If this price instability can be reduced thereby raising the weighted average farm price, then producers have a price in- centive to expand output and make greater use of modern technologies. Although half borrow now, they could expand output with more credit. Those who do not borrow now because of risk considerations might borrow if credit terms were more acceptable and funds were available. Nearly all loans are farm production loans made at planting time and repaid at or shortly after harvest time. l6“ A shortage of marketing credit appears to exist at the present time. Most producers borrow from the government banks where interest rates (I% monthly) are less than the annual rate of inflation (3.9% monthly in I966). Credit at the government banks is rationed to producers. Producers seem to be willing to pay higher interest rates in order to borrow more money. Bean production in the Northeast is still part of traditional agriculture. Production is gradually changing toward greater dependence upon the market economy. AS this transition takes place, it becomes important to stabilize farm product and factor markets. Given the apprOpriate incentives, the transition can be facilitated so as to achieve better linkages between uban and rural areas . CHAPTER VI THE BEAN ASSEMBLY MARKET SYSTEM Introduction "Assemblers” perform the functions of buying small lots of commodities, assembling them for sale in local markets and forwarding to distant markets. In carrying out these functions, assemblers assume the risk of ownership and add to the value of the commodities by creating "place utility”. Assemblers may also contribute ”time utility" through storage activities and may add to "form utility“ by sorting, grading and processing commodities. Assemblers are also involved in providing credit to both producers and other small assemblers. As demonstrated in Chapters IV and V, bean producers are poorly linked with the non-food consumption goods and factor input markets. The best linkage which a traditional agriculture has to the money economy is through the local assembly markets. Furthermore, this farm product market provides major contact for producers with the money economy, more important than the consumer goods and factor markets. This chapter focuses on the role which assembly markets can play in the linkage of the urban-rural economies. I65 I66 The Specific linkages are from assemblers forward to the urban market and backward to the producer. An attempt will be made to evaluate how well the assembly market system has performed its marketing functions by asking two questions: I. IS the system sufficiently well coordinated so that firms are encouraged to expand output and increase productivity? 2. Are there traditional attitudes and/or value orientations which limit the firm's willingness to change? This chapter is made up of four sections. The first section describes the structural characteristics of size and number of firms in the assembly market. A discussion of the market channels reveals the buying and selling patterns of assemblers. The third section is an analysis of market performance. The fourth section presents the attitudes of assemblers. A diagnostic summary of the assembly market system concludes the chapter. Structural Characteristics The number of firms in the different size categories as well as the totals for the two areas being studied are shown in Table 6.l. About 5l7 firms Operate in the Alagoas-Pernambuco area, while only 70 function in the Irece area. The basic market structure is one of many firms I67 Table 6.l. Estimated Number of Assembly Firms by Categories for the Two Areas Under Study, l967 Assembly Firm Typea AI-Pe Irece Large Coordinated Assemblers (handling more t'an l00 tons per year and selling exclusively to wholesalers) l5 2 Medium-sized assembler (handling 50 to 2“0 tons per year and selling to truckers and assemblers as well as wholesalers) l7“ l8 Small assemblers (handling less than l20 tons per year and selling mostly to other assemblers 306 25 Itinerant Truckersb 122 25 Total 5l7 70 aRanges overlap considerably due to the variation in volume handled between area and between urban and rural assemblers. bThis is an estimate of the number of itinerant trucker-assemblers which normally buy in the areas but who may not reside there. Source: SUDENE/MSU Assembler Survey, I967. I68 characterized by large variations in size within and between categories. It is quite apparent that there are a small number of large firms in terms of market Shares and absolute size. There are large numbers of medium-sized firms and very large numbers of small assemblers in each area. The Irece area lwas a propor- tionately smaller number of small and medium-sized assemblers and a proportionately greater number of itinerant truckers than the Al-Pe area. The larger number of firms in the Alagoas-Pernambuco (Al-Pe) area is demonstrated by the fact t“at there is one assembler for every “8 tons of beans produced, compared with one per l00 tons in Bahia. Large coordinated assemblers are usually headquartered in convergence centers. There are about Is of these firms in Alagoas and Pernambuco and 2 in Irece. The average yearly volume of these assemblers in the Al-Pe area is estimated at “79 tons of beans and l00 tons of corn, versus “95 tons of beans and 9l5 tons of corn in Irece. (Table 6.2 and 6.3). The yearly volume for large coor- dinated bean assemblers interviewed ranged from lOO to 8l0 tons during I966, which accounts for the much higher total value of their purchases compared to other assemblers. I69 - ~.e e.__ m.m_ m.e_ ..m. nee=_o> eo N emmtoem . m.~ m.o ~.o_ m.m m.~o Amcou u_cuOEV mmucoe : OOcOOm - me. om 6mm 0.. me... Anceeee .ane >e_unenu ommcoum Ommco>< k.~e m... m.m ~.e~ ..m_ m..:. nooo._mcoz mummLOcam .mu0h - m.m~ m.mm m.m e.o_ ..N. .ne_eno co eeeutme mm OO__oo:m u_OOLu ooo.o~ oee.m .em.~ o~m.m_ ome.m mmm.km beene>e_ meoz 0.0m e.e_ m.m_ ~.mm k.m~ ~.oo_ mam. .oeente ecOu mc0h u_cuoz o.e:_ m.em ..mN e.ek e.mm «.mke eem. .eeence mcmOm mach O_Luoz Loxoach .mcam cone: .mcam cone: omega mo_um_cOuomcmcu penEm panam, Enema: Eaeae: eeencwmwooOIi immOmm_< .mEc_u >_nEOmm< comm Ommco>< mo mo_um_cmuumcmcu .mcauoacum OOL< oonoEmccom .N.m 0.06b I70 .mmm_ .>O>L:m co_nEOmm< :mz\mzwo:m "OOLOOm .Oom_a boxcmziz “mew—nEOmm N emncoem . :.o w.m N. 0 mm mcucoe : OOcOum mach - ma e. me me om. Anceeee .ene >e_unene OmOLOOm Ommco>< mom m.m m.m_ m.m_ 0.5m. mmN mooo._wcuz momchLOm .OOOP . m.m o.:m . m.o o.m_ .mu_omu mo ucOOLOm mm OO__oQ:m u_omcu ooo.m. mmm.m mmm.m - Ne..m ooo.mm neene>c_ meoz om. m.m m..@ m: o.~:_ m_m owm. .boomch ccoo mcoh O_euoz o.oe m.m_ e.km o.~: k.~m mm: oem. .neence memom meow o_cuoz mcoxoacb .mLOm cone: .mcam cone: Omen; mo_um_LOuomcm:u pmemi Fememi E:_mori Eapbotl wOumcmeooU move. mec_u >_bEOmm< comm mo mu_um_cOuOmcmcu .mcauuacum .m.w O_omh I72 nom— .>O>c:m LO_oEOmm< :mz\uzmo:m "OOLOOm .Oum_a umxcngtenmco_nEOmm_Ox__ m_ LOLLO mc__aEmm o_nmcoo_mcoo .Eaumcum some c_ ooZO_>cOuc_ Ocoz so» >_O>_um_Oc ouc_m "Ouoz 2.: e.e.<.z e.< e.z e.e.3 z emeutaom .owc_ ounce comm: - Ne N. ON m. cm: mee__ee:m co consaz oom.m_ KN._ m:.m . - 0.: o_emm .mu_amu\m6mmcucam mcoxoncb .mcam cone: .mcam cone: mec< mu_um_LOuummeu remem reenem e:_me:, Enema: weeneeaeooo, Aboac_uc0uv .m.m 0.3m» I73 The average Storage capacity of large assemblers in Irece is l80 square meters, and in the AI-Pe area, it is ll79 square meters. They Store a slightly lower percen- tage of their purchases than the middle-size assemblers. However, on the average, they Still store I3.l% of their total volume for more than four months, and because of their larger sales volume they perform a large Share of the storage function. Large assemblers have more money invested in their business than any other group of assemblers. A high purchases to capital ratio means that they are also using this capital more effectively than other assemblers. Large assemblers maintain an average of 6.6 workers. The average annual wage per worker was estimated by them at NCr$l,l20. Even large assemblers have no systematic or analytical accounting procedures and are unable to estimate such indirect costs as bad debts, risks of tax collection and total selling costs. Medium sized assemblers are specialized commodity buyers with established places of business in a local trading center. These assemblers average about one-tenth of the volume Of beans and about one-third of the volume in corn handled by large assemblers. It is estimated that l7“ there are l7“ medium-sized assemblers in the Al-Pe area and l8 in Irece. Medium-sized assemblers are defined as those with yearly sales volumes ranging from 50 to 2“0 tons and who sell some beans to other assemblers. An indication of the typical medium-sized assembler in each area is given in Tables 6.2 and 6.3. The average storage capacity of these assemblers is significantly less than for large assemblers, but they use it more fully. Their capital investment is considerably less than for large assemblers. Some medium-sized assemblers Store up to 30% of their volume and rotate their capital only once or twice a year. Considering the cost and difficulty of obtaining adequate market information, the difficulty of selling directly to urban wholesalers, and the small scale of producers from whom they buy, the decision to concentrate on low volume- high margin transactions is a rational one. Small urban assemblers live in small towns where they trade in small volume. They usually have other occupations (farming, etc.) and turn to bean buying for less than half the year when working capital is needed to finance the harvesting and marketing of farm production. It is estimated that in the Al-Pe area, there are l27 such small I75 urban assemblers and in Irece about l2. The small urban assemblers range in size from l.2 to l08 tons of beans annually. The average characteristics of small urban assemblers are found in Table 6.2 and 6.3. They usually store beans in the back of their store, in their garage or in an empty room in their house. Storage is usually for a relatively short period as indi- cated by the fact that four months after harvest, an average of only 0.3 tons remain in storage. Their capital investment is small, so both entry and exit from the market is easy. The small urban assemblers' specialty is supplying credit to small farmers. An average of 35% of their capital is used in this manner. A relatively small percentage of this credit is advanced in the form of goods (small grocers). There is some indication that the importance of these assemblers would be reduced if other sources of credit were available for small farmers. In addition, if more bank credit were available to large and medium-sized assemblers, they could have sufficient working capital to purchase all the beans small assemblers presently purchase. Case Study interviews revealed that one competitive advantage of small urban assemblers is that they are able to I76 avoid almost completely the circulation tax.h' By not paying the tax when the purchase is made from the farmer, assemblers Show no margin and are then able to act as if they themselves had produced the beans. Small rural assemblers are located at a crossroads or in a small village. It is estimated that there are I79 small rural assemblers in the AI-Pe area and I3 in Irece. Small rural assemblers range in size from I.“ to l20 tons per year. Like small urban assemblers, these rural firms also Specialize in supplying credit to farmers. A signi- ficant part of the credit they provide is their own. One of the small rural assemblers was asked what he would charge farmers if he got credit at two percent a month. The answer was 2.5%. Because of their more frequent contact with producers, small rural assemblers have better credit information about farmers than do medium-sized assemblers. The greatest uncertainty affecting their credit transactions is weather within the community. Small rural assemblers in Alagoas and Pernambuco store only 6% of their volume and have an average of I65 sq. “'The circulation tax is a tax on the gross margin -- difference between buying and selling price -- for any transaction. At the time of the study the margin tax was' set at 18%. I77 meters of storage Space. Their basic marketing function is to collect small lots of beans from producers and sell them almost immediately to larger assemblers. They, therefore, maintain a fairly high ratio of purchases to capital assets. Most indicate little willingness either to move into another business in their community or to go outside the community to find other employment or business, even though their investment in the business is small. This immobility is tied to the fact that most are farmers in the community and have strong personal ties with their neighbor-suppliers. Itinerant trucker assemblers travel from market to market and deal in 6-8 ton lots. It is difficult to estimate the number of itinerant assemblers, since many are not known in the areas by name, and there is a constant flux of assemblers who had never appeared before. However, a partial list of names was obtained, and the number of those that regularly buy in each area was estimated: l22 in the AI-Pe area and 25 in Irece. Some truckers have their own trucks, while others rent one or more for the purpose of buying, transporting, and selling farm products. A few itinerant truckers in the Northeast have done well enough to rent warehouses at several points in the major bean producing areas. According I78 to other buyers, truckers have been the most effective tax evaders and some have discovered that their tax liability under the new circulation tax can be reduced by establishing a firm somewhere along their route. Truckers generally do not store beans, and they do not advance credit to producers. Their investment is second only to that of the large assemblers, and they maintain a high purchases/capital ratio (Table 6.2 and 6.3). Description of Market Channels The principal buying and selling patterns of the marketing system serving the two sample survey areas are summarized graphically in Figures 6.l and 6.2. The circles on the map indicate the transaction points in the channel. The relative importance of each flow is represented by the width of the connecting lines. Also, the percent of product moving through each channel is indicated numercially in a small box within the connecting lines. The average transaction price within channels is also indicated in the connecting lines. The SUDENE/MSU field surveys of producers, assemblers, wholesalers and retailers provided most of the data used in constructing the channel maps. These survey data were ode E mu: 33243 :00 .8532. .0 ~53: ooo HZuS—mi—aabw <_IO>L:m Eemm :mz\uzuo:m ”OUeOOm .oLmza: bumm_n on.>mE moo—m) Omozu .mcomum>cOmno cm”: 30» m ocm mco_um>comno mo consac ..mEm o co meow .mEmcmo__x c_ oucammoe m_ o~_m co_uonmcmch_ O~_m co_uummcmch ommco>< >m pummzueam acoueom 0mm— oee. o.oo_ o.oo_ o.oo_ mmnce>< Lo .neoe - e.m e.~ a.“ neoeeo m_w m.m 0.x m.: LO__muOL .mOOJ memm e.- ~.o~ e.om cesee beneee_e_ Nmeme e.m _.~ m.m tesae m_nee_oez ceeeo .mNN e.m m.e m.m_ cexae e_nne_oee, oe.uee .mea o.em m.me ..o. xemcnee ceczo emaoeecnz 0mm. m.e_ ~.e_ o.m_ ncoxee ee~_n e:_eoz amen. e.m e.m ..o. te>ee __n2m mOL< moL< oocmneou ooc_nEoQ O¢i_< move. Lo>am mo oa>h .moo>b Lo>3m >n o~_m co_uummcmch ommeo>< Ocm .co_uummcmch mo_mm mo copu:o_cum_o .o.o O_nmh l9“ The farm chapter demonstrated that substantial seasonal variation in the price of beans does occur. Assemblers were asked if such price variation was a barrier to their expansion. Sixty-four percent said that such price instability was a barrier, while 36% said it was not. No significant differences were found when these responses were tested against size or type of firm and modernity. Price insta- bility seems to affect all firms in the system. Although the evidence is not available, price variability may be advantageous for the assembler who studies the market closely in order to take advantage of such price change. For the majority of assemblers, however, this would not be true. In addition to price instability, the assembler must also concern himself with supply uncertainty. One way of overcoming this problem is to have a large number of suppliers. The hypothesis that more modern firms have more suppliers is not true. NO significant differences were found. Another possible means of reducing uncertainty is to stabilize the number of suppliers. The more modern firms have chosen this alternative by loaning money to their suppliers using a tied sale arrangement. Only 28% of those ranking in the lower third on an index of modernity advance credit to suppliers, while 87% of those on the upper third of the index advance credit to their suppliers (Table 6.7). Such a tied sale arrangement is similar to I95 Table 6.7. Relationship of Scores of Modernity Index to Credit Advancement Ranking on Modernity Index Credit Policy Lower Middle Upper Third Third Third % %' 4% Advances money to suppliers 28 73 87 Does not advance money to suppliers 72 27 I3 Source: SUDENE/MSU Assembler Survey, l967. to the contractual arrangements used in developed countries which may or may not provide credit in addition. An essential difference between the tied sale arengement used here and contracting is that the former does not specify prices, quality, etc., in advance of the harvest season. This, of course, may be of detriment to the producer involved. Competitive Behavior Bean assembly markets appear to be reasonably compe- titive. The large number of buyers in the market has so far prevented the emergence of any strong monopoly elements. The relatively easy conditions of entry and exit contribute I96 to a structure of many small firms. Even with this structure, there are factors which limit competitive behavior. A majority of assemblers, 68%, did not view excessive competition as a barrier to their expansion. The size of firm and modernity index were both tested against assembler's views of competition as a barrier. No significant relationships were found. The failure to perceive competi- tion as a barrier is probably caused by two factors. One is that, in an atomistic market structure, all firms are able to Operate independently without regard for inter-firm effects. Secondly, atomistic assemblers who have not felt the effect of a changing market Structure are not aware of competition as a barrier. Competition is also restricted in these areas by informal procedures among assemblers. The attitude of assemblers toward competition is revealed in the following statement. "The businessmen who pay more in order to buy more are not well regarded by Others." Thirty-two percent agreed and 6“% disagreed. When tested against scores on a modernity index, a significant relationship was found. Social sanctions against competition differ among firms (Table 6.8). Among the more modern, 70% believe such sanctions do exist. One explanation of this is that only among the moderns do sanctions exist, while among the more traditional buyers, no such sanctions exist. A more plausible I97 Table 6.8. Relationship of Scores on Modernity Index toward Assembler Belief in Social Sanctions Against Price Competition Social Sanctions Score on Modernity Index Against Price Competition Lower Third Middle Upper Third % %' 77% Sanctions do exist “7 l8 70 Sanctions do not exist 53 82 3O Source: SUDENE/MSU Survey, I967 explanation is that such sanctions exist for all buyers but not all buyers are aware of them. The traditional buyers who have never paid higher prices to gain a greater market share may be unaware of such social sanctions. The moderns, on the other hand, may have become more price competitive and discovered that such sanctions do exist. Thus, social sanctions against price competition probably do exist and the more modern price competitive buyers have been sanctioned when they broke with tradition. Price collusion is another means of achieving non-price competition. Each assembler was asked if any of his competitors had ever invited him to make a price agreement with them. Twenty-eight percent had been approached and I98 72% had not. These responses were tested for their relationship to the size of firm and modernity index. Since no Significant relationships were found, price collusion among bean assemblers may only slightly reduce the level of competition in the whole system. Tied sale agreements between assemblers and producers can also restrict the degree of competition in the system. Since most of these loans go to small farmers, the tied sale arrangement can reduce the bargaining power of small producers. Most bean producers, 76%, never sell beans for later payment to anyone. Thus, tied sale agreements and sales for deferred payment may reduce the bargaining power of a limited number of small producers. For the vast majority, however, these practices do not seriously reduce the degree of competition in the assembly market. Market Information The types and frequency of assembler and producer exposure to some mass media information are shown in Table 6.9. It is apparent that assembler use and exposure to mass media information, such as newspapers, is higher than that for producers. Radio is the best means of mass communication among assemblers and farmers. I99 Table 6.9. Assembler and Producer Exposure to Mass Media Information Percent Positive Respppse Item Assemblers Producers %' % Do you read newspapers “l 52 Read newSpaper last few days “0 36 Functioning radio at home 85 55 Listen to radio at least one hour daily 78 23 Never watch television ““ 68 Do you go to movies sometimes 55 27 Source: SUDENE/MSU Rural Survey, l967 At the present time, the assemblers' main source of market information is from other businessmen in the community (““%), direct observation in the local markets (28%), private radio (9%), commercial radio (7%), and out-of-town buyers (5%), other (7%). Thus,at the present time, assemblers do not depend upon the mass media for market information. The main source of information also varies by size of assembler. The large coordinated ZOO assemblers rely upon wholesalers and telegrams to the urban center for their information. The itinerant trucker also relies upon wholesalers for his information. Medium- sized assemblers have less contact with urban centers, so they must rely more heavily upon local market information. Small assemblers must rely entirely upon the local market for their information. Thus, large assemblers with direct information contacts have the best information about urban market conditions. Large scale firms do, therefore, have an information advantage over small firms. Assembler response to the following question demon- strates that lack of market information can be a barrier: ”I can take advantage of my suppliers easily because they don't know much about prices.” A significant relationship exists between size of firm and its response to the above statement. (Table 6.IO). The large firms have a greater information advantage relative to suppliers than do small firms. This is not to say that these firms are exploiting suppliers as a result of their position, but only that the Opportunity for them to do so does exist. To the extent that such Opportunities are actually exploited, improved market information can both increase competition and improve the over-all coordination of the system by keeping producers and assemblers well informed. ‘ 20I Table 6.l0. Relationship of Size of Firm to Its Market Information Advantage Over Suppliers "I can take advantage of my Assembly Firm suppliers easily because they Sales in NCr$ don't know much about prices.” Agree Disagree %' 7% O-“2,500 39 6I “2,50I-l,000,000 8l l9 Source: SUDENE/MSU Assembler Survey, l967 Sixty-six percent of bean producers learn about prices from the bean buyers themselves. Fifteen percent learn about prices from their neighbors, and l“% obtain their price information at the feiras. Less than I% hear price information over the radio. Thus, it is evident from the above that bean producers are very dependent upon buyers for their price information. The degree of producer contact with buyers provides an idea of their general activity in the marketplace. Bean producers on the average sold to only two different buyers in I966. Before selling, producers were contacted by an average of three different buyers. The number of buyers from whom bean producers Obtained price information 202 before makinga sale was signficantly related to an index of their output responsiveness. Those who scored highest on the index of output response also contacted the greatest number of buyers (Table 6.II). The reader is reminded here that the most output responsive producers also sold for the highest farm prices which implies that comparative pricing among different buyers to gain more information does indeed bring positive results. Table 6.ll. Relationship of Scores on Output Response Index to Frequency of Producer-Buyer Contact Score on Output Number of Producer-Buyer Contacts Response Index I 2-5 6-8 %’ 7% %’ Lower 60 I8 22 Middle 35 37 28 Upper BI 37 32 Source: SUDENE/MSU Farm Survey, l967 Grading and Quality Improvement In the bean industry, quality is an important factor affecting the saleability of the product. Type, variety, color, cleanliness, and the hardness or softness of the bean determine its consumer acceptability. 203 Buyers normally inspect beans personally at the time of the sale. Mulatinho, the most preferred type of bean, commands the highest price in the market. Beans that are harvested must be sold to the consumer within about one month or they begin to lose their softness. AS beans harden, cooking time increases and palatability decreases. Cleanliness is another serious problem with beans. Samples of beans bought by project personnel in Recife had 5% or more of their weight made up of rocks and other foreign material. Farmers are often accused of cheating on weights. However, the foreign material may be largely due to primitive harvesting methods. At the time of sale, the weight of each sack is determined on scales generally owned by the buyers. Sixty- six percent of farmers believe that buyers are giving them honest weights, but 2“% do not think so. Ten percent do not know whether they are being cheated. About 36% of bean farmers have their own scales which can be used as a check against the buyers' weights. For most assemblers, this personal grading system is expensive and time consuming. Only large assemblers who have a good reputation with wholesalers are able to make sales transactions by description through the communication media. All other assemblers must rely on more expensive 7 face to face methods of transaction. The usual method is 20“ taking bean samples to urban markets where wholesalers can inspect the samples prior to purchase. Shipment is then made on the basis of the sample. Occasionally the buyer finds that the shipment is of lower quality than the sample. When this occurs, the transaction must be re-neogitated. This may mean accepting a lower price from the present buyer or making another trip to the urban center to look for other buyers. Thus, the added expense and risk of selling to urban markets are obstacles to more direct selling. The lack of an Operational standard for determining grades increases the cost and risk of making market transactions. A basic function of the marketing system is the effective transmission of consumer preferences through all stages of the channel from consumer to producer. In a well-coordinated system which effectively transmits quality Signals, production can adjust more rapidly to changing consumer demands. The hypothesis is that the bean assembly market system fails to convey adequately quality Signals to the producer. There are difficulties involved in communicating consumer preferences to farmers. This problem begins with the retailer who is not fully aware of consumer preferences and increases as the preference must pass through each 205 marketer from retailer to the producer. Assembler quality decreases as the signal gets farther from consumers. (Table 6.I2). Quality signals seem to be quite high between wholesalers and large assemblers, but a major breakdown in the transmission of product quality signals occurs at the small assembler level. Large assemblers transmit quality information to small assemblers, but small assemblers transmit very little quality information to producers. Only 25-29% inform producers of buyer preferences. Thus, assemblers are not effectively transmit- ting quality information to farmers. Bean Storage Bean assemblers have much more storage capacity than bean growers. (Table 6.I3). Bean growers in Irece also have more storage capacity than Al-Pe growers, but the Al-Pe growers stored more beans in I966. Since Irece bean prices were high at harvest time in I966, there was little incentive to store beans. Storage capacity also varies by size of assembler. (See Tables 6.2 and 6.3). Large and medium-sized assemblers have more Storage capacity and Stored larger volumes than small assemblers. The more innovative producers can also store larger quantities than the less innovative (Table 6.l“). 206 Table 6.I2. Assembler Awareness of Quality Signals Percent of— Respondents Large Assemblers Attitude Level of Transaction Al-Pe Irece Feels his buyers pay more attention to quality than to price L-W 8“. lOO. Sales price varies with quality L-W 9l. 95. Buys most saleable qualities L-S 97. “3. Transmits quality to small assemblers better than others L-S 57. lOO. Average % positive response (large assemblers) 82. 8“. Small Assemblers Attitude Feels his buyer pays more attention to quality than to price S-L 60. 87. Sales price varies with quality S-L 85. 22. Buys most saleable qualities S-F 23. 72. Transmits Quality to farmers better than others S-F 25. 29. Avera e % positive response (smal assemblers) “8. 50. Overall average % positive reSponse 65. 67. W s Wholesaler, L a Large and medium-size assemblers, S - Small assemblers, F = Farmers. Source: SUDENE/MSU Assembler Survey, l967. 207 Table 6.I3. Storage Capacity and Actual Quantity Stored by Bean Assemblers and Growers, I966 Bean Assembers Bean Growers Irece Al-Pe Storage capacity in kilos ll6,792 l2,5“0 “,725 Quantity stored two months after harvest 22,033 l,707 2,672 Quantity stored as percent of storage capacity l8.8 l3.6 56.5 Source: SUDENE/MSU Assembler and Farmer Surveys, l967 Table 6.l“. Relationship of Scores on Innovation Index to Farm Storage Capacity, I966 Score on Kilos of Farm Storage Capacityl I966 Innovation Index l-9OO 90l-260 26l/or more 4% % 3% Lower “6 “3 ll Middle 32 23 “5 Upper 22 3l “7 Source: SUDENE/MSU Farmer Survey, l967 208 An index of barriers associated with bean storage was constructed to test their impact on assemblers. The index consists of questions pertaining to the unprofitabil- ity of storing, lack of credit, risks of price change, and spoilage risks. A low index value indicates more barriers to Storage. This index was not found to differ significant- ly from scores on the modernity index. However, the storage barriers are Significantly associated with the size of firm. Since high scores indicate few barriers, it can be seen that 86% of the large firms vs. 23% of the small firms scored in the upper third of the index (Table 6.I5). Thus, large firms perceive fewer barriers than their small competitors. Table 6.I5. Relationship of Scores on Storage Barrier Index to Size of Firm Storage Barrier Index NCr$ Sales in I966 Lower Third Middle Third Upper Third % 75' % 0-“2,500 39 38 23 “2,501-I,ooo,ooo o I“ 86 Source: SUDENE/MSU Assembler Survey 209 Because many bean producers (75%) did not store beans, they were asked for the reasons why they did not. Nearly “7% sold their beans at harvest time because they needed money to buy food and medicines for their families. Twenty-two percent sold their beans because of a need to repay a loan. Three percent thought that it did not pay to Store beans. A very Small amount (2%) did not have any method of storing beans on the farm. The other 2“% did not respond or were not asked. Thus, the need for money or lack of storage loans seems to be the major reason why producers sell beans at harvest time. Storage and Handling Losses The storage and handling losses for beans are Shown in Table 6.l6. Table 6.l6. Storage and Handling Losses for Beans in the Al-Pe and Irece Market Channels (in percent) Market Survey Al-Pe Irece Retailer l.8 l.8 Wholesaler 2.8 2.8 Assembler 3.8 2.“ Producer 8.2 3.I Total Storage and handling loss I6.6 lO.l Source: SUDENE/MSU Marketing Surveys, l967. 2lO The total losses are greater in the AI-Pe channel than Irece channel. In both market channels the losses are high and could probably be reduced to half that level with improved storage facilities and practices. The amount of quality deterioration which occurs in storage may also be an important factor in determining losses. Because of the difficulty in establishing the degree of quality deterioration in stored beans, no estimate is included in the above data. The reported storage losses derive from the results of survey data and not controlled experiments designed to study actual losses. Retailers and wholesalers were asked how much spoilage due to rodents, insects, etc. which they had out of each IOO units sold. Farmers and assemblers were asked how much they stored and then how much loss due to insects, rodents, etc., was incurred. Table 6.I7. Types of Storage Used by Bean Assemblers and Producers Type of Storage Percent Using Assemblers Producers Metal silos ““ “6 Sack on wood or cement warehouse 3“ 3“ Sacks Hihome ll l9 Bulk storage 2 O Sacks on ground 7 0 Other . 2 l Total IO0.0 l00.0 Source: SUDENE/MSU Assembler and Farmer Surveys, l967. 2ll Metal silos (Vasos) are the most popular means of storing beans in rural areas. (Table 6.I7). With good storage practices, bean storage losses can be reduced to an insignificant level in these silos. The silos hold an average of 600 kilos and cost about NCr$l50. Since they last for about 20 years, the depreciation on the silo is very low. The silos may be purchased ready-made or made from sheet metal. They are usually about 2 to 3 meters tall and l/2 to l meter in diameter. There is a small hole at the tOp used when filling the silo and a second Small hole at the bottom from which it can be emptied. Once the silo has been filled, the holes are sealed with a wax (usually bees-wax) to create what is nearly an airtight container. Beans can then be stored in good condition for periods of time as long as one year. If the moisture content of the beans is l6% so that relative humidity is 75% in the silo under normal daytime temperatures of the Northeast, then storage life is shortened to 3-6 months. However, with a moisture content of IS% in the beans and about 65% relative humidity, the beans can be Stored in good condition for more than one year. Insect damage in the silos is low if beans are insect free' when stored. If insects are present, beans must be treated 2l2 Table 6.l8. Annual Bean Storage Costs Per Kilogram in Northeast Brazil, I966 Cost of Item Annual Cost Per Kilo in NCr$l Silo depreciation 0.02 Fumigant cost etc. 0.0l Cost of borrowing O.l2 Total O.l5 'The calculations assume an annual interest rate of 36% for I966. Other costs are based upon estimates of actual storage expenses in Northeast Brazil. A charge for losses due to handling, shrinkage and deterioration is not made Since this loss is negligible under proper storage conditions. Source: SUDENE/MSU Case Studies, l967 before storage. The information available on the problem of hardening suggests that differences in varieties and growing conditions are more important determinants of the rate of seed coat hardening than in length of storage. Thus, storage up to one year in these silos appears to be an effective, low cost means of storage.“2 1”This information is based upon a conversation with S. T. Dexter, CrOp Scientist, Department of CrOp Science, Michigan State University, May, I968. 2l3 The average farm price data showed a change of NCr$O.3O per kilo in the nine months from harvest (September) to the highest price of the year (May). Storage in this time period is profitable, since storage costs are NCr$0.l2 per kilo for nine months. This assumes a fixed cost for depreciation and fumigation but a variable cost for the borrowed money. Fixed costs are NCr$0.03 per kilo, and variable costs are NCr$0.0l per kilo per month. Three months storage would cost NCr$0.06 per kilo using the same procedure. The return for this storage would have been NCr$0.09 per kilo from September to November in I966. Thus, storage would have been profitable in I966 during the post harvest period. Storage, however, is not profitable if Spoilage rates are high. Transpprtation Barriers The types of roads leading into rural areas may reduce over all performance of the assembly market by increasing the costs of distribution. The largest percentage (25%) of the assembly firms interviewed lived on a road traveled only by ox-cart. The next largest percentage (2“%) lived on graded dirt roads and l5% lived on cobble- stone streets. The rest lived on ungraded roads. Since 2l“ a majority of bean producers live on roads which can be travelled only by ox-cart, road conditions essentially determine the type of farm to market transportation which can function in these areas. The approximate importance of the several modes of farm-to-assembler transportation is shown in Table 6.I9. It indicates the greater importance of primitive means of transportation in Alagoas and Pernambuco than in Irece. Table 6.I9. Predominate Modes of Farm to Assembh Market Transportation in Bean Areas, I966 Percent of Assemblers Using Mode of Transport Al-Pe Irece % 7% Animals l6.3 I5.0 Oxcarts 58.2 l6.l Others (on foot, etc.) 6.6 0 Total traditional modes 8l.l 3l.l Independent truckers l3.3 2l.3 Shipping company trucks l.8 l.“ Assembler's trucks 3.6 “6.2 Total motorized modes l8.7 68.9 Source: SUDENE/MSU Assembler Survey, l967. 2l5 This is partially due to roads with greater year-round accessibility to farms in Irece, even though unimproved. In the Al-Pe area, the lack of adequate roads in rural areas results in the need for beans to pass through additional transactions from field to farm house to village. This additional handling by traditional methods is costly. Moreover, even after beans are collected by trucks in the villages, the costs of transportation to assembly centers are great. As a result of poor road conditions, the real rate of truck depreciation is frequently high. No Significant differences were found between Size of firm and the dependent variables of vehicle ownership, type of farm-to-market transportation used and type of road on which the firm is located. A poor transportation system increases the geographic isolation of assembly markets. These conditions create imperfectly competitive product and factor markets. Competition from the outside, especially itinerant truckers, is lessened because of this isolation. In addition, poor roads are a physical limitation on the scale of transaction. Poor roads perpetuate the existence of many small firms which handle these small scale transactions. 2I6 Credit Barriers Assemblers perceive high interest rates, lack of working capital, and the inability to borrow more money as barriers to their expansion (Table 6.20). Yet only 62% of bean assemblers borrowed money in I966. It is apparent that many assemblers do not borrow and prefer to use only their own capital. For those who do not borrow, the reasons given were; no source of credit (“l%), do not like to owe or borrowing is risky (28%), high interest rates (ll%), others (20%). Table 6.20. Assembler Response to Questions Identifying Major Factors Which Limit Their Expansion Which of the following are important reasons for your business not increasing sales: Agree Disagree I could not borrow more money 76% 2“% Interest rates are too high 66 I6 Insufficient working capital 87 6 Source: SUDENE/MSU Assembler Survey 2l7 The interest rates paid by assemblers depend greatly upon the source of that credit. It is obvious from Table 6.2l that the least costly and most popular source of credit is government banks. The next most popular source of credit is the moneylender, who charges a high rate of interest. Moneylenders make the high risk loans which no one else is willing or able to make. According to the International Monetary Fund, the annual rate of inflation for Brazil was 36% in I966.".3 At this rate of inflation, assemblers can borrow from government banks for an interest rate less than the rate of inflation. Private banks and money lenders charge positive interest rates. Because of their low interest rates, government banks must ration their credit. Thus, the high cost of credit is a limiting factor only for those who borrow from non-government banks. The loans from government banks are actually a subsidy at this rate. All assemblers should be willing and eager to borrow money at the government bank rates. l'3International Financial Statistics, International Monetary Fund, Washington, D. C. Vol. I“, l967. 2l8 Table 6.2l. Monthly Interest Rates Paid by Bean Assemblers by Source of Credit Source intgggiilfizte giggeghaEOSOEtégg % % Gov't Banks 2.2 36.“ Private banks 3.5 l8.5 Friends and relatives 2.3 l8.6 Monthly lenders “.“ 2l.5 Other “.8 5.0 Source: SUDENE/MSU Assembler Survey About 63% of all assemblers in the Al-Pe area advance farm credit as opposed to “6% in Irece. Most assembler loans are made to small farmers, whether the source is directly from small and medium-sized assemblers or by large assemblers through small assemblers. Most other farmers rely on bank credit or private capital. Assemblers loaned an average of NCr$63,““O to all their suppliers in I966. An average of ““ persons received this credit which amounts to NCr$l““l per borrower. Most of the money is loaned during the planting season and repaid at or Shortly after harvest. 2I9 Among those assemblers who loan money to their suppliers, there were various criteria used to evaluate the suppliers. The criteria used by 7l% of the large firms was the amount of production for that particular supplier, while only 9% of the small firms used this same criteria. (Table 6.22). Thus, the small firms will base their decision to make a loan on more subjective factors, while large firms rely more heavily on the objective factors. Either method seems to give satisfactory results, because the number of bad debts lost does not vary significantly with size of firm. Table 6.22. Criteria Used in Making Supplier Loans as a Function of Firm Size Firm Sales in NCr$ I966 Loan Criteria I-uz,sooo “2,501-I,ooo,ooo 7% 7% Farm production 9 7l Personal ties 63 22 Family and kinship ties 28 7 Source: SUDENE/MSU Assembler Survey, l967. 220 There are few credit transactions which take place between assemblers and their buyers. Virtually no money is advanced by wholesalers to help assemblers finance purchases or production. When credit arrangements are made, it is the assembler financing the wholesaler rather than vice-verse. Assemblers sometimes provide working capital financing to wholesalers by selling beans for delayed payment of 30 to 60 days. Most assembler sales (95%) are for cash whether the market is active or slow. The most urgent credit problems are the high interest rates which some assemblers pay and the shortage of capital for assembly market Operations. The credit which assemblers advance to producers is also primarily in the form of production credit. A Shortage of marketing credit appears to exist for both assemblers and producers. lgpgt Barriers In the two bean areas sampled, 55.“% of the assemblers sold seeds in the Al-Pe area, while only ll.“% did so in Irece. Two percent of the buyers in Alagoas sell tools. Thus, input sales are very low at the present time. None sold fertilizers, insecticides and/or farm machinery. Additional analysis of those who do sell inputs has revealed no significant differences among them. The larger, more modern firms supply inputs neither more nor less 22I frequently than smaller, more traditional firms. These assemblers might be willing to distribute other output increasing inputs if markets for these inputs could be more fully deveIOped. Any program to distribute inputs should keep these assemblers in mind because of their established contact with producers. In addition, sales of farm inputs could be very complementary to other firm activities by providing a means for product diversification. Sales would be concentrated in another period of the year allowing for more efficient use of the business and a more stable flow of cash income. Attitudes of Assemblers The general attitudes of been assemblers were tested by a series of questions referring to modernity, trust, risk, familism, and business orientation. The results of these questions are indicative of adaptability or receptiveness of bean assemblers to new ideas. Reactions to the two statements below indicate that bean assemblers tend to be more today-oriented than future-oriented, even when the financial gain from delayed satisfaction is greater than the rate of inflation plus interest. ‘Q‘ ' - ~ - Q ~ (I) It s :ett : re e ‘e \-':y 9 -\ 5 9' ~ . ‘- ~ . - L Q s new t‘an N-.::- t - .a e - ‘- ~> Corsage- c’fé: : ~ C?> ' a - ‘ \ (2) It 5 better :3 l .e ’:' :ecai :ecaese exe~xt “a will take ce'e C’ :55 ’ tower'an. “ ‘8 ‘7‘\\o' \a .‘\ t\ h e\\‘\. :\ ————‘— Corciee: areas ~: ~? The response patterns to State“ee:s 5. “. and 5 reveal some wide differences of Opinion sheet the extent to which other peOple can be trusted. howexer, the basic response patterns indicate a willingness to trust others. Many are reluctant to trust peOple outside of their own family as much as family members. Nevertheless, a very high percentage would participate in a business partnership with peOple outside of their family. Agree Disagree (3) One can trust relatives and others alike Combined areas “2% 58% (“) We may be partners with others, even if they are not relatives. Combined areas 73% 27% (5) A person can lose much money when working with others Combined areas “8% “9% 223 (6) When bean assemblers were asked to play the risk game the results were as follows: Willing Unwillipg Combined areas 8l% l5% The game involved paying a small fee (NCr$0.50 for a chance to choose three alternative payoffs: I) 75% chance of winning NCr$ 5.00 2) 55% chance of winning NCr$ 20.00 3) 25% chance of winning NCr$ 50.00 The largest percentage of bean assemblers indicated a preference for the low risk, low payoff alter- native; but many chose (32%) the other extreme-- high risk, high payoff. (7) lst 2nd 151 MA Combined areas “I% 9% 32% l9% As index of interpersonal trust was constructed by using questions three, four, and five. These questions indicate a willingness to trust partnerships but less willingness to trust peOple generally. When tested against size of firm and age, this index was not signifi- cant. Thus, large firms are neither more nor less trusting than small firms. The young are not more trusting than the old. As indicated by the questions, the level of trust and distrust is nearly equal. 22“ Returning to attitude measurement, it was found that a very high prOportion of the assemblers put a high value on family ties when considering alternative employment Opportunities. Also, there was general agreement that assemblers can't do much by themselves to improve their lives and that the government can be relied upon to help them solve their problems. Opinions were more evenly divided on the desirability of a small versus a large family and the relative importance of luck versus business know-how. The assemblers strongly agree that know—how is not a factor limiting expansion (see reSponse patterns below). (8) It is better to work near one's parents but earn less than to work far away and earn more. Agree Disagree Combined areas 78% 20% (9) In our present world, small families are better than large ones. Combined areas 5“% “2% (ID) The real barrier to an increase in output is lack of know-how. Combined areas 85% I“% (II) To make more money, it is better to know how to do business than to be lucky. Combined areas 59% 39% 225 Agree Disagree (l2) Nowadays the businessman alone cannot do much to improve his life. Combined areas 63% 3“% (l3) Business may count on the government to solve their problems. Combined areas 6“% 32% (l“) We would be better off if the scientists left things alone. Combined areas l6% 82% Questions eight and nine were used as measures of familism. The former reveals strong preferences for living near one's family and the latter reveals a general preference for small vs. large families. Another test of familism which showed only 26% of the respondents willing to migrate to the city was not significantly associated with their firm's size. The age of the respondent was also not sig- nificantly associated with this test of familism. Thus, as indicated above, family ties are quite strong, and they are equally as strong in the young as in the Old. Assemblers who were willing to migrate said they would do so if they were guaranteed a job which paid them NCr$275 per month. An index of business orientation (fatalism) was developed using questions eleven, twelve, and thirteen. It 226 is designed to test the individuals view toward his envir- onment and how much control he feels he has over it. Among bean assemblers, a general level of fatalism seems to predominate. Again, when this index was run against size of firm and age, no significant differences were found. The large firms are as fatalistic in their views toward control of their environment as the Small firms. Younger peOple are also as fatalistic as older peOple toward their present environment. A risk index was constructed using questions six and seven to determine the willingness of assemblers to assume risk. Since 8l% of the assemblers played the game, many of them are willing to assume risk. This index, when tested against Size of firm, was significant. Willingness to assume risk does not, however, vary with age. Large firms are willing to take greater risks than small firms. In the highest risk category, there were 80% of the large firms and only 20% of the small firms (Table 6.23). Thus, willingness to change and assume the risks of new technologies appears much stronger for the large firms than small firms. 227 Table 6.23. The Variation in Willingness to Assume Risk by Size of Firm Score on an Index of Willigness NCr$ Sales to Assume Risk in I966 EOwer 7Middle Upper Third Third Third O-“2,500 60% ll% 20% “2,501-I,ooo,ooo l7 3 80 Source: SUDENE/MSU Assembler Survey, l967 Thus, the attitudes of assemblers reveal strong family ties which result in an unwillingness to migrate. Assemblers are trustful but very fatalistic over what they can do to improve their businesses. Large assemblers indicate a greater willingness to risk money in order to gain a larger return than do small assemblers. A general index of modernity was constructed by using questions one, two, ten, and fourteen. This index was then tested against a number of variables to identify those pOpulation groups with the greatest potential for change. Age was not significantly related to the individual's score on the modernity index. The size of firm wasn't significantly associated with modernity, which means the owners of large firms do not have more modern views than the owners of small firms. In the same manner, those who 228 have a high exposure to the mass media do not hold Significantly more or less modern views than those who have a low exposure. The literate-educated assemblers do not hold significantly different views on modernity from the illiterate, less educated. The relatively small number of significant relation- ships is indicative of the homogeneous nature of the system. In this respect, the data present an interesting contrast from the research results of Puerto Rico. In Puerto Rico, the younger were more modern, had greater exposure to mass media, and were more innovative. The better educated also tended to earn higher incomes. These interrelationships do not hold among bean assemblers in the Northeast. It appears as though the system is so highly traditional that the elements of change measured by the above factors appear infrequently. The failure of a complete pattern to emerge leads one to conclude that the assembly market shows little change at the present time, but one with some potential for change. Summary Diagnosis of Barriers in Bean Assembly Markets A large number of small buyers is characteristic of the structure of bean assembly markets. The market structure is characterized by several types of buyers, each Of whom 229 possess a certain degree of functional Specialization according to his abilities and location in the system. Large firms are generally specialized commodity buyers, whereas small firms rely upon other occupations and enter the marketplace for only part of the year. Large and medium-sized firms are more heavily involved in storage, while small assemblers specialize in supplying farm credit. There are a few large firms which recognize their stronger position in the market and many Small firms with virtually no individual influence upon aggregate output or price. The market structure is changing slowly as competitive pressures force the smaller, less efficient firms out of business. This appears to be taking place more rapidly in Irece than in the AI-Pe area. One identi- fiable trend is the continued rise of itinerant trucker- buyers whose direct buying from producers and selling to wholesalers has forced some traditional assemblers out of business. Changing urban markets will increase the competitive pressures on traditional assembly markets through the increased use of vertical coordination to reduce costs and stabilize supply. The trend toward fewer and larger firms will likely continue in response to the changing needs of the urban markets. The potential exists for a substantial reduction in the number of firms. 230 Analysis of the market channels revealed that each type of buyer has selected groups from whom he buys and also to whom he sells. These assemblers are also specialized in the services they perform for suppliers. The relation- ships were found to be quite stable, although some changes are taking place. One of these changes is the use of order buying between wholesalers and large assemblers who have deveIOped confidence in each others' samples. Another is the increasing market share purchased by itinerant trucker-assemblers. The trucker activities which increase the competition at all levels in the channel tend to break down some of the traditional buying and selling patterns. Future trends will be continuing growth in the prOportion bought directly from producers with a decline in purchases from other assemblers. Another change will likely be the emergence of assembler sales directly to the large scale retailers. While unimportant at the present time, it is probable that retail market changes will lead to vertical coordination or integration in an effort to meet compe- titive pressures. The channel maps summarized the basic differences in buying and selling relationships for both the Al-Pe and Irece areas. The Irece channel has fewer types of buyers 23l who handle larger market shares. A greater share of production is purchased directly from producer and sold to wholesalers in the Irece channel. Because of this, fewer transactions are needed to move the goods through the market channel which means a lower cost of marketing. If Al-Pe assemblers handled larger volumes, a substantial reduction in the number of firms in the industry would be possible. This estimate is based on the fact that there are “8 tons of beans produced per assembler in the AI-Pe area as compared to I00 tons per assembler in Irece. This is not to say such a reduction should take place. The reduction in number of firms should occur only if the productivity gains from such an action are greater than the costs generated from the unemployment of these assemblers. The analysis of market performance has revealed several problem areas which suggests that poor coordination does indeed increase the level of market risks and uncertainties. Large spatial price differences were found in bean assembly markets. According to the channel maps, large urban buyers pay higher producer prices than do local assemblers. 232 Gross margins of assemblers averaged l6% Of their selling price. No gross margin differences were found between firms. Assembler margins are not excessive, but rather quite reasonable given conditions in the Northeast. Increased competition would probably do little to lower assembler margins. Increased vertical integration and/or coordination appears to be the best mechanism to lower the cost of marketing. Price instability and supply uncertainty are barriers to expansion for a majority of assemblers. Some assemblers stabilize supply through the use of credit with tied sale arrangements. The ease of entry and exit keeps bean assembly markets reasonably competitive in terms of numbers of firms. Most assemblers (68%) did not view excessive competition as a barrier to expansion. The more modern firms believed that social sanctions against apressive price competition do exist. According to assemblers, very little price collusion exists within their ranks. Rather, a live and let live attitude seems to prevail. Thus, large numbers of small firms does not always imply aggressive competition. Little market information is available through the mass media at the present time. Large assemblers who get 233 market information from the urban centers are the best informed group of assemblers. Medium and small-sized assemblers must rely upon other assemblers for their information. It is generally inadequate and frequently inaccurate. Most large assemblers (8l%) agreed that they have an information advantage over their suppliers. Producers also obtain price information from the local assemblers. No outside source of market information is available. A positive relationship was found between output responsiveness, number of buyer contacts and prices received. Comparative pricing among buyers means higher producer prices. The lack of an effective grading system increases the cost of sales transactions. Only large assemblers with good reputations can make sales transactions through the communications media. All other assemblers must bring samples to buyers and personally make the sale. This is expensive and time consuming. Information on product quality (color, cleanliness, etc.) is fair between large assemblers and small assemblers and poor between small assemblers and producers. Bean assemblers have more storage capacity and store more beans than producers. Large assemblers store more than small assemblers. Innovative producers can store 23“ more than non-innovative producers. A shortage of credit, risks of price change, and spoilage risks are important barriers to bean storage among assemblers and producers. Large firms, however, perceive fewer barriers than small firms. Storage and handling losses are high, l6% and IO% in the Al—Pe and Irece market channels, respectively. Less than half of the producers and assemblers use the metal silo, which is the most effective means of storage available in these areas. Storage in the post harvest season for 6-Klmonths would have been profitable in I966 if storage losses were kept low. Poor roads force 8l% of assemblers to use non- motorized means of transportation when buying from the producers. This limits the scale of assembly firms and reduces competition because of geographic isolation of buyers and sellers. Most assemblers (87%) say lack of working capital keeps them from expanding sales, yet only 62% borrowed money in I966. Interest rates from government banks are lower than the rate of inflation (36% in I966) but interest rates from private sources are high. Assemblers advance production credit to producers, but both assemblers and producers appear to lack marketing credit. 235 Assemblers sell few farm inputs to producers, but should find this an attractive way of diversifying their sales in producing areas. Analysis of the attitudes of assemblers has shown them to be quite traditional in their attitudes and thinking. Large firms Show a greater willingness to assume risk than do small firms. Age is not an important indicator of general modernity. An index of literacy- education is also not an important indication of general modernity. Traditional attitudes are widely held by all assemblers with little variation among them. These traditional attitudes do indeed seem to retard the firm's willingness to change. There is little evidence to indicate that any one group of assemblers is more willing to change than another. For this reason, the forces of change will most likely come from the outside as opposed to within the assembly market system itself. CHAPTER VII CONCLUSIONS AND RECOMMENDATIONS Introduction This last chapter is divided into three major sections. The first section briefly restates the problem studied, the research objectives and the procedures. Section two contains the major findings and conclusions. The third section presents the recommendations for impnbving the performance of the bean production and marketing system. Developing countries may be characterized by Structural distortions such as a widening urban-rural income gap and excess industrial capacity. The purpose of this study was to determine the role which the marketing system can play in a further linkage of the urban-rural sectors so as to more actively promote economic growth and deveIOpment. The economic exchange functions performed in the marketing system provide a bond through which these linkages may be fostered and Strengthened. In deveIOping countries, poor linkages due to ineffective market coordination contribute to high levels of risk and uncertainty. Because firms seek ways to avoid market risk and uncertainty, they do not allocate resources efficiently. Firms do not 236 237 increase output and invest in new, more productive technologies. Thus, market coordination improvements which reduce risk and uncertainty can lead to greater resource use efficiency among production and marketing firms. The over-all objective of this thesis was to analyze product and factor market coordination in the bean industry of Northeast Brazil. More specific objectives were as follows: I) To conceptualize the role of product and factor market coordination in the process of agricultural deveIOpment. 2) To describe and compare the product and factor markets for beans as they are organized in two rural communities both serving a common market area. 3) To identify conditions in these product and factor markets which act as barriers to output expansion and as barriers to the adoption of technologies and organizational changes that would reduce costs of production and distribution. “) To make reform recommendations directed toward the elimination or reduction of market barriers. 238 This thesis was carried out as part of a more comprehensive study of marketing institutions in Latin American countries. Three different data sources were used. Secondary sources provided information on the historical development of the Northeast, agricultural institutions and agricultural production. Primary data collected from random samples of bean producers, bean assemblers and a systematic sample of input distributors provided information on the economic relationships, attitudinal and communication characteristics of the marketing system. Case studies with selected market participants provided additional insights on the nature of the system. Conclusions The major findings of this thesis deal first with the general agricultural setting of Northeast Brazil; secondly, with the nature of farm production technology currently being used; thirdly, with factor input markets and finally with farm product markets. An attempt will be made to point out the traditional nature of the present system and then analyze the poten- tial role of factor and product markets in transforming this traditional agriculture. Primary interest will be upon the changes which can be made in product and factor markets so as to encourage and facilitate the transition from a traditional to a modern agriculture. 239 Agricultural Settipg The poor natural resource base of the Northeast has retarded regional economic growth and development. The amount and seasonal distribution of rainfall varies considerably from the humid coastal zone to the semi- arid interior. Rainfall in the coastal zone averages 60-70 inches annually and is well distributed throughout the year. On the other hand, rainfall in the semi-arid interior averages 20 inches or less annually and is poorly distributed throughout the year. The periodic droughts which strike the Northeast can cause a considerable decrease in food production. Serious droughts lead to food shortages and often force large scale migrations to urban centers in the Northeast and Southern Brazil. The "Drought Polygon" encompasses about one-half of the land area in the Northeast. In the past, fighting the drought has marked nearly all efforts to improve the region. More recently, the emphasis has shifted to a more compre- hensive deveIOpment effort to improve the basic economic and social conditions of the region. Widely varying soils also characterize the Northeast. Only a thin layer of topsoil covers the Iatosolic soils of the region. Organic matter decomposes rapidly under the hot trOpicaI sun. Heavy and/or torrential rains 2“O rapidly leach soil nutrients from the thin tOpsoil. Soil fertility is therefore low although small valleys can be found where soil fertility is good. Low crop yields also indicate the general low level of soil fertility in the region. A significant barrier to change in the agricultural sector is the low level of technical knowledge and the general lack of modern farm imputs. The universities and research stations have done little to develop new, improved seed varieties, determine Optimum levels of fertilizer use under Northeast conditions, study proper use of insecticides, the desirability of interplanting beans and corn, etc. The little research which has been done, has 850 not been distributed to producers either through local extension offices or through the commercial sector. Because new and more productive technology has not been developed and distributed, near static conditions remain in bean production. Educational and literacy levels of been producers and assemblers are low. Only 5§%_of the producers had attended school. Those who had attended averaged three years of education. More assemblers (82%) had attended 2“l school. A literacy test demonstrated that only 37% of producers and ““% of assemblers could read and understand a simple sentence. Low education and literacy levels need not prevent change by themselves but they do condition the type of changes that can occur and increase the cost of reform programs by requiring more intensive effort. Producers and assemblers hold predominantly tradi- tional views toward the modern world. A test of a modernity index revealed that no age, education or income groups of producers or assemblers held significantly more moder views toward the world. Nevertheless, responses to some of the individual questions indicate a willingness and desire for change. All exhibited a Strong belief in the ability of science to improve their level of living. The strong family ties among bean producers and assemblers indicate a reluctance to migrate to urban centers for higher incomes. However, producers and assemblers are very trusting of others and willing to enter into partner- ships with them. Most bean producers and assemblers feel they can't improve by themselves but that the government and science can help. Some want to change and believe that it is possible. Thus, change is no doubt possible but it probably will occur slowly because few signs of modernization can be detected at the present time. 2“2 Furthermore, the forces of change will likely come from outside the producer and assembler groups through private and governmental action. Producers and assemblers seem to lack the resources (human and financial) to change by themselves. Health may limit the productivity of the “0% of bean producers who said they were sick and unable to work at some time during the last year. For those who were idle, the median number of reported days sick was 2l days. Although poor health may not be a major barrier to aggre- gate output expansion,it likely was a deterrent to greater output for those individuals who were sick a large number of days. Individual health may be closely related to food consumption. Bean producers spend over 50% of their gross farm sales on food. This is in addition to what they are able to grow for home consumption. These producers also consume a relatively narrow variety of foods which concen- trates on the cereals at the expense of foods high in proteins and vitamins. Low income levels and lack of proper variety of foods may be important factors contri- buting to a high rate of illness among bean producers. The land tenure system does not appear to be a major barrier to increased output of bean producers. Most bean 2“3 farms are family farm operations. Individual Operators own the land and family members provide most of the labor for the farm. Some bean producers are renters but very few are sharecroppers. Farms average about 80 hectares in Size making many of them sufficiently large for modern agriculture. Traditional Production Bean production is still very traditional in the Northeast. Some changes are beginning to take place which may gradually modernize bean production. The marketing system can facilitate this transition by helping to provide the incentive and technology needed for this transformation. Bean producers were using relatively few modern pro- duction technOIOgies on their farms in I966. No one was using chemical fertilizers and tractors were seldom used except in the Irece area. Insecticides on the other hand were frequently used. Improved bean varieties were not being used--traditional varieties were used by 59% of bean producers. Primitive technology, coupled with low soil fertility results in low bean yields (6l9 kgS/hecatre in I966). Furthermore, yields have not been increasing in recent years. 2““ Knowledge of new technology is quite low. Only 52% of the producers had heard about chemical fertilizers. However, those who knew about fertilizers held reasonably positive views towards its use. Technological knowledge among producers may be related to market availability. Producers know least about fertilizers which are seldom available in the market and most about insecticides which are widely available in local markets. In addition, availability and use may be closely related. More Irece producers use modern technologies than Al-Pe producers and those technologies are more widely available in Irece. Bean producers appear to be responsive to price incentives. Indications were that they are more willing to expand output in response to price increases than to reduce output with price decreases even though the latter was larger. A minimum price program conducted at market prices which existed during the interviews would also have encouraged greater output. Seasonal price instability may also reduce production incentives. Bean prices varied by almost l00% from the lowest month of the year to the highest. Most producers market beans when prices are lowest. Reducing seasonal price instability by reducing its variance may increase the weighted average farm price received. This may both increase the incentive to expand output and to adopt the new more productive technologies needed for that expansion. 2“5 Although only half of producers now borrow, most think they could expand output with more credit. Farm credit is available on a rationed basis for farm production loans but little credit is available for marketing loans. Most producers borrow from government banks where the interest rates (I% monthly) are less than the annual rate of inflation (3.l9% monthly in I966). Producers seem to be willing to pay higher interest rates in order to borrow more money. Present credit arrangements are inadequate for producers desiring to use more modern technologies which require more capital per unit of land area and longer term credit. Consumer Goods and Factor Markets Low incomes and a high percentage of income Spent on food limit buying power for non-food consumer goods in rural areas. A low ownership of many non-food consumer goods reflects this low buying power. Producers indicated a high propensity to consume these goods with increased farm income. Most consumer goods (clothing, leather, pots and pans, etc.) seem to be available in the local feiras visited frequently by bean producers. This availability may soon have a greater incentive effect upon production. 2“6 Local retail sales however, does not preclude the possibility of other mass merchandizing techniques in rural areas to reach a broader segment of the market. A lower margin operation could possibly Open up a larger rural market for these non-food consumer goods. Very few firms sell modern farm inputs (fertilizers, improved seeds, etc.) in rural areas at the present time. Only traditional farm inputs (hoe, axe, etc.) are readily available in rural markets. The distributors who sell these modern inputs must charge relatively high margins because the volumes sold are small. The prices of fertilizer and tractors were found to be high relative to the prices of farm products. Fertilizer and tractor prices were much higher relative to product prices and farm income in Northeast Brazil than in other countries where these inputs are widely used (Japan, U.S., Taiwan, etc.). An l8% sales tax further increases the relative price of modern farm inputs in Brazil. Elimination of this tax would signifi- cantly reduce the farm price of selected modern inputs. Improving the agri-industrial termsof trade through lowering of input prices could expand sales in rural areas. Increased sales of these inputs would also contribute to a greater utilization of the idle industrial capacity existing in factor input industries in Recife. More importantly, increased sales would significantly increase farm productivity. 2“7 New factor market institutions will have to be deveIOped in order to increase supplies and sales of modern inputs in rural areas. The relatively small number of distributors now located in the areas are poorly organized and do not reach large numbers of producers. Thus, new market institutions must be deveIOped in rural areas to effectively distribute modern farm technologies. Product Market Bean assembly markets operate with many Small firms and only a few large firms. Easy entry and exit have kept the assembly market competitive in terms of numbers of firms. Changing urban markets increase the competitive pressure upon traditional assembly markets through the increased use of vertical coordination to reduce costs and stabilize supply. A trend toward fewer and larger firms will likely continue in response to the changing needs of the urban market. The potential exists for a substantial reduction in the number of firms. Most assemblers (65%) did not view excessive competition as a barrier to expansion. There appears to be some social sanctions against aggressive competition which lead to a live and let live attitude rather than fierce competition. The large number of assembly firms does not in this case suggest aggressive competition. 2“8 Gross margins of l6% among bean assemblers seem to be quite reasonable given conditions in the Northeast. Marketing costs can probably be reduced very little through a narrowing of assembler's margins but rather through more direct buying and selling arrangements which eliminate some of the middlemen and increase scale of Operations. This seems to have taken place in the Irece market channel more rapidly than in the Al-Pe area. Because of this, fewer transactions are needed to move the goods through the Irece market channel. At the present time, little market information is available through the mass media. Producers and assemblers rely on other assemblers for their market information. Most large assemblers (8l%) agreed that they have an information advantage over their suppliers. This lack of information creates unequal bargaining situations. The large spatial price differences observed could probably be reduced through improved market information. The lack of a standardized grading system increases the cost of marketing goods. Only large assemblers with good reputations can make sales transactions through the communications media. All other assemblers must negotiate sales personally which increases the time and cost of marketing goods. 2“9 Bean storage would have been profitable in the Northeast given I966 price movements. Annual storage cost of NCr$O.l5 per kilo would have made storage profit- able anytime through the first nine months after harvest. Spoilage losses, however, must be kept low or Storage would not be profitable. A majority (87%) of assemblers say lack of working capital prevents them from expanding sales. Interest rates from government banks are less than the rate of inflation but the credit is rationed. Assemblers who borrow from moneylenders pay much higher interest rates than those at government banks. Thus, high interest rates and a shortage of credit appear to be serious problems for assembly market Operators. A poor system of roads increases the cost of trans- portation and weakens urban-rural linkages. The largest percentage of assemblers and producers lived on ungraded dirt roads or trails on which only an ox cart can travel. Most bean producers travel to the local market on foot or horseback. Eighty-one percent of been assemblers reported that beans are transported to them using some form of non- motorized transportation. Improved roads may contribute to lower costs of marketing by reducing the number of trans- actions in the market channel. In Irece, where roads are 250 better, 2.9 versus 3.“ transactions in the Al-Pe area were needed to move beans from the producer to the retailer. Improved roads would reduce the need for small assemblers who perform a gathering function in areas where access is difficult. Naturally, small scale production may require small assemblers even in some areas with improved roads. Poor roads influence the marketing system in at least one other important way. Geographic isolation may reduce competitive behavior even in areas with large numbers of firms. Assemblers in relatively isolated production areas may have a Strong bargaining position that is unlikely to be disturbed by competitive forces from the outside. Competition from the itinerant-trucker-one of the few dynamic elements in bean assembly markets - is substantially reduced by geographic isolation. Better roads may therefore contribute to more competitive behavior among bean assemblers. Poor roads may also discourage another change element - backward vertical coordination and integration. The emergence of self service retail Operations in Recife and other urban centers will require large scale, stable supplies of products.“I 1“See Chapter IV in Robert W. Nason, Urban Market Processes in Recife; Brazil, Ph.D. dissertation, Department of Marketing, Miéhigan State University, to be completed July, I968. 25I Vertical coordination and/or integration are mechanisms for achieving this large, dependable supply. Poor roads which limit the size of firm by necessitating Small scale transactions may discourage backward vertical coordination and/or integration. Recommendations The conclusions have indicated several problem areas in the bean production and marketing system which need attention. This last section presents a list of recommen- dations which policy makers could consider in designing programs to improve performance of the bean production and marketing system. Each recommendation is followed by a discussion of what needs to be done in order to start implementation Of that program. As pointed out by the analysis chapters, there is a noticeable absence of modern technologies on bean farms in the Northeast. The evidence presented also showed the existence of a very low level of productivity on these farms and a lack of knowledge about the new technologies which can increase output and productivity. At the same time the data indicated that these technologies are generally not available in the local trading centers and if available, costs are relatively high. In addition, wide seasonal price variations were observed in bean markets during I966. 252 With these considerations in mind, the highest priority recommendations represent a combination of modern farm inputs and stabilized farm product markets. The group of reforms chosen for this program seem to be the most appropriate policy tools which can be used to achieve greater output, improved productivity and greater use of modern technology. The reforms are listed in order of a critical path which seems most apprOpriate given the needs of agriculture in Northeast Brazil. A time horizon of five years has been contemplated for the recommendations presented. All of the reforms would begin during the first year in either a research, planning, or action phase since various stages of progress on the recommendations can be observed in the Northeast. The programs would reach a peak in second or third year and continue at this rate throughout the five year period. At the end of five years, a reassessment of them may be needed to determine which if any should be terminated, those to extend beyond the five year period and those which may be able to continue without additional public support. Seed Improvement Program a) Multiplication and distribution of present varieties b) DeveIOpment of impnaved varieties c) Multiplication and distribution of improved varieties. 253 A modern agriculture requires high yielding, disease resistant crOp varieties which are highly responsive to fertilization. Such varieties did not seem to be used on Northeast Brazil bean farms in I966. The first phase of this program would collect and multiply the best strains of currently available varieties for immediate distribution. This would allow producers to use seeds better than what they have while allowing the second phase of the program to get under way. A foundation seedhouse needs to be deveIOped that would turn varieties over to commercial firms as they become ready for commercial multiplication and distribution. Area dealerships might be used to deveIOp the rural distribution system for seeds once large quantities are available for commercial distribution. Farm supply cooperatives could also be used for seed distribution. A top quality plant geneticist is needed to develop improved Strains of present bean varieties and to develop new varieties. The geneticist would have responsibility for developing higher yielding, disease resistant varieties that have consumer acceptability in the Northeast. Domestic and foreign varieties should be experimented with in such a program. The Rockefeller Foundation's Wheat and Corn Center in Mexico has deveIOped improved varieties of corn and beans which have been used successfully in Mexico to 25“ increase yields. Samples of these varieties should be tested under field conditions in the Northeast. If successful, larger quantities Should be purchased for multiplication and distribution in rural areas. Once varieties are developed and field tested, they can be turned over to private firms for commercial multiplication and distribution. Fertilizer Response Program a) Fertilizer Response Research b) Fertilizer Demonstration c) Fertilizer Distribution The reSponsiveness of traditional varieties and of new varieties as they are developed to varying levels of fertilizer use must be established. Since soil conditions vary widely and rainfall patterns are uneven in the Northeast, a large number of research plots will be needed in major bean producing areas. The importance of water to fertilizer response is critical in the Northeast. The research objective is to determine the Optimum level of fertilizer use. Once the Optimum levels of fertilizer use are known a large demonstration program should be carried out in the bean production areas. The ANCAR extension agency and local ministry of agriculture representatives should be used to 255 carry out these tests under field conditions. Fertilizer companies in Recife should be encouraged to support the program by supplying the fertilizer needed at reduced prices. Profertil, the largest fertilizer company in the Northeast, is already COOperating on a similar project in Pernambuco involving the Federation of COOperatives and the Peace Corps. The insecticide companies (Shell, etc.) should be encouraged to supply the insectlcides needed on these same demonstration plots so that any complementarity from the use of these inputs is achieved. Improved seeds from the foundation seedhouse should also be used. A promotional campaign using radios, billboards, displays in rural feiras, etc., should be launched to promote the awareness and profitability of using these new technologies. Producers Should be informed of where these demonstration plots are located so that interest can be cultivated by actual observation of the results under field conditions. In the bean areas, fertilizer could be distributed through three channels. One might be through the federation of COOperativeS in areas where good COOperatives exist. Because cooperatives deal only with their members, other channels of distribution are needed in all areas. Probably the most effective channel would be the creation of 256 franchised dealers in the major production areas. The market deveIOpment costs of these dealers could be under- written by the fertilizer companies through a government loan which the companies would receive for this purpose. The third channel might be the local ANCAR extension offices which would handle reserve stocks for sale only when the input packages might be unavailable from other sources. The ANCAR offices should charge slightly higher prices so as to encourage the growth and deveIOpment of viable commercial sales outlets. ANCAR distribution is desirable only to insure the likelihood that fertilizer will be available at any time. Fertilizer Pricing Program a) Remove circulation tax b) Determine subsidy needs The profitability of using fertilizer can be increased through elimination of the l8% sales tax. Improving the relative prices of the inputs used and the products produced is needed to provide the necessary incentives for the initial phase of the program. At the present time such a tax is a dis-incentive on the use of new technology. In addition, elimination of the tax would mean only a small loss in revenue to the government because sales of these inputs are 257 very low at the present time. The loss in revenue could be easily offset by the additional revenues resulting from increased food production. It is probable that further price reductions are needed before widespread use of fertilizer becomes possible. This could be accomplished through a subsidy to the fer- tilizer companies which would allow them to lower the selling price. The amount of the subsidy would have to be determined after careful study of relative prices of fertilizer and beans and the fertilizer response research. In addition, it may be desirable to increase short run profitability slightly above "normal profit levels" to hasten the initial adoption rate SO as to get the program off to a good start. Input Credit Program a) Build new line of credit b) Begin semi-supervised credit A new line of credit is needed to help farmers finance the cost of buying the seeds, fertilizers and insecticides. The Bank of Brazil's current loan regulations allow the individual to borrow up to a maximum amount of money for each hectare that he plants. This limit needs to be raised to allow for the increased cost of purchasing modern input package. The present loan limit based upon traditional 258 technologies is inadequate. In addition, the possibility of the input distributors making these loans should be explored. Input sales may be enhanced if the distributor can also finance the purchase. It is more convenient for the buyer and may involve less red tape. In addition, loans to Small farmers capable of using the input package may be handled with greater ease through COOperatives and other input distributors than through the Bank of Brazil. Some credit supervision may be needed to assist producers in the proper management and use of these new technologies. Banks will need well trained personnel to perform this function possibly in connection with the ANCAR extension offices. Since knowledge and literacy levels are low this credit supervision may be an extremely important part of the program. Price Stabilization Program a) Expand current program b) Improve storage and grading Seasonal price instability was found to be one of the major problems in the farm product market. Low, unstable farm prices discourage farm output and investment in new technology. To encourage greater farm output and improved productivity, stable and remunerative price relationships are essential. 259 A minimum price support program is needed, to stabilize farm product prices. A minimum price program in cooperation with the storage program of CIBRAZEM has just recently begun Operating in the bean production area. At the present time the program is operated on a limited basis with only the Bank of Brazil allowed to make purchases. Other interested T7 banks should also be allowed to make minimum price purchases so as to reach the greatest possible number of producers. This is especially true of the areas where there is no if branch of the Bank of Brazil. Since the program is quite new to the Northeast, there is a need for the banks to inform producers of all the basic features of the minimum price program. This might be accomplished through radio programs and the local extension agencies. One cannot state categorically the apprOpriate price level which should be used in a minimum price program. However, the real average price level in a region for a period of three to five years is a good indicator of the price which should be used. The product price must also be considered relative to the cost of the modern inputs to be used and relative to other farm product prices. The farm price must be high enough to encourage the use of modern farm inputs. At the same time it must be kept in balance with other farm product prices so as to prevent the 260 occurrence of undesirable changes in the mix of farm output. Bean producers were found to be quite responsive to only a slight increase in farm prices. For these reasons it is probably best to establish price support levels slightly below the longer run real average product price level. This will Stabilize farm product prices without the danger of creating relative product price imbalances. If additional incentive is needed to encourage the use of modern technOIOgies, it may be most desirable to lower the price of the factor input. This not only provides the incentive to use the input but it also rewards only those who choose to use the new technology. The danger of course may be the necessity to subsidize the firm selling the input so as to achieve this lower input price. It still however, seems to be the most desirable alternative. Some research is needed to deveIOp more Operational grades and standards. Official grades are not used; all quality evaluation is done on a personal inspection basis. Improved grades and standards are needed for more effective Operation of the price stabilization program. A study of warehousing in the bean area is also needed to determine the quantity and quality of storage available 26I for the price stabilization program. This would also determine where new storage is needed as the price stabilization program expands. Village to Market Center Roads a) Use municipal bonds to raise money b) Begin construction Inexpensive villaie to market center roads are needed to facilitate transportation of goods into and out of the areas. These roads would be graded dirt or gravel that would allow for year round access to the area. It is suggested that communities attempt to raise the money themselves through sales of municipal bonds with low interest rates and long payback period. First priority in major production areas would be given to linking up each county seat to the market center roads. This might be followed by a program to connect Small villages to the county seat with improved roads. Road construction would utilize primarily volunteer hand labor with engineers supervising construction. Shovels, culverts, a few trucks would provide most of the basic materials needed. 262 Market Information Program a) Plan information center b) Begin Operation Recife is presently being linked up with a market information system servicing major cities in Southern Brazil. Quantity and price information will be exchanged between major cities for the basic food commodities. Recife, however, is not linked up with interior towns in producing centers. The program here would transmit market information from Recife to the interior towns where it could be broad- cast on radio and in the local feiras. Prices and volumes traded in convergence centers would then be transmitted back to Recife where buyers could get the information. The first phase of this program would concentrate on selecting the convergence centers and getting the equipment purchased and operating. Technicians would have to be trained to Operate radios and collect the information needed. Possibly in the second year the program could begin Operation. 263 A Concluding Comment An attempt has been made to examine the traditional nature of bean production and distribution in Northeast Brazil. Some of the major factors contributing to the traditional system were described and analyzed. It was concluded that a lack of effective coordination in farm product and factor input markets contributes to the near Static conditions in agriculture. Even those firms desiring to improve productivity would find it difficult because the inputs needed are not available. Poorly coordinated farm product markets increase risk and uncertainty and further discourage efforts to expand output and improve productivity. Improving product and factor market coor- dination may, therefore, positively influence firm output and productivity. In this way, the marketing system can perform an active, dynamic role in facilitating the transformation from a traditional to almflern, highly pro- ductive agriculture. As this transformation takes place, sectoral linkages will become strengthened so that each sector may share more fully in the output of the other. These rural-urban interactions will lead to markets for foods, non-foods and farm inputs. With stable and 26“ remunerative prices this means greater use of modern farm inputs and improving farm productivity. With a well coordinated product marketing system,farm productivity gains can be passed along to consumers in the form of lower food prices which increase real per capita incomes. Thus, marketing can actively contribute to economic development and growth. Further research is needed to Specify empirically the manner in which risk and uncertainty affect firm behavior in deveIOping countries. Additional refinement of atti- tudinal measurement is essential to identifying those groups of individuals with the greatest potential for change. Research is needed to determine the relationship between economic profitability and adoption of innovations so that deveIOpment planners can more apprOpriately determine the relative price level needed to achieve desired rates of adoption. LIST OF REFERENCES Department of Armg, U.S. Army Handbook for Brazil. Washington, .C.: ‘Department of Army, JuTy, I96“. Pamphlet No. 550-20. Department of Defense. Northeast Brazil Nutrition Survey March-May I963. A Report by the InterdEpartmental Committee on Nutrition for National Develo ment, Washington, D.C.: Department of Defense, ay I965. Getulio Vargas Foundation. Projections of the Supply and Demand for Farm Products in Brazil. 7Rio de Janeiro: GetulioVargasFoundation,7Vol.T, I966. Harrison, Kelly M. Vertical Coordination in the Economic Development of Puerto Rico I950-637 7Unpublished Ph.D. diSsertatiOn, Department Of7Aificultural Economics, Michigan State University, l9 6. Hirschman, Albert 0. Industrial Development in the Brazilian Northeast and the TOp CFEdit Mechanism of Article 3“]l8. PreTiminary Draft,HarvardUniversity, l967. IBGE National Statistics Council. Statistical Annuals of Brazil I 63—66. Rio de Janeiro: NationaT StatistiCs CounClI, I963-66. International Monetary Fund, International Financial Statistics. Washington, D.C.,’VOT7 l“, l967. Johnson, D. Gale. Forward Prices for Agriculture. Chicago: University of Chicago Press, I937. Knight, Frank H. Risky_Uncertainty and Profit. New York: Harper 8 Row, I9657 Latin American Studies Center, Market Process in Recife Brazil and Its Foodshed, Latin Amefican Studies Canter, Michi an State University, To be published September I968. Meier, Gerald M. Leading Issues in Develppment Economics. 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