l (OZ/7'; ; (.2. -..-————._\ - .4» ( : 4.. @*“*’8b “3.? .. (I / v C ABSTRACT MARKETING PROBLEMS OF SMALL FARM AGRICULTURE: A CASE STUDY OF THE COSTA RICAN POTATO MARKET By S. Kenneth Shwedel Concern for the development of small farm agriculture has often led policy makers to stress production oriented strategies, ignoring 'the impact of the marketing system on small farm agriculture. When the Inarketing system fails to adequately coordinate economic activities that link small farmers to larger regional and national markets, it may act as a barrier to the development of small farm agriculture. Identifying marketing problems and Opportunities for improving the performance of the marketing system, consequently, is important in establishing programs for the development of small farm agriculture. In this study, a comparison of the production and marketing acti- vities of small and large Costa Rican potato farmers provided the oppor- tunity to examine the nature of marketing problems facing small farm agriculture. Major goals of the research were to develop a conceptual framework which could be used to explain dualistic marketing system development, and to apply that framework in order to recommend general strategies for improving product markets for small farmers. The institutional framework for small farm trade was found to be different from that which characterizes large farm trade. Performance of the small farm production marketing system, furthermore, was found S. Kenneth Shwedel to relate to the nature of the institutional framework for trade, as well as to the resources under the control of the sub-system participants. Large and small farmers were seen to trade with a different set of assemblers. Large farm trade was characterized by a series of informal contract-like agreements for the exchange of potatoes which greatly improved vertical coordination, and reduced risks. Assemblers would often advise large farmers as to the best time for harvesting potatoes. Large farmers, for their part, offered administrative econo- mies to assemblers, since they sold larger lots of potatoes and were selling potatoes throughout the year. Small farmer trade, on the other hand, made limited use of contract-like agreements for the exchange of potatoes. Vertical coordi- nation was relatively poor and risks higher. Partly in response to high risks and partly due to their poorer understanding of the marketing system, small farmers adopted strategies which provided protection but limited their profitability. At the production level small farmers were seen to have the potential to produce potatoes at lower costs than large farmers. When marketing costs were added to production costs, the small farm produc- tion marketing sub-system no longer held a cost advantage. Recommendations for programs to stimulate the development of small farm agriculture arising from this study were formulated in four general areas: l. Technical assistance to farmers and assemblers to develop their marketing skills, and to introduce them to alternative arrangements for organizing trade. S. Kenneth Shwedel Information programs which provide farmers and merchants with the type of data needed for effective decision making, such as price and outlook information. Capital improvements intended to improve the technical effi- ciency of those operating within the marketing system, as well as infrastructural investments designed to stimulate improved performance. Group action programs whereby small farmers would be organ- ized, for example in cooperatives, bargaining associations, or under the auspices of a marketing board, to take advantage of the economies and bargaining power which accrue to large scale trade. MARKETING PROBLEMS OF SMALL FARM AGRICULTURE: A CASE STUDY OF THE COSTA RICAN POTATO MARKET « By xdoc _ S. Kenneth Shwedel A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1977 To my parents. ii ACKNOWLEDGMENTS The research for this study was completed while the author worked with Michigan State University under a USAID-Mission contract in Costa Rica. The collaboration received in Costa Rica from numerous individuals and organizations is greatly appreciated. Mr. Travis King, Rural Development Officer provided encouragement and bent rules to speed along this investigation. The marketing group of the Inter-American Institute of Agricultural Sciences, especially Dr. Pablo Torrealba, offered advice during the design and analysis stage of the work in Costa Rica. PIMA, the Programa Integrado de Mercadeo Agropecuario, furnished space and an institutional base from which to carry-out this study. Thanks are due to PIMA staff pe0ple, particularly Jorge Ramirez and Lucia Chinchilla for their help and most of all for their friendship. Among all those who helped me along in Costa Rica, I must express special gratitude to the members of the Union Regional de Cooperativas (en Formacion) de Cartago. They were able to provide entry into the rural communities where most of the research was undertaken. They reviewed an early Spanish draft of this study, and provided invaluable insights into the production and marketing activities of the region. But most of all, I am grateful for friendship. Special acknowledgment and appreciation is given Dr. Harold M. Riley, committee chairman, and Dr. Kelly M. Harrison, thesis advisor. iii Their guidance, advice, patience and encouragement throughout all stages of this research was invaluable. Their fortitude for working long hours in Costa Rica and for reading early drafts of the thesis in Spanish and English was amazing. Appreciation is also due to Dr. James Shaffer and Dr. Warren Vincent, members of the thesis committee, and to many of my fellow stu- dents for the comments and help during the course of this study. And to Esther, my wife, who was able to aguantarme while I was working on this thesis, I owe so much.‘ Thank you for your encouragement and confidence. iv TABLE OF CONTENTS Chapter LIST OF TABLES .............. g ......... LIST OF FIGURES ......................... GLOSSARY OF TERMS ........................ I PROBLEM AND OBJECTIVES ................... Introduction ....................... Small Farm Agriculture ................. The Marketing Systems . . . . . . . .......... The Problem ....................... Marketing Problems of Small Farmers: A Review of the Literature ....................... Objectives of the Study ................. Plan of the Study .................... II CONCEPTUAL FRAMEWORK AND METHODOLOGY ............ Marketing Systems .................... The Framework of Analysis ................ Application to the SFSS and LFSS ............ Methodology ....................... Crop to be Studied ................... Research Procedure ................... III OVERVIEW OF THE POTATO PRODUCTION MARKETING SYSTEM AND DEMAND FACTORS FOR POTATOES .................... System Overview ..................... Production ................... . . . . . Potato Marketing .................... Demand Factors ...................... Population ....................... Income ......................... Price Elasticity .................... Processed Potatoes--Trends and Consumption ....... Other Forms of Potato Demand .............. Summary ......................... IV POTATO PRODUCTION AND PRODUCER CHARACTERISTICS ....... Production ........................ The Cartago Region ................... V 37 37 37 43 45 46 62 62 Chapter Page Numbers and Size of Potato Farms ............ 63 Inputs ......................... 66 Costs ......................... 67 Yield ......................... 74 Production Decision .................. 76 Potato Production as Part of the Whole Farm Operation . 83 Farmer Characteristics .................. 84 Group Activities .................... 90 Summary ......................... 92 V FARMER POTATO MARKETING .................. 95 Harvesting ........................ 95 Negotiation ....................... 98 Alternative Arrangements for Selling Potatoes ..... 104 Summary ........... ' .............. 105 VI THE ASSEMBLY PROCESS .................... 108 Assembler Characteristics ................ 108 General Characteristics ................ 108 Modernity ....................... 112 Perception of the Potato Marketing System ....... 116 Exchange Process ..................... 118 Assembler-Grower Level Contact ............. 119 Preparation ...................... 120 Assembler-Wholesaler Contact .............. 122 Costs of Operation .................... 127 Summary ......................... 134 VII POTATO WHOLESALING ..................... 136 Introduction ....................... 136 Wholesaler Characteristics ................ 137 Entry ..................... ~ . . . . 140 Other Products Handled ................. 140 Education and Attitudes ................ 141 The Exchange Process ................... 144 Costs of Wholesaling ................... 147 Summary ......................... 149 VIII PRICES AND MARGINS IN THE POTATO PRODUCTION MARKETING SYSTEM 152 Price Fluctuation .................... 152 Seasonality ...................... 152 Price Cycles ...................... 154 Price Movements at Different Levels in the System . . . 154 Potatoes Compared with Other Crops ........... 159 Marketing Margins and Returns .............. 160 Size of Margins .................... 160 Returns ........................ 162 Summary ......................... 165 Ir, Chapter Page IX CONCLUSIONS AND RECOMMENDATIONS FOR THE COSTA RICAN POTATO PRODUCTION-MARKETING SYSTEM ................ 167 Examination of the Hypotheses .............. 167 Participants ...................... 170 Institutional Framework ................ 172 Behavioral Relationships ................ 175 Performance Characteristics .............. 176 Recommendations ..................... 185 Development of Marketing Skills ............ 186 Group Action for Small Farmers ............. 187 Storage ........................ 188 Capital Improvements .................. 190 Potato Production ..... . .............. 190 X IMPLICATIONS FOR POLICY AND ORGANIZATION OF SMALL FARM AGRICULTURE ........................ 192 Small Farm Agriculture .................. 192 Policy Implications: Market Programs for Small Farm Agriculture ....................... 194 ‘ Technical Assistance .................. 195 Market Information ................... 197 Financing Infrastructural and Capital Improvments . . . 199 Group Action ...................... 201 Suggested Research .................... 210 APPENDIX A ............................ 214 APPENDIX B ............................ 215 BIBLIOGRAPHY ........................... 216 vii Table III-1 III-2 III-3 III-4 III-5 IV-1 IV-2 IV-3 IV-4 IV-5 IV-6 IV-7 IV-8 IV-9 LIST OF TABLES Page Potato Production and Planted Area in Costa Rica by Province ......................... 39 Per Capita Consumption of Potatoes in Costa Rica, Peru, Colombia, and the United States ............. 46 Percent of the Urban Population Consuming Potatoes, Percen- tage of Total Urban Consumption and of Expenditures on Potatoes for 1974 by Income Levels ............ 52 Arc Elasticity and Per Capita Consumption for 1974 . . . . 52 Percent of Urban Families Consuming Potatoes per Family Consumption and Price of Potatoes per Average Week per Month for 1974 ...................... 54 Number of Farms, Production, and Production per Farm of Costa Rican Potato Farms, 1950, 1963, 1973, by Farm Size . 64 Potato Yields and Average Area Planted in Costa Rica: 1950, 1963, 1973 ..................... 65 Cost of Materiel, Transportation, and Land per Carga Har- vested for Small and Large Farms ............. 69 Fertilizer and Seed Use, by Farm Size .......... 69 Man-days for Potato Production Activities per Carga Har- vested for Small and Large Farmers ............ 7O Potato Production Costs per Carga Harvested Under Differ- ent Family Labor and Seed Cost Assumptions for Small and Large Farms ....................... 71 Farm Level Average Potato Cost Functions per Carga Har- vested for Small and Large Farms ............. 74 Classification of Potato Production by Grade and Farm Size 76 Percent of Small and Large Farmers Identifying the Months of Highest and Lowest Prices According to the Wholesale Price Index ....................... 77 I“ Table IV-lO IV-Tl IV-12 IV-13 IV-14 IV-15 IV-16 IV-17 VI-3 v1-4 VI-S VI-6 Page Percentage of Small and Large Farmers Planting More, Less, and the Same Land Area in Potatoes Between 1970 and 1974 . 80 Percentage of Small and Large Farmers Who Plan to Plant the Same, More, or Less Land Area in Potatoes in 1976 . . 80 Results of Linear Equations Examining Potato Production as a Function of Potato and Onion Prices .......... 82 Number of Years of Formal Schooling Completed by Small and Large Farmers ...................... 85 Response to Question Examining Future Orientation, by Farm Size ............. g .............. 86 Responses to Questions Testing Fatalism, by Farm Size . . 88 Responses to Questions Testing Trust, by Farm Size . . . . 89 Response to Question Testing Innovativeness by Farm Size . 89 Number of Different Location of Potato Fields, by Farm Size ........................... 96 Number of Months Selling Potatoes, by Size of Farm . . . . 96 Farmer's Knowledge of Assembler Selling Policy, by Farm Size ........................... 100 Percentage of Farmers Who Sell to the Same Assembler by Farm Size ........................ 101 Average High and Low Potato Prices and Discounts Received by Farmers Between September 1974-1975, by Farm Size . . . 102 Number of Years of Formal Education Completed by Assemblers by Size of Assembly Operation .............. 112 Response to Question Testing Future Orientation by Size of Assembly Operation .................... 113 Responses to Questions Testing Fatalism by Size of Assem- bler ........................... 114 Responses to Questions Testing Trust by Size of Assembler 115 Response to Question Testing Innovativeness by Size of Assembly Operation .................... 115 Percentage of Assemblers Who Correctly Identified Month of Highest and Lowest Wholesale Potato Prices and Percentage of Assemblers Who Could Not Answer, by Size of Assembly Operation ........................ 117 Table VI—7 VI-8 VI-9 VI-IO VI-II VI-12 VII-1 VII-2 VII-3 VII-4 VII-5 VII-6 VII-7 VIII-1 VIII-2 VIII-3 VIII-4 VIII-5 Page Percent of Assemblers Who Trade at San Jose Each Day, for All Assemblers and By Size of Assembly Operation ..... 124 Average High and Low Prices per th and Differences Between Them by Size of Assembly Operation ............ 127 Cost per th of Potatoes Handled by Small and Large Assem- blers Under Different Labor Cost Alternatives ...... 128 Variable Costs per th of Potatoes Handled by Small and Large Assemblers ..................... 129 Fixed Costs per th Handled by Small and Large Assemblers 130 Assembly Operation Average Cost Function per Carga of Potatoes Handled by Small and Large Assemblers ...... 131 Years of Formal Education by Wholesalers ......... 141 Response to Question Testing Future Orientation of Whole- salers .......................... 142 Responses to Questions Testing Fatalism in Wholesalers . . 142 Responses to Questions Testing Trust by Wholesalers . . . 143 Response to Question Testing Willingness to Innovate by Wholesalers ....................... 144 Total and Average Costs of Wholesale Operations per Week at the Borbon and San Jose Wholesale Markets ....... 148 Wholesale Operation Average Cost Function per Carga of Potatoes Handled ..................... 149 Monthly Wholesale and Retail Price Index and Index of Potatoes Harvested .................... 153 Standard Deviation of the Wholesale and Retail Price of Ten Fruits and Vegetables in Costa Rica, 1964-1972 . . . . 160 Cartago Market Price, Prices Received by Assemblers, Gross Margins and Assembler Markup per th, August 1974-August 1975 ........................... 161 Prices Paid to Assemblers, Received by Retailers, Gross Margin and Markup per th, August 1974 - August 1975 . . . 162 Rate of Return to Assemblers Under Different Capital Investment Assumptions for Potato Costs, by Size of Assem- b1y Operation ...................... 164 Table Cost IX-l Comparison of Major Characteristics of Small vs. Large Farm Sub-Systems ..................... 168 IX-2 Percentage of Farmers Selling to Alternative First Buyers 173 xi Figure III-1 III-2 III-3 III-4 IV-I VI-l VIII-1 VIII-2 VIII-3 IX-I IX-Z A-1 LIST OF FIGURES Page Map of Costa Rica: Estimated Volume and Zones of Potato Production: 1972 .................... 38 Yearly Production of Potatoes: 1957 - 1973 ....... 41 Manzanas of Potatoes Planted and Harvested: 1974 . . . . 42 Per Capita Production of Potatoes: 1957 - 1973 ..... 47 Farm Level Average Cost Curves .............. 75 Assembly Level Average th. Curves per Carga Handled . . . 132 Monthly Moving Average of Wholesale Potato Prices, 1964 - 1974 ........................... 155 Weekly Potato Prices at the Cartago Market, August 1974 - August 1975 ....................... 156 Weekly Prices Paid to Potato Assemblers in the San Jose Wholesale Market, 1975 .................. 158 Hypothesized Demand Curve for Potatoes .......... 180 Average Cost Curves per Carga of Potatoes of the Small and Large Farm Sub-Systems .................. 184 Channel Map of the Costa Rican Potato Production Distribu- tion Network ....................... 214 xii I GLOSSARY OF TERMS Manzana -- A unit of land area equal to 1.73 acres or .699 hectares. Carga -- A unit of weight used to measure potato production, and for trade between assemblers and farmers; equal to 18 cwt. Colon -- The Costa Rican money unit; equal to $0.117. ¢ -- Symbol used to denote the Colon. xiii CHAPTER I PROBLEM AND OBJECTIVES Introduction Small Farm Agriculture The agricultural sector of many developing countries is charac- terized by the existence of: l) a relatively small number of large farms controlling a large portion of the land and capital resources; and 1 2) large numbers of limited resource, small farms. The differences between these two groups of farmers go beyond the variance in the size of their resource base. Small farm agriculture is characterized by: 1) a reliance on owned rather than purchased inputs; 2) limited mechani- zation of farm operations; and 3) the importance of multi-crop enter- 2 prises. Furthermore, the organization of economic activity by small farmers emphasizes strategies which furnish security and not necessarily 3 those which maximize profits. The decisions, or strategies, with 1Huntly H. Biggs, "New Perspectives on Development Strategies," in Small Farm Agricultural Problems, ed. Huntly H. Biggs, (Fort Collins: Colorado State University, 1974), pp. 8-13; Carl Eicher and Lawrence H. Witt, ed., Agriculture in Economic Development (New York: McGraw-Hill Book Co., 1964), pp.71254128; Bruce Johnson et a1., "Criteria for the Design of Agricultural Development Strategies," Food Research Institute Studies in Agriculture Economic Trade and Development XI (No. 1 1972): pp. 27-58. 2Kelly M. Harrison and Kenneth Shwedel, Marketing Problems Asso- ciated with Small Farm Agriculture, RTN No. 5 (New York: The Agricil- tural Development Council, Inc., 1974), p. 1. 3Clifton R. Wharton, Jr., "Risk, Uncertainty and the Subsistence Farmer: Technological Innovation and Resistence to Change in the Context of Survival," paper presented at the Joint Session American Economic Association and Association for Comparative Economics, Chicago, 28 December, 1968, p. 49. ‘\I| respect to the nature of these activities are often the result of "inherited institutions and . . . traditionally determined socioeconomic behavior."4 Large farm agriculture, by way of contrast, is characterized in addition to size, by: 1) a greater reliance on purchased inputs; 2) higher utilization of mechanized and chemical processes, and 3) greater specialization of farm activity. Large farmers tend to organize their operations around those activities designed to maximize profits. Stra- tegies are, more often than not, determined by economic factors rather than by tradition. Concern for the develOpment of small farm agriculture follows from 5 of both economic and social considerations. Much of the literature economic development sets as the goal of agricultural policy, increasing the food surplus, in order to help finance development of the rest of the economy.6 The movement of the population out of agriculture and rural areas into urban-industrial settings, along with high rates of population growth and the accompanying urban unrest have created even greater demands on the agricultural sector to fulfill urban food needs. 41bid., p. 52. 5For example, Gustav Ranis and John C. H. Fei, "A Theory of Eco- nomic Development," Agriculture in Economic Development, ed. Carl Eicher and Lawrence Witt (New York: McGraw-Hill Book Co., 1964), pp. 181-194; E. A. J. Johnson, The Organization of Space in Developing Countries (Cambridge: Harvard University Press, 1970); William H. Nicfioils, "An 'Agricultural Surplus' as a Factor in Economic Develop- ment," The Journal of Political Economy 71 (February 1963): 1-29. 6The argument states that since the cost of food is a major bud- get item, by keeping the price 1ow, the wage rates need not be raised, permitting more labor to be employed. Presently, small farmers provide the food needs for roughly 50 percent of the world's p0pulation, and for any particular country they may supply the food for as much as two-thirds of the entire population.7 Further- more, small farm agriculture, with its high output-labor ratio and large pool of underemployed labor is said to be technologically capable of increasing the size of its agricultural surplus.8 Small farmers and their families, given the size of the agricul- tural sector in many developing countries, constitute a large portion of the national population, and yet, are often the poorest members of the society. Per capita income of rural residents trails far behind that of urban dwellers. Minimum services (electrical power, running water, health care, education, etc.) and supplies of desirable consumer goods 9 are often not available to rural residents. Low income, inadequate employment opportunities and limited access to land resources have caused 10 massive migration by small farmers out of agriculture, often further aggravating urban problems. It has been suggested that programs 7Biggs, p. 8. 8Additionally, small farm agriculture is less capital intensive, thereby freeing capital resources which can be invested elsewhere for more rapid industrial growth. Peter Dorner, Land Reform and Economic Development (Baltimore: Penguin Books, Inc., 1972), p. 103. 9"Relatively little detail is known about problems of the economic and institutional functioning of farmers' and other residents' operation of buying and selling (particularly buying) food, agricul- tural inputs and consumer goods . . ." Michael T. Weber, "Towards a Locational-Institutional Paradigm for Research to Improve Rural Food- Supply-Area Marketing Systems in Developing Countries: A Case Study from Costa Rica," seminar paper presented to the Department of Agri- cultural Economics, Michigan State University, East Lansing, 1975. 10Biggs, p. 10. directed towards the traditional farm subsector, would lead to a more equitable distribution of income as well as to increased employment.n Additional purchasing power from higher real income would permit the farmer to achieve a higher standard of living, and stimulate industrial demand. Part of the increased production could then be taxed away to finance the extension of basic services to rural areas as well as to subsidize growth in other sectors of the economy. The Marketing System Trade of agricultural products is characterized by varying levels of organization and coordination.12 On one extreme trade is highly coordinated, being characterized by contracting, futures markets, tech- nologically advanced handling and processing, highly specialized and trained personnel, and frequently, vertical integration of different marketing and production stages under one administration. At the other extreme, trade is poorly coordinated. The number of intermediaries is very large and their size extremely small; additionally, many are only part-time merchants. Price distortions and uncertainties are exagger- ated by limited information and knowledge of market opportunities as well as by "crude and inefficient handling, packaging, storage, and product preservation practices."13 1]See for example: Agency for International Development, Propo- sal and Recommendations for the Review of the DevelOpment Loan Committee: Guatemala—Small Farm Development, AlO-DLC/p-2137 (1975), p. 85. 12W. 0. Jones, Marketing of Staple Food Crops in Africa (Ithaca: Cornell University Press, 1972), p. 72. 13Kelly M. Harrison, et a1., Improving Food Marketing Systems in DevelOping Countries: Experiences from Latin America (East Lansing: Michigan State University, Latin American Studies Center, 1975), p. 80. The marketing system serving large farmers need not be, and often 14 The market- is not the same one which serves small farm agriculture. ing system which serves small farm agriculture has been characterized by small scale trade with a proliferation of limited resource traders, lowering profits and raising costs. Trade is often, but not exclusively, local in scope with a few linkages to larger regional and national markets.15 Large farm agriculture, on the other hand, rarely depends solely on local markets. By trading directly with large assemblers, large farmers are able to bypass local markets and establish linkages with regional, national and international markets.16 A picture emerges of two sub-systems; one for small farm agri- cultural production and marketing (SFSS) characterized by limited resource farmers trading through a poorly coordinated marketing system. The other, for large farm agricultural production and marketing (LFSS), comprised of specialized farm Operators trading in a more efficiently coordinated marketing system. The Problem Many of the programs designed to stimulate the development of small farm agriculture have tended to focus only on technical production- increasing strategies while ignoring market system improvements or rele- 17 gating them to a secondary or adaptive role. When marketing functions 14Jones, p. 230; Harrison and Shwedel, p. 3. 15Carol Ann Smith, "The Domestic Marketing System in Western Gua- temala: An Economic, Locational and Cultural Analysis" (Ph.D. disser- tation, Stanford University, 1972), pp. 12-13. 16R. J. Bromley and R. Symanski, "Marketplace Trade in Latin American," Latin American Research Review IX (Fall 1975): p. 21. 17Harrison, et al., p. 2. have been considered the state has often intervened in: l) the pricing process by fixing minimum and/or maximum prices to the various agents in the production distribution system through fiat or supply management, and/or 2) the distribution of inputs and/or food products. The choice of strategies for dealing with the marketing problems of small farm agriculture has often been based on assumptions reflecting a lack of knowledge and misconceptions of the marketing system. It is not uncommon, for example, to find policy makers holding the belief that the marketing system is characterized by unscrupulous middlemen 18 engaging in speculative activities to gain outrageous profits. That there may be certain structural conditions producing externalities which lead to poor performance,19 is not considered. The role of marketing as a positive force in development20 is also ignored. The question of who captures the possible benefits from changes in the marketing system is side-stepped. The benefits of these changes do not necessarily accrue to the participants of the SFSS, but rather to those who are in a position to best take advantage of new economic 18Harrison, et al., p. 3; Edith H. Whetham, Agricultural Market- ing in Africa (London: Oxford University Press, 1972), p. 96. 19Harold Riley, et al., Food Marketing in the Economic Develop: ment of Puerto Rico (East Lansing: Michigan State University, Latin American Studies Center, 1970), p. 7; N. R. Collins and R. H. Holton, "Programming Changes in Marketing in Planned Economic DevelOpment," in Agriculture in Economic Development, ed. Carl Eicher and Lawrence WittTTNew York: McGraw-Hill Book Co., 1964), pp. 363-365. 20[Marketing] development, above all others, makes possible eco— nomic integration and the fullest utilization of whatever assets and productive capacity an economy already possesses. It mobilizes latent economic energy. It contributes to the greatest needs: that of the rapid development of entrepreneurs and managers . . ." Peter Druker, :ggrketing and Economic Development," Journal Of Marketing 22 (January 8 : 253. ‘51-, {ul- A... '5' s“ u n 5 opportunities as they present themselves. Furthermore, government poli- cies designed to deal with perceived market related problems often work at cross purposes. Lele argues, for example, that price controls may have an adverse effect on "the growth of food production by increasing risk and uncertainty and reducing returns to investment in food produc- tion."21 By investing few, if any, resources in improving the marketing system which serves small farm agriculture,22 government programs have allowed these farmers to continue trading under conditions which provide limited incentives for economic growth. Ruttan, in a review of rural development programs, stated that "the potential gain from comprehensive programs of rural development that can be achieved in the absence of expanding commodity markets and more efficient factor markets are limited."23 That the marketing system has failed to furnish adequate coordination of economic activities to effectively link small farmers to larger regional and national markets, suggests that the marketing system has, in effect, acted as a barrier to the development of small farm agriculture. Thus, identification of marketing problems and opportunities for improving the performance of the marketing system becomes an important consideration in establishing programs for the development of small farm agriculture. 21Uma Lele, "Considerations Related to Optimum Pricing and Mar- keting Strategies in Rural Development,‘l paper presented at the XVI International Conference of Agricultural Economists, Nairobi, Kenya, 26 July, 1976, p. l. 221bid., p. 32. 23Vernon W. Ruttan, "Rural Development Programs: A Skeptical Perspective," Agricultural Development Council, New York, 1974, (Mimeo- graphed Draft), p. 25. Marketing Problems of Small Farmers: A Review of the Literature The process of develOpment, due to the accompanying structural transformation of society,24 requires institutions and procedures to integrate and coordinate activities within a transformed society: The essential aspect of an underdeveloped economy and the factor the absence of which keeps it underdeveloped is the inability to organize economic efforts and energies, to bring together resources, wants and capacities, and so to convert a self-limiting static system into creative, self- generating organic growth. When the marketing system is functioning efficiently, it coordi- nates by sending price signals as well as related information concerning market conditions to those operating within the system, telling them what to produce, how to produce (i.e., resource utilization), and how to divide the production among potential consumers. Additionally, an effective system maintains a flexibility that would signal the system participants to adjust their actions to changing circumstances. A well— coordinated marketing system stimulates desired economic and social performanCe by: 1) reducing risks through better information; 2) rewarding economies in production and distribution; 3) making the demand for products more elastic by stimulating new processes, storage, etc.; 4) developing the administrative capacity by providing opportunities for efficient organization to better coordinate production with demand; and . 24Kuznets has characterized development as "a sustained increase 1" per capita or per worker product, most often accompanied by an in- crease in population and usually sweeping structural changes." Simon Kuznets, Modern Economic Growth: Rate Structure and Spread (New Haven: Yale University Press, 1966), p. l. 25Drucker, p. 255. b- 5) incorporating marginal groups into society by providing them access to economic and social opportunities.26 Just as a marketing system which works efficiently can play an important role in stimulating development, an inefficient system can create barriers to development: Performance failures of the agricultural marketing system in coordination and physical distribution can retard the transition from a traditional to a high productive econo- my. Uncertainty and unrewarding farm product prices, unreliable and expensive farm inputs, high prices and un- certain supplies of food to urban consumer all encourage27 the maintenance of low-productivity subsistence farming. The fact that marketing systems do not develop uniformly throughout the economy nor within various sectors of the economy implies that there would also be differential rates and patterns of growth associated with different marketing systems. Differences in the marketing systems serving different sectors, in some respects, relate directly to the nature of the exchange process. Schmid and Shaffer conceptualize exchange being conducted within cer- tain frameworks (or systems) defined by intangible social relationships and sets of property rights: Status--transactions are governed primarily through pre- secribed roles associated with social position. Roles are not defined exclusively in economic terms. Exchange ratios are not subject to bargaining and are set through customs. Administrative--transactions are controlled by those participants in positions of political authority. 26Reed Moyer, Marketing in Economic Development, Occasional Paper No. 1 (East Lansing: Michigan State University, Institute for Inter- national Business Studies, 1965). . 27Kelly Harrison, James D. Shaffer, and Michael T. Weber, Foment- JpgpImprovements in Food Marketing in Costa Rica (East Lansing: Michigan State University, Latin American Studies Center, 1975), p. 11. 6“ I; \‘l 10 Exchange rates are variable within limits. Roles may be civic as well as economic in nature. Bargained--transactions are governed by a set of imper- sonal rules. Exchange rates are bargained, with mater- ial success as the final goal. Where a bargained price system dominates, political and economic positions are usually distinct and separate.28 While no one framework is unique to a specific society, the status framework tends to characterize the more traditional society.29 Other factors influencing exchange have also been suggested. They include: 1) volume of transactions; 2) distance from the market; and 3) accessiblity (e.g., road conditions).30 Small farms often trade in small lots, and may be located at great distances from the market. Merchants who deal with small farmers under these conditions often adopt strategies which, while allowing them to stabilize their business operations (e.g., handle a wide variety of product), result in poor vertical coordination of the marketing system.31 The difference in organization of marketing institutions as they relate to development are suggested by Harrison and Shwedel when they state that, ". . . organizations which serve the large farmer are not 28James D. Shaffer and Allan A. Schmid, "Community Economics: A Framework for Analysis of Community Economic Problems," Department of Agricultural Economics, East Lansing, Michigan State University, 1973, p. 34. (Mimeographed.) 29Raymond Firth, "Social Structure and Peasant Economy: The Influence of Social Structure Upon Peasant Economies," in Subsistence Agriculture and Economic Development, ed. Clifton R. Wharton(Chicago: Aldine Publishing Co., 1969), p. 27. . 30Juan Antonio Aguirre, "The Economics of Milk and Beef Produc- tion in the Humid Tropics: ACase Study of San Carlos County, Costa Rica" (Ph.D. dissertation, Cornell University, 1969), p. 209. 31d. Pablo Torrealba, "Improving the Organization of Fruit and Vegetable Production-Assembly System inthe Coffee Zone of Colombia: A Case Study of the La Mesa Region" (Ph.D. dissertation, Michigan State University, 1972), pp. 255-257. a. N ‘/| o. 11 able to provide the same services to the small farmer."32 Furthermore, they report: "The organizations which serve the small farmer often lack the resources and abilities of the large-farm distribution organiza- tions."33 It would be expected, therefore, that the inability of the SFSS distribution sector to provide the same services as that of the LFSS, due to its lack of resources, would lead to a different type of behavior and performance which would result in differential growth rates. Size of operation has been suggested as a key variable in determining sources of disadvantage between the two sub-systems. Mar- keting organizations ". . . tend not to be scale-neutral, and have a "34 commercial bias that favors large-scale producers. Large numbers of small farmers make the costs of providing marketing services very high per unit handled,35 and the large numbers of middlemen result in situa- 36 tions approaching atomistic competition. Higher cost operations are reflected at the farmer level by lower product prices for the grower.37 Other factors relating to the organization of trade, besides size, further add to the costs of marketing. Limited information and 32Harrison and Shwedel, p. 4. 33Ibid., p. 4. 34Ibid., p. 4. 35Ibid., p; 5; Kenneth L. Bachman and Paymon P. Christensen, "La Economia dei Tamano de las Granjas," in Desarrollo Agricola y Crecimien- jp_Economico, ed. H. M. Southworth and B. F. Johnson (Mexico: Union Tipografica Editorial Hispano Americana, 1970), p. 253. 36Riley, et al., p. 26. 37Charles Fletschner, Structural Patterns in the Marketing of §§1ected Agricultural Products in ChiTe: The Position of Smallland' L339§_§E%!2£§, Research Paper No. 10 (Madison: University of Wiscon- 51". Lan Tenure Center, 1971), p. 2. 12 poor understanding of the structure and conduct of marketing system and its operation result in passing up many opportunities for either tech- nological or commercial innovations. With reSpect to fruit and vegetable distribution in Puerto Rico, Riley, et al., concluded, "Neither produ- cers nor merchant truckers were able to understand the nature of consu- mer demand sufficiently to perceive the need or profitability of washing, grading and carefully handling perishable commodities."38 Alternative forms of trade are limited and those that exist pro- vide few opportunities for small farmers. Large numbers of buyers and sellers have resulted in trade being carried out along lines of personal relationships. In some cases the relationship may be based on a status 39 framework, while in others it will represent an attempt to establish 40 In either case these assured trading partners at moderate costs. relationships restrict the farmers' trade to one or a small group of middlemen. The small farmer who will go to the market himself is an occasional seller not often aware of the current level of prices, and under pressure to complete his business on the same day he comes to market.41 Many of these factors which distinguish SFSS marketing from that of the LFSS, also contribute to a higher level of risk and predispose SFSS participants towards.certain strategies which reduce risk by 38Riley, et al., p. 174. 39Sidney W. Mintz, "Internal Market Systems as Mechanisms of Social Articulation," Proceedings of the 1959 Annual Spring Meeting of fine American Ethnoldgical SocietyTBrooklyn: n.p., 1959), p. 124. 40William 0. Jones, Marketing Stople Food Crops in Tropical Eflijgg_(lthaca: Cornell University Press, 1972), p. 254. 4‘Jones, Marketing Stople Food Crops, p. 253. 13 narrowing the range of decisions and discouraging change which threatens the established order.42 These strategies designed to reduce risk by small farmers, such as diversification and the reluctance to try new methods, make ". . . assembly expensive and reduce the flow of coordi- nating information in the system."43 When governments have initiated marketing programs aimed at deve- loping the agricultural sector, the SFSS had a lesser chance of benefit- ting and usually suffered the negative impacts of government policy.44 Harrison and Shwedel report that: "Government programs . . . often unwittingly encourage or strengthen the position of firms at monopoli- zation points,"45 which has the effect of further disadvantaging the position of small farms. Attempts to deal directly with small farmers through government purchasing programs have not always met with success because they "lack the administrative capacity and the manpower required to purchase small scattered supplies of food craps "46 Moreover, the position of larger and more capital intensive units has been strengthen- ed due to the predominance of efficiency as the criterion for research 42Erven J. Long, "Institutional Factors Limiting Progress in Less Developed Countries," in Agricultural Sciences for the Developing Nations, ed. Albert H. Moseman (Washington, D.C.: American Association for the Advancement of Sciences, 1964), pp. 3-14. 43James D. Shaffer, "On the Concept of Agricultural Commodity Development Boards as Institutions for Fomenting Economic Development, " East Lansing, 1973. (Mimeographed draft), p. 2. 44Fletschner, p. 2. 45Harrison and Shwedel, p. 4; Monopolization points are capital intensive points within distribution channels, such as "large regional assemblers, processing plants, exporters and national grain wholesal- ers," Ibid., p. 4. 46Uma Lele, The Design of Rural Development: Lessons from Exper- ience (Washington, OTC:.:TWorld Bank Publication, 11975), p. 1107. IA' ii F'a i‘l 4.1 T 14 and market evaluation, . . . ignoring equity as a measure of perfor- mance."47 Group activity for marketing small farm production has often centered around the concept of formal cooperative societies replacing traditional middlemen. Cooperatives have had some success in trading 48 crops such as sugar, cotton, tobacco, and coffee, because many of the characteristics of the product markets for these crOps facilitate the 49 marketing operation of cooperatives. For most other crops, especially those destined for domestic consumption, however, cooperatives have failed to make much headway.50 Successful intervention in these markets requires levels of administrative skill and entrepreneurial capacity often lacking in cooperative organizations.5] Furthermore, cooperatives incur extra costs and have problems different than those of private 52 traders. This makes it difficult for cooperatives to effectively organize and compete with private tradersirlthe domestic food market. 47Harrison and Shwedel, p. 4. 48Lele, Considerations Related topgptimum Pricing, p. 28. 49Being mostly for export crops, it is relatively easy to esta- blish a centralized marketing facility. Often the international price sets the domestic price which frees cooperatives from risky decisions as to how much to purchase at what prices. Finally, some of these crops require processing which gives the cooperatives an opportunity to verti- cally integrate; the value added from processing is often enough to allow the cooperative to offer an attractive price to the farmer. Ibid., pp. 28-29. 50113111., p. 27. 5lLele, The Design of Rural Development, p. 107. 52For example: 1) aid staff; 2) interest paid on CFEdit;.3) costs of accounting; and 4 conflict of interests among its members. Edith H. Whetham, pp. 191-192. 15 Objectives of the Study A pessimistic picture of small farm agriculture emerges. On one hand, structural differences have resulted in a marketing system which has been unable to render those services necessary for the task of sti- mulating and coordinating the development of the SFSS. On the other hand, the same situation which resulted in the relatively poor perfor- mance of the SFSS's marketing system reinforces behavioral patterns 53 When government which contributed to that very same poor performance. has intervened, rather than stimulate the development of small farm agriculture, its policies with respect to the agricultural marketing system have often failed to improve the economic conditions of the small farmer, and in some cases further disadvantaged the SFSS 1L5 o 313 the LFSS. Group action has largely been unsuccessful, except in a few sPecial cases, as an alternative means of overcoming many of the market- 1."Sll problems faced by small farmers. The general objective of this study, therefore, is to identify Oppo rtunities which will allow the marketing system serving small far- mers to become a more dynamic institution effectively coordinating and integrating the SFSS into the larger economy as a productive force con- tr‘i buting to national economic development. The specific and Operational objectives are to: x \ emb 5:g'Georgescu-Roegen's concept of tradition that, ". . . not only at’tQGies the rules of conduct for one individual, but also dictates the th 1 tude of the individual towards tradition itself," appears to sum up Geo relationship between the SFSS and it distribution sector. Nicholas An r‘Qescu-Roegen, "The Institutional Aspects Of Peasant Communities: me“ halytical View," in Subsistence Agriculture and Economic Develop- W3 ed. ggifton R. Wharton, Jr. (Chicago: Aldine Publishing Co., . p. . l6 1. Develop a conceptual framework which could be used to explain dualistic market system development. This will require postulat- ing a set of hypothesized differences between the marketing system of the LFSS and SFSS. 2. Describe and analyze the production-distribution systems used by small and large Costa Rican potato farmers in order to examine and test the differences hypothesized to exist between the two sub-sectors. 3. Identify the marketing problems of the Costa Rican potato farmers, especially those problem areas where the marketing sys- tem acts to inhibit the economic growth of the small potato farmers. 4. Recommend programs for improving the performance of the potato sub-sector with particular concern for small farmers. 5. Apply the knowledge gained from the case study of Costa Rican potato farmers to recommend general strategies for improving the product markets linking small farmers to larger regional and national markets. Plan of the Study Chapter II outlines the conceptual framework which is used to Study the dualistic nature of agricultural product markets. The hypo- 1:r“3!§£es explaining the differences between the marketing systems of the l‘F:5555 and SFSS are set forth. Finally, the rationale for choosing the Costa Rican potato production-distribution sector and the methodology used for this study is explained. Part II of the thesis examines the Costa Rican potato production- distribution sector. Chapter III gives an overview of the potato 17 production-distribution sector and explores the factors which influence the demand for potatoes. Chapter IV deals with the potato production process. General characteristics of small and large growers are dis- cussed, and an attempt is made to identify differences in the production practices. Chapter V examines the process by which small and large farmers trade potatoes, indicating institutional arrangements and prac- tices used by both groups. Chapter VI analyzes the assembly process-- operating costs and trading practices--to demonstrate that the two groups of farmers trade with different groups Of assemblers, and that these differences in assembly Operations influence grower welfare. Chapter VII evaluates the wholesale process. While it will be seen that both the SFSS and LFSS trade with the same wholesalers there are, never- theless, differences in trading arrangements which influence the cost Characteristics Of the two sub-systems. Chapter VIII analyzes prices and margins for potato marketing. Part III presents the general summary and conclusions of this StUdy. Chapter IX relates the hypotheses set forth in Chapter II to the results of the study of the Costa Rican potato market. Recommen- dations for improving the performance of the Costa Rican potato " p""~'-)duction-distribution sector are made with special emphasis on alter- nat‘i ves designed to improve the position Of the small growers. Chapter X a‘l-‘-1:empts to generalize the conclusions of this study recommending strategies for small farm agriculture. Some potential areas for future research in the marketing problems Of small farm agriculture are Identified. CHAPTER II CONCEPTUAL FRAMEWORK AND METHODOLOGY Marketing Systems Churchman has defined a system as ”a set Of parts coordinated to accomplish a set of goals."1 Coordination, in turn, implies that there is an interdependence between different parts or components Of the sys- tem;2 these can be identified permitting causal relationships to be postulated and to some extent measured. The components of a system interact within an environment which influences both the pattern of their Ir'e‘lationship and limits their set of possible activities. Additionally, the finite resources, both physical and managerial, act as further C“3'18 traints to the activities which a system or any of its components may undertake. A system model is the representation of the reality of a parti- CL‘] a? system. When it is a dynamic model it allows for change by the "1C1 usion of variables as part of the activity set which permit the pro (less of transformation to take place. Change, may be considered as oCchllr‘ring as the reaction to: 1) exogenously induced phenomena; and/0r 2) dissatisfaction with system performance as measured against \ \. . 1C. West Churchman, The Systems Approach (New York: Dell Pub- ‘Shing Co., Inc., 1968), p. 29. 2James D. Shaffer, Designing Agricultural Marketing Systems in t$Ekpjng Countries (East Lansing: Michigan State University, Depart- “t of Agricultural Economics, 1972), p. 7. 18 19 goal statements. The nature and intensity of change is a function of the: 1) induced phenomena; 2) dissatisfaction, and 3) resource base. A dynamic system model may be defined in terms of: 1. The total systems objectives and, more specifically, the performance measures Of the whole system. 2. The systems environment. 3. The resources of the system. 4. The components Of the system: their activities, goals, and measures Of performance. 5. The management of the system.3 6. The behavioral assumptions of the different components. The institutions, participants, and activities involved in agri- cul tural marketing comprise a system. It is considered that the goal of the agricultural marketing system should be to integrate the production activities of many separate and individual farm units into the national eCc"Iomy so that the agricultural sector: 1) serves as a positive force in economic and social development; and 2) participates equitably in the di 8tribution of the benefits arising from the growth of the nation's ecOhomy.4 The Operational Objective of the marketing system would, theY‘efore, be the effective coordination of the activities of those 1nv°Tved in the production and marketing of agricultural products in Sue}, a way that those activities which contribute to the system's goal \ 3Churchman, p. 3. s 4As pointed out in Chapter I policy makers'--those responsible for setting goals--understanding of the workings and potentials of marketing YStem reflects a lack of knowledge and misconceptions. Thus, the posi- ‘Ye role Of the marketing in economic development is Often neglected in d e formulation of national goals and passed over in the design of eve10pment programs. 20 are: 1) clearly perceived; and 2) positively reinforced; while 3) those which hinder the implementation of the system's goal are successfully d i scouraged. To consider the coordination of production and marketing as the objectives Of separate systems renders as arbitrary the distinction "Farm production between the production and distribution activities. "6 and product distribution are interdependent in a commercial economy; i”t is more proper, especially for problem solving, to consider marketing as part of a production-distribution system extending from the production- iiipatrt decision mix through to consumer demand.7 Marketing, therefore, would include those activities involved in production, assembly, whole- sa‘l ing, retailing, and consumption as well as those set of institutions 8 and rules governing transactions, or the exchange of property rights. The interaction Of production and distribution activities within this inSti tutional framework results in a set Of system outputs or performance: It is characteristic of food marketing problems in coun- tries undergoing accelerated economic development that they arise simultaneously all along the 1ine from the planning of production to meet market demand, through transport, wholesaling, and processing to retail distri- bution.9 \ 5Kelly M. Harrison, et al., Improving Food Marketing Systems in WWW Countries: Experiences from Latin America (East Lansing: Ch‘lgan State University, Latin American Studies Center, 1975), p. 4. 6Shaffer, p. 7. Di 7Christopher 0. Andrews, “Improving Performance of the Production- mstr‘ibution System for Potatoes in Colombia" (Ph.D. dissertation, ch‘lgan State University, 1969), p. 24. 8Harrison, et al., p. 4. Ha 9d. C. Abbot, "The Role of Marketing in the Development of Back- ‘92:)Agricultural Economies," Journal of Farm Economics XLIV (May, = 359. 21 This study will apply an institutional approach to market analy- sis. This approach requires the researcher to "ask how would different rules, different power distribution, different objectives affect perfor- mance?"10 The performance objectives are considered as normative statements describing desired outcomes. The system's concept permits this type Of analysis by providing a framework in which interactions are explicitly postulated between the resources, rules, and organization Of a system and its performance. Evaluation of the system is designed to determine what is hindering desired performance and what steps are necessary to move it to a more desirable state.H The Framework of AnaLysis Using a systems framework, the agricultural marketing system will be conceptualized in terms of four separate, but interacting components: 1) participants; 2) institutional framework; 3) behavioral relationships; and 4) performance. The participants are considered as those indivi- dué‘l s and groups involved in activities within the environment defined by the system. The institutional framework refers to the structure (1 - e. , concentration, barriers to entry, etc.) of the various industries operating within the system as well as to the set of rules (institutions) "hi Ch govern the interactions between participants. The actions of the pa"‘ticipants as they work towards fulfilling their individual objec- ti"95: are considered the behavioral relationships. The performance \ 10Gerald R. Campbell and Thomas S. Clevenger, An Institutional Web to Vertical Coordination in Agriculture, Working Paper Series, ~p‘I (Madison, Wisconsin: North Central Project 117, 1975), p. 13. HIbid., p. 13. 22 refers to the outcome or consequences of activities undertaken by the participants in relation to system Objectives. The participants in the system interact with one another by means of transactions involving the transfer of property rights, that is, the control of resources and the claims tolthe future benefits accruing to those resources.12 The exchange Of these rights takes place within a framework Of institutional arrangements that prescribe and facilitate this interaction. Behavior of participants is a function of the set of institutional arrangements which circumscribe and regulate their parti- cipation in the market process. The behavior or conduct of the parti- cipants determines the performance of the system. In what may be said to approximate a feedback loop, if the outcomes from the performance are compatible with the participant's private goals, he will develop Standard operating procedures (SOP) to routinize his behavioral reaction t0 the institutional structure through which he acts. Unsatisfactory Performance, on the other hand, will cause the participant to seek change "‘5 thin the system. The ability to influence change will depend upon the resources at his disposal. If the participant is unable to favor- abjy affect system performance, or only a part of it, he will most 1“ kely modify his behavior developing new sets of standard Operating p"Ocedures to minimize the effects Of undesirable outcomes. While such cor"duct may be beneficial to the participant, in many cases it will pron to be counter productive to the system's goals, especially as they relate to national develOpmental Objectives. At this point it may \ A 12James D. Shaffer and A. Allen Schmid, "Community Economics: MiFl‘amework for Analysis of Community Economic Problems," East Lansing, ch'igan State University, 1973, p. 19. (Mimeographed.) 23 be necessary for an exogenous force, e.g., governmental policy, to directly intervene to bring about change in the system's performance. Behavioral relationships, as stated above, are a reaction to the institutional arrangements and the participant's ability to perceive them and act upon them. This may be expressed as: (1) B = m. R) where B is the behavior of the participants, I the institutional arrangements, and R a variable representing the participant's percep- tions and resources. The institutional arrangements at any point in time are the result of previous changes in the system and random factors, which may be represented as: (2) I = f(A I. 1‘) Where A I is a variable denoting that the present set of institutional arrangements are the results of previous changes, and r, which repre- sen ts random effects. The changes in the system are the result Of the pe Y‘ception Of the participants and their ability to influence change, as well as exogenous factors such as government intervention: (3) A I = f(R, E) "hare E represents the set of possible exogenous factors. Performance Can be considered as the stream Of consequences Of behavioral patterns: (4) P = f(z B) where P is the performance. By substituting (1) into (4), performance '5 eXpressed as a function of the sets of institutional arrangements and participants' abilities: (5) P = z f(I, R) BY Substituting (3) into (2), institutional arrangements, expressed as: (6) 1= f(R, E, r) 24 Rare the result Of perceptions and abilities of the participants, and exogenous factors, such as governmental programs. Thus, if performance of two sub-sectors differed, it would be expected to relate to differ- ences in I and R. Since I is also a function of R and E, it would further be expected that the effects of exogenous factors such as government programs are not the same,.i.e. the benefits are not distri- buted equally. Programs designed to change sub-sector performance would be directed at modifying institutional arrangements within the sub- sector. This would require altering perceptions and resources of the participants as well as assuring that the effects of exogenous factors are favorably distributed to that sub-sector. Using the framework to identify marketing problems of small farm agriculture and indicate Opportunities for improving the performance of the marketing system, implies that research and programs directed at a 1 tering institutional arrangements within the SFSS would affect the performance of small farm agriculture. The programs would be directed to eliminate differential effects of exogenous factors and improve the Participants' understanding of the system and their ability to influence 7 ts working. The specific programs would depend upon the types of 'ins titutions and participant relationships existing in the sub-system. flamication to the SFSS a'nd LFSS This section will develop a set of specific hypothesized differ- e"(lees between the SFSS and LFSS within the context of an agricultural '“E"“l " ~<' ,9"! 3‘". ' pk ’ \ .' f t 1 (.;\x ,. 4::e- .. CARIBBEAN SEA SW'W/ . . HEREDIA ‘ ‘- U- I -m- ;, mac-u . .lm -' D‘. .W Ni 0-.- V, . LIMON a , ,. L ”.51 m coho-1m "‘ '5“ IT?’ a I _. a...“ .77." :0. ‘M- ’LZTQF ' N ' "' .r. J. '6 ........=.--~ ‘- CARTAGO __ __ . .1; 'T‘jf‘SAN (USE. --1 nn!"'1.:l TL .A "nod I” 1.“.' PACIFIC OCEAN Figure III-1. Map of Costa Rica: Estimated Volume and Zones of Potato Production: 1972. Source: Programa Intregral de Mercadeo Agropecuario, San Jose, 1973. 11111I1-.I\I.Fh 1- I I...1§- 1‘ .IaiicN ac‘ flail-‘ ‘.l11.ll P-h \.lll. air-a \:.1.V\I\1-—~ f.‘ A \a..~ h 1‘ u § .Ih u\o..h 39 .Ammm— .uHmz .mmoc :wmv mmmp “owcmzuumoem< omcmu "momcmu a aueumwumpmu mu Pacmcww cowouwcwo ”mucsom «.mom.op emu.PNm.o~ _.poo.~ me move mumou N_.o u.moo.m moo.mm m.m mm mmcmsmpcza m~.o m.-m.~ www.me m.mp om mummumcmae mp.o «.mpm.m moo.Pm o.m o mwvmgm: wo.om m.v~¢.- emm.mmm.m_ m.wpo.F vwm convene mo.m m.o~m.¢ NNm.Fm—.— m.o¢~ mmm upmznp< mm.m m.m~o.m. omm.mmm o.o- mmp mmoq cam gem“. nee... gee”... awed“. ;........ 3.... yo ucmusma . . mms< . TH H H m _ an... mucw>oga 52 move mumou cw mms< tuneup; ecu comuoznoga oucuoa In! REJ- as“ «flu. 4o likely due to the introduction of a new potato variety accompanied by the eclipse of older traditional varieties. Many native varieties dis- appeared from the market during this period as the Atzimba variety from Mexico was brought to Costa Rica to replenish seed stock. As late as 1958, Green was able to report that the bulk of potatoes were produced from three native varieties.2 By 1973 Atzimba accounted for 95 percent of the national production.3 The remaining potatoes are Rosita, a native variety, and some Kennebec. The yearly production Of potatoes from 1957 through 1973 is shown in Figure III-2. Until 1968, there was a steady increase in the amount of potatoes produced. After 1968, however, production declined, and it was not until 1972 that it was able to surpass pre-l968 levels. The exact reason for the decline in production is not known, but is was around 1969 that the pulilla, a worm that attacks the tuber, first appeared in Costa Rica. Potatoes are planted and harvested every month of the year (Fi- gure III-3), however, the major portion of the crop comes on the market twice a year from late August through early November, and again in March. The seasonality Of potato production is related to climatic conditions. The rainy season begins in April-May and runs through Octo- ber and sometimes into November. This allows farmers to plant at the beginning Of the rains, and again at the end of the wet season. Since there is very little irrigation used in the cultivation of potatoes, an . 2R. E. L. Greene, An Economic Study of the Production and Market- Jflg_of Potatoes in Costa Rica (San Jose: STICA/AID, 1958), p. 1. 3Luis Cartin, et al., Apuntes Sobre el Cultivo de la Popa en Miss. (San Jose: MAG, 1973), p. 2. 41 mm mm —m on me we. mcam> no mo .mueoume copuozuoea cmemwpnsaca .mczuezuwem< co sgpmpcwz me .mump 1 Nmmp we mm "mmopmpoa mo cowauauoca speed» we pm om mm mm "mocaom .NamuH mgzmwm mm om mm 2 88. : use me om mm 42 500 459 ‘— Planted 400 350 300 250 200 .‘J 150 lOO 50 I I I I I I I I I I I I I I I I At Harvested \\ ,1 \ 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ‘1 1. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Figure III-3. Manzanas of Potatoes Planted and Harvested: 1974. Source: Nelson Montero, presentation to Costa Rican National Congress, Cartago, October, 1975. 43 extended dry season will cause a large decrease in the supply of pota- toes,resulting in large price fluctuations. The normal growing cycle for the varieties used in Costa Rica is approximately 135-140 days,4 or 4% months. The growing period will vary between micro-climatic areas in the Cartago region. Near the city of Cartago, potatoes are harvested in 3% months, while in the highest areas the period between planting and harvesting can be extended to almost a year. In the other potato producing regions, northwest of San Jose, planting occurs in June and November, with harvesting coming between four and five months afterwards. Potato Marketing5 Potato production in Costa Rica is a highly commercial farm enterprise. Most of the potatoes are sold on the cash market (79 percent). Losses, or potatoes Of noncommercial quality account for seven percent of the total production, while 13 percent of the produc- tion is kept for seed stock. On farm consumption of potatoes is mini- mal, accounting for less than six-tenths of a percent Of total production. Every Sunday for two hours during the morning in the city of Cartago farmers and assemblers gather on a street corner to sell and buy potatoes. During this period both groups spend a good deal Of time "feeling-out" the market. Farmers usually bring a small bag of pota- toes which are supposed to represent a sample of their crops. On the basis of this sample the farmer and the buyer will come to an agreement 4Cartin, et al., p. 6. . 5See Appendix A, Figure A-l for the channel map Of the Costa R1can potato distribution network. 44 on: 1) quantity; 2) price per oorgo (units of 1,800 pounds); and 3) the day in which the buyer will pass by the farm to pick up the potatoes. No money changes hands, nor are any contracts or other agreements signed. On the following Sunday in Cartago the assembler--having sold the potatoes during the previous week--will pay the farmer. It is often the case, however, that the price paid is lower than the price agreed upon the previous Sunday. After picking up the potatoes on the agreed upon day, they are taken to be washed, sorted, dried and repacked in sacks Of approximately 100 pounds.6 The potatoes then move either to San Jose or directly to one of many local markets. At no other place is the distribution channel so concentrated than at the assembly level. This concentration is reflected in the high percentage of available potatoes which are marketed and handled by a relatively small number of merchant middle- men at one location. San Jose wholesalers, on the other hand, are numerous, and handle smaller volumes than do the assemblers. Entry as wholesaler is difficult, and those who are trading in the marketplace are among the most traditional participants within the system. From the San Jose markets potatoes move to secondary markets across the country--for wholesale or retail sales--or directly to rural store owners who Will, in turn, sell them to rural consumers. Those consumers in San Jose, where the largest market for potatoes is concen- trated, receive their potatoes for the most part from neighborhood stores. There are, nevertheless, a fair number Of consumers who prefer to venture into the Borbon and San Jose market areas foregoing the con- venience of the neighborhood store for lower prices. 6Assemblers receive potatoes in sacks of 180 pounds. 45 There is very little demand for potatoes other than for table- stock. Essentially, the only processed use for potatoes in Costa Rica is for chips. And, except for seeds, hardly any storage of potatoes takes place. Thus, almost all potatoes which are harvested move direétly into the marketplace. The seasonality of production com- bined with both a lack of storage and alternative demand has resulted in large seasonal price fluctuations for potatoes. Demand Factors The potato is not an important element in the Costa Rican diet. Table III-2 compares per capita potato consumption in Costa Rica with Peru, Colombia, and the United States, countries of high per capita potato consumption. The main staple and source of calories in the Costa Rican diet is rice. Gonzalez and Hammock report that when the village of Tierra Blanca was settled in 1823 the main crops were corn, and later wheat. While potatoes were reported planted in the area in 1910, it was not until 1935 that potatoes were cultivated on a large 7 scale. Based on conversations with farmers in other villages in the Cartago region, it appears that the history of Tierra Blanca is typical of the entire region, i.e., large scale potato production is a rela- tively recent phenomenon in the agronomic history Of Costa Rica. Potatoes, therefore, have never been a traditional part Of the Costa Rican diet. This appears, more than any other factor, to account for the limited per capita consumption of potatoes.8 7Jose L. Gonzalez and John C. Hammock, Seis Communidades Costar- ricenses (San Jose: DINADECO, 1973), p. 62. 8Consumers do not appear to be very responsive to changes in po- tato prices. As will be seen below, demand is highly price elastic. Furthermore, compared with the price of potential substitutes (i.e., 46 Table III-2. Per Capita Consumption of Potatoes in Costa Rica, Peru, Colombia, and the United States Costa Ricaa Perub Colombiac USAd Urban All (1974) (1973) (1971) (1967) (1970) (pounds) ’ (pounds) (pounds) (pounds) (pounds) 40.9 27 230.76 123.2 118.6 Sources: aDireccion GeneralckaEstadistica y Censos, Poblacion de Costa Rica (San Jose: MECI, 1973); Agricultural Census Survey, unpublished data. bEric S. Graber, Potato Sopply, Demand and Marketing in Cen- tral Peru,Paper No. 6 (Ames: Iowa State University, 211-d Grant Program, 1974), p. 21. cChristOpher 0. Andrew, "Improving Performance of the Production—Distribution System for Potatoes in Colombia" (Ph.D. dissertation, Michigan State University, 1969), p. 66. dKelly M. Harrison, Stephen 0. Sparks, and M. Fabre, The Michigan Potato Industry: A Market Analysis (East Lansing: Department of Agricultural Economics, Agricultural Economics Reports No. 294, Michigan State University, 1976), p. 3. Population To examine changes in the consumption Of potatoes over time, per capita production was calculated (Figure III-4). In 1957 per capita production averaged almost 28 pounds per person. By 1973 per capita production had decreased to less than 27 pounds per person. Even excluding the years between 1969-1971, which appear to be deviant obser- vations, per capita production shows a downward trend. TO estimate future trends in per capita production, equations for potato production k yuca, plantain, rice, and beans), potato prices increased at a slower rate between 1967-1974, yet consumption of potatoes did not appear to increase. 47 .Aeeap .Humz "mmow cmmv wave mumou we cowoapaoa .momcmu a mowumwumpmu mu chmcmo cowuumcwo “maeoumc cowuusvoea umzmwpnzaca .wsappau_em< co acumwcmz mm Nu pm on mm mm .mump 1 mmmp mm we me> me "mmouauoa mo covenanoea nuance can we mm mm _m om mm mm ”mocaom .e1HHH deemed mm om Fm mm mm em mm mm mm mm aeeaeu can mucaoa 48 and population growth were calculated.9 Using these equations to pro- ject production and population growth out to 1985 show that given present conditions per capita production will continue to decrease.10 The largest single market for potatoes is the city of San Jose. If this market is enlarged to include the urban areas of the Central Moooto_(Central Plateau)--Alajue1a, Heredia and Cartago, then this market includes approximately one half of all Costa Ricans, yet they account for 75.3 percent of potato consumption. With consumption being concentrated in the Central Meseta, its rate of growth as compared with the rest Of Costa Rica is important to determine possible demand shifts. An equation was calculated to estimate Central Meseta b 9The production equation calculated for years 1957-1973 is given y: Ln v = 12.5143 + .16598LnX R2 = .74 where Y = Production in year i Xi = year i i = 58-73 b The population equation calculated for years 1952-1973 is given y: Y = '187164o.9 + 51682.389Xi R2 = .99 where Y = Population in year 1 xi = year i i = 52-73 10 For 1985 the estimated per capita production was 22.6 pounds per person. When per capita production was estimated excluding the years 1969-1971 it decreased, though by not as much, to 25.7 pounds Per person. 49 1] and then used to project population out to 1985. population growth, The 1985 projected Central Meseta population is 1,489,380 persons com- pared with the projected national population of 2,521,362 inhabitants-- or 59 percent of the nation's population in the Central Meseta. This implies that if consumption and population patterns do not change, the demand for potatoes will increase faster than would be indicated by only the proportional rate Of population growth. Three reasons may explain the difference between the consumption levels of potatoes in the Central Meseta and the rest of the country. The first is that as potatoes leave San Jose the costs of marketing become very high. Besides the additional transportation costs, it must be remembered that potatoes, compared with rice or beans, are relatively perishable. Another reason for higher costs outside the Central Meseta is that rural store owners will often purchase from town retailers, adding another link to the marketing chain and riasing the price to consumers. Finally, outside of the Central Meseta other root crOps and plantains are locally grown. Besides holding a price advantage over the potatoes, they are traditionally consumed food items having wider consumer acceptance. As one moves to the higher and cooler Central Meseta area, potatoes are more readily available, of better quality and lower priced. Thus, consumption Of potatoes becomes more feasible. 1]The equation calculated for years 1952-1970 was specified as: Ln Y = 2.586 + 2.617LnXi R2 = .99 where Y = Population in year Xi Xi = year i i = 52-70 50 11591112 Another factor which may result in increased potato consumption as the population relocates in the urban Central Meseta is that incomes are higher in that area, and it appears that up to a point potato con- sumption is income elastic. Cespedes estimated the national per family income at ¢1175 ($138) per month, yet when comparing rural and urban areas, the monthly per family incomes were c796 ($93) and ¢1,239 ($199) respectively.12 While the income level is higher in the urban area, it is not the result Of a concentration of wealth in the hands of a few very rich urban dwellers.. In the rural areas 77 percent of the popula- tion have monthly incomes of less than ¢200 ($23) compared with only 32 percent of the urban population in that category. Thus urban residents, in general, have higher incomes than rural residents. The families interviewed by the Costa Rican Statistics and Census Bureau were divided into seven groups separated by ¢l,OOO ($117) incre- ments in income. This made it possible to conduct a cross sectional income consumption analysis. It is recognized that there are limita- tions with this type of analysis when used for policy purposes. The basic underlying assumption is that as a person shifts from one income level to the next he will adopt behavioral patterns associated with the new group. This ignoresz; 1) the possibility that as one's income changes his socio-economic status may not change; 2) the effect Of changes on price as large numbers in the population shift income levels; and 3) the time it will take one to adjust to the new income ___ 12Victor Hugo Cespedes, Costa Rica: La Distribucion del ngreso 1L§1_Consumo de Algunos Alimentos (San Pedro, Costa Rica: Universidad de Costa Rica, 1973), p. 51. 51 13 The information gathered from such analyses must, therefore. level. be applied with care. While it will be impossible to exactly predict consumption based on changing income levels, it will nevertheless pro- vide an insight into the relationship between the two variables. Table 111-3, and Table III-4 show the relationship between weekly per family consumption and income. As the income level increases consumption also increases, although not as fast. The increase in per family consumption cOntinues until the 3,000-4,000 colon ($351-$468) per month income level at which point it levels Off, and then begins to fall for the highest income group. As income increases the per family consumption as well as the percentage of those in the population consum- ing potatoes will slowly increase. Throughout this range potatoes can be thought of as superior goods, and only with the highest income earners does it become an inferior good. Table 111-4 gives the arc elasticity calculated at the mid-point for each group. If potatoes are a superior good over an income range that encom- passes 95 percent Of the population, this would imply that changing income levels may, in turn, influence demand. It was calculated that real per family income will increase yearly by ¢8.98 ($1.05).14 This would mean, ceteris paribus, that total consumption would increase by 13Lester V. MandersCheid, "Some Observations in Interpreting Measgred Demand Elasticities," Journal of Farm Economics 46 (February, 1964 : 130. 14A trend line was estimated for real per capita income for the years 1958-1973: v. = ‘91.1703 + 1.76 x. R2 = .58 where vi = real per capita income in year 1 xi = year i Table III-3. 52 Percent of the Urban Population Consuming Potatoes, Per- centage of Total Urban Consumption and of Expenditures on Potatoes for 1974 by Income Levels Income Percent Diegfigflt Percent Percent Level of Sample Consumifig of Total of Total (Colones) _ POpulation Potatoes Consumpt1on Expend1tures O-lOOO 25.1 70.2 16.9 16.9 -2000 34.2 82.9 34.4 33.9 -3000 17.2 84.0 20.3 20.3 -4000 9.1 87.0 11.7 12.0 -5000 4.8 86.3 5.9 5.7 -6000 2.8 86.8, 3.7 3.6 6001 and above ‘ 6.9 80.2 7.2 7.7 Source: Costa Rican Statistics and Census Bureau Survey, 1974. Table III-4. Arc Elasticity and Per Capita Consumption for 1974 Income Level (Colones per month) Per Family Consumption (pounds per week) Arc Elasticitya 0-1000 2.71 .396 -2000 4.05 .318 -3000 4.75 .266 -4000 5.19 _ 278 -5000 4.89 .346 -6000 5.24 _].350 Above 6000 4.18 Source: Costa Rican Statistics and Census Bureau Survey, 1974. aThe formula used to calculate arc elasticity was: AQ AI (12 + I])/2 T02 + 4972 where: Q I quantity income 53 about .7 percent per year. These calculations are based on the assump- tion of a completely equal distribution of the increased income. Ces- pedes, however, found that between 1961 and 1971 income was redistributed downward. This implies that consumption would increase by even more than seven-tenths of a percent. What may be concluded, therefore, is that with respect to potato consumption there appears to be growing market in Costa Rica. Price Elasticity The final component of demand relates the quantity consumed to the market price, i.e., price elasticity. Again data provided by the Statistics and Census Bureau were used to try to estimate the price elasticity of demand for urban families. Observations Of the market by the author as well as conversations with knowledgeable participants within the system pointed to the fact that there were no special periods during the year when potatoes were in greater demand. Without a sea- sonality in the demand for potatoes, the demand curve can be assumed fixed with differences in price due to the changing supply of potatoes on the market. This allows the demand curve to be identified using quantity and price Observations. Using the monthly prices and per family consumption from the Statistics and Census Bureau survey, presented in Table III-5, a demand function was estimated and price elasticity of demand found to 54 Table III-5. Percent Of Urban Families Consuming Potatoes Per Family Consumption and Price Of Potatoes per Average Week per Month for 1974 a .Percent of . Per Family Price per Month Families Consum1ng Consumption Pound Potatoes (pounds) (colones) 1 76.6 3.3 1.49 2 80.1 3.5 1.54 3 78.2 4.2 1.42 4 79.0 4.0 1.32 5 77.7 .8 1.16 6 81.7 4.5 1.00 7 80.4 ' 3.9 1.06 81.1 3.9 1.04 9 83.8 4.3 .88 10 76.4 4.3 .83 11 84.3 4.1 1.03 12 79.1 4.5 1.14 13 83.3 4.0 1.21 aThe year was divided into 13 months of 4 weeks each. Source: Costa Rican Statistics and Census Bureau Survey, 1974. 15 be high inelastic. In periods of over-supply falling prices did not generate much more urban per family consumption. The percentage of 15Elasticity was calculated from the following demand equation: v = 5.24 - 1.05 X, R2 = .44 where Y = per family consumption X1 = Price in month i 55 urban families that consumed potatoes also remained fairly constant--close to 80 percent. Thus, lower prices due to seasonal variation in production did not induce more urban families to consume potatoes, rather, the "excess" supply moved out to the rural areas as prices dropped enough to encourage wholesale truckers to handle potatoes. Processed Potatoes--Trends and Consumption Two types of processed potato demand are identified. The first may be convenience food demand. This would include frozen, dehydrated, or canned potatoes whose form has been changed in order to: 1) prolong the life of the product; and most important, 2) hafaCilitate the prepar- ation of the product by the consumer. As of October 1975 there were only three companies involved in this type of potato processing. In all three cases, processed potatoes represented just one of many products that they handled. The amount of potatoes destined for this use was 3045 cwt in 1974, representing 21 percent of the total processed potatoes, and .7 percent of the total 1974 potato consumption. By processing potatoes in a convenience food form a service is provided to the consumer. The production of this service has a cost which is incorporated into the price Of the product. The group which may constitute a market for convenience foods is women between the ages of 15 and 60 who, because Of study or work, are outside the home most Of the day. Of the total female population in this age group, exclud- ing domestic help, only 23 percent are studying or working. Of this figure it is not known how many are responsible for preparation of meals--although it si considered to be sma11--thus this market segment is also very limited. It should be pointed out, however, that the Setting X and Y at their mean values the elasticity was equal to -.3. 56 structure of Costa Rican society has been changing as more women are incorporated into the labor force. As their numbers increase, so will the demand for convenience foods, since: 1) they will have a higher income; and 2) they will be willing to pay for the service of pre- prepared food. The second form of processed potatoes are those destined for the snack food market. Production of potatoes for snack foods is almost exclusively potato Chips, although there is one company manufacturing potato sticks for export within the Central American Common Market. Nine companies were identified that manufactured potato chips. Besides these companies, there are very small scale manufacturer-retailers of potato chips operating in San Jose. They usually occupy the front cor- ner of restaurants located near bus stops. They fry the potatoes on the spot, then sell them in small paper bags. Sometimes they also manufac- ture and sell taco chips. The position of potatoes in the snack food market has diminished ‘6 While it is not known exactly why snack food con- in recent years. sumption of potatoes has declined, it is considered to be due to the introduction of other snack food products in the Costa Rican market. These have usually been corn products manufactured by companies Operating throughout the Central American Common Market, and introduced into the Costa Rican market by means of extensive advertising campaigns. Additionally, the declining market may also be due to the nature of the potato chip industry itself. Quality control of potato chips, beginning with the selection of the potato, is minimal. Potatoes are not 16Interview with Ing. Abel Coto, Planning Office, Costa Rican Ministry of Agriculture, San Jose, 8 August, 1975. 57 grown especially for chip use--rather it is Often the culls which are used for potato chip manufacturing. This results in a product whose size and taste vary from lot to lot. Potato chips are packaged in clear plastic bags which do not Offer the same protection that paper bags pro- vide. Thus, the lack of alternative snack food uses for the potato and the poor quality of the potato chips already on the market have resulted in the decline in potato snack food consumption, especially in the face Of increased competition from other products. .IEEEQE- To determine changes in the uses of processed potatoes, a 1972 study on the industrial use of fruits and vegetables17 was up- dated to 1974 for potatoes. New processors--i.e., those who had initiated operations since 1972--were questioned as well as those manufacturers identified in 1972 as potato processors who were still Operating. Indus- trial use of potatoes for processing dropped from 24,882 cwt in 1972 to 6 14,474 cwt in 1974. The large decline between the two years (41.8 percent) in the amount of processed potatoes18 suggest that either: 1) there was an error in the data collection procedure; 2) the processed potato industry, as it now exists, is passing through a period of con- traction; and/or 3) there were other factors which resulted in a tempor- ary reduction in the output of processed potatoes. While the first possibility cannot be ruled out, it is considered that there has been a reduction in the volume of processed potatoes on the market. 17Carlos Cervantes and Roy McDonald, Consumo Industrial de Frutas y Hortalizes en Costa Rica durante 1972 (San Jose: IFAM-PIMA,11973TL 18As a percentage of total potatoes entering the market, it declined from 5.9 percent in 1972 to 3.2 percent in 1974. 58 The reduction in processed potatoes is probably due to a combin- ation of short-run economic factors and a long-run decline in the pOpu- larity of potatoes as a snack food. Between 1972 and 1974 the consumer price index rose from 121.42 to 181.96 (1964=100). Since most of the processed potatoes are for the snack food market, when the general price level rises expenditures on snack foods will be temporarily reduced until the previous real income level is restored.19 Over the long-run, the trend in the snack food industry has been away from potato chips. Between 1972 and 1974 the number of potato chip manufacturers remained constant at nine, yet two companies ceased manufacturing while two new companies began Operations. The potato chip manufacturers were asked if they planned to use more potatoes in 1976. Only one answered that he would expand output--increasing it by about 20 percent. Two answered that they would reduce output--one by about 44 percent, the other would not give a figure. Two other manufacturers, however, reported that they were in the process of closing down. Compared with the decrease in potato chip demand, the use of potatoes in other processed forms appears to be slowly growing. Of the three nonsnack food firms processing potatoes, one planned to reduce purchases of potatoes by three percent in 1976, while one expected to increase the use of potatoes but would not give a figure. Although nonpotato chip demand is increasing, the entire processed potato indus- try, due to the importance of potato chips, is going through a period ‘ of decline. 19This assumes that tastes as well as other variables will not change during this interim period. 59 Other Forms Of Potato Demand Two other types of demand for potatoes are identified: 1) govern- mental, and 2) restaurant. Of these, the governmental demand is the most important. The National Production Council (CNP) purchases 6.7 per- cent of the potatoes that are traded on the San Jose market; these potatoes are then redistributed in their retail outlets located primar- ily in rural and poor urban areas. Additionally, in 1975 the government of Costa Rica was negotiating a loan from the United States Government to finance the development of a nutrition program. As this is opera- tionalized the Costa Rican Government will be entering the market to purchase large quantities of food, including potatoes, to be used for this program. The demand for potatoes served in restaurants is growing. There is one fast-food chain, for example, that used 3,000 cwt. of potatoes in 1974, and plans on using even more in 1976. As the urban areas grow in size and more offices change from a two-hour lunch to a 45 minute lunch period, the demand for restaurant meals will increase. Presently, most of the potatoes served in restaurants are french fried. Occasion- ally potatoes will also be mixed with meat and beans, or served boiled and sliced. Other forms of serving potatoes, e.g., baked and mashed, are seldom seen. Thus, there are different ways of serving the potato which could become widely accepted which could increase restaurant demand. It is also probable that the development of a frozen or a dehydrated potato product would result in more potatoes being served, since this would eliminate some of the restaurant owners' problems associated with serving potatoes: 1) loss, 2) waste, and 3) labor involved in peeling and preparing potatoes. L.’ 60 Summary Potatoes are not a staple in the Costa Rican diet; annual per capita consumption being only around 27 pounds. The low per capita consumption is probably due to the fact that large scale potato produc- tion only began in the mid-1930's. Thus, the potato is not considered as part of the traditional Costa Rican diet. Furthermore, consumption of potatoes in processed form is minimal. The consumption of potatoes is concentrated in the urban areas Of the Central Moooto, Since potatoes are income elastic, consumption Of potatoes is lower in the relatively poorer areas outside the Central MEEEEE: High marketing costs, making potatoes more expensive, and the fact that other root crops are locally grown and consumed serve to further limit consumption outside the Central Moooto, It appears that most Of the rural consumption of potatoes is during periods of large supply, although the CNP handles potatoes all year. The continued growth in population and migration to the urban Central Moooto, along with rising real per capita income, suggests that the total demand for potatoes should be increasing. Potato production, however, does not appear to be rising in response to possible increased demand. In fact, per capita production appears to be slowly decreasing. Although per family consumption is low, potatoes are widely consumed in urban areas--around 80 percent of the families eat potatoes throughout the year. The urban demand for potatoes is highly price inelastic. Since potatoes move into the rural market in relatively large quantities when prices are very low, this suggests that the potato demand curve in kinked. That is, the potato demand curve is inelastic over a range representing urban demand until the price is low enough to 61 induce rural consumption, at which point the demand curve becomes more elastic. It will be seen that this demand situation will work against small farm agriculture, and yet this situation is partially the result of the institutional framework for trade which characterizes the SFSS. CHAPTER IV POTATO PRODUCTION AND PRODUCER CHARACTERISTICS Production The Cartago Rogion The area around Cartago is one of the most important vegetable producing regions in Costa Rica. In addition to potato production, national carrot and beet production are also highly concentrated in the region. There is some specializatiOn, but most of the production of these crops is by potato growers. Cartago is also one of the important dairy regions of the country. Most of the herds are found on the larger farms--82 percent on farms of 10 hectares or larger. While many of the larger potato producers also have dairy cattle, rotating land between pasture and production, there are also highly specialized dairy Opera- tions in the region. In the Cartago region, potatoes are planted at altitudes ranging from 1400 to 2800 meters. Temperatures vary throughout the area. The lowest tempterature at different locations range from 37°F to 52°F while the highest temperatures run from 51°F to 73°F. Average rainfall also varies substantially from one location to another within the region going from 1565 mm to 2418 mm.1 The effect of these variations has been to create numerous microclimates throughout the region, causing the growing time to vary according to the location of the planting. 1Ministry of Agriculture, Meteorological Service, daily records. 62 63 Numbers and Size of Potato Farms Potatoes are grown in Costa Rica on 980 farms ranging in size from less than one half to over 100 manzanas. The number of farms has increased from 729 in 1950, with most of the increase being in the cate- gory of farms less than 10 manzanas (Table IV-l). Whereas in 1950, these smaller farms represented 45 percent of the total farms, they now represent almost 65 percent, accounting for a third of the production. The trend appears to be towards: 1) more smaller farms (lO manzanas or less); and 2) consolidation of the larger farms (lOO manzanas or larger) at the expense of the intermediate size production units. The decline in number and in importance of the intermediate size farms suggests that existing technologies of potato production favor the extreme size farms, i.e., small and large farm operations. On one hand, small farms can make extensive use of family labor, with the occasional hiring of part- time labor and/0r oxen. Only 27 percent of the small farmers own oxen and less than five percent employ full time laborers. Large farms, on the other hand, are able to extensively utilize oxen and full-time 1ab0r--88 percent of the large farmers own oxen and 59 percent employ full-time help. The average area planted per farm has not varied much since 1950 (Table IV-2), yet average yield has doubled. These averages, however, tend to obscure the fact that the largest farms are planting more while the rest of the farms have more or less continuedixiplant the same area. In 1963, the larger farmers planted 7.4 percent of the total area, while in 1973 the area planted by these farmers increased to 9.9 percent of the total land in potatoes. Furthermore, they increased average annual yields by 59 percent compared with a 34 percent increase by the smallest farms. 64 .eee8..Huem "owcmaumqoem< omcmo .emnH mammmp .Humz ”mmoq cmmv mmmF "owcmsumaoLm< omcmu Homemsomaoem< omcmo .momcmu a muwpmwumpmm mu Faewzmo cowoumewo nomad cmmv mmmp .eaeH MAN88_ .8882 N882. eemc 888? "muezom .mpeuop caspou mo mucmocma “commends mmmmgpcmeea cw mg¢nE=za P.88e o_8.88e 888 8.888 888.888 88K 8.8,8 8N8.88F 88a apex aumou Peace AP.~NV “8.8v A~.N_c A8c some AN.8V oo_ 8888 8.85NN Fem.oop 8e 8.8e8 8N8.ee 88 8.885 8ee.om N8 8888828 Aces A8.8V . A_.N~c A8.opc APNV AP.__V 8.8e8 N8m.8e e8 8.8_8F 8mm.88 8e 8.888 8e~.~8 .8 88, - Ae.emv A8.8Nv A8.oev A88V A8.88V A8.emc 8.888 888.88_ emm 8.888 8N8.8ap 88~ P.88N 888.88 N8~ 88 - “8.8mv Ae.e8c A~.8~c Ae.eec Ae.8pc AF.8ev 8.88m NF,.~8_ 888 8.88m 88P._8 88m 8.P8 8_~.88 8N8 8_ - o ELM; Auzuv mELmu Eme ApZUv mEme Egon AHZUV mEme A v cma mo Lma mo can we macaNcme cowpoavoca corpoauoca Longsz cowpuauoca cowuuauoea consaz cowpozuoea cowpuzuoea consaz Esau 88 8~88 88e8_ 8888p 8888, 8N88 acme s8 .memp .momp .omm_ .mecam ounuoa cmuwm mumou mo Esau can cowuuzuoga ucm .cowuoawoea .mELmu eo consaz .F->H m—nmb 65 Table IV-2. Potato Yields and Average Area Planted in Costa Rica: 1950, 1963, 1973 1950a 1963b 1973C Production/Manzana (cargas) 4.1 8.1 8.8 Average area planted (manzanas) 2.8 3.3 2.9 Sources: aR. E. L. Greene, An Economic Survey of the Production and Marketingyof Potatoes in Costa Rica (San Jose: STICA/AID, 1958). bDireccion General de Estadistica y Censos, Censo Agropecua- rio: 1963 (San Jose: MECI, 1965). cIdem, Censo Agropecuario: 1973 (San Jose: MECI, 1974). Land area. Over the period from 1950 to 1973 the total land area in Costa Rica devoted to potato production grew by 37 percent, from 1457 hectares to 2001 hectares. Comparing the period from 1950 to 1963 with that of 1963 to 1973, the average increase in land area per year in the two periods were 21.2 hectares and 26.8 hectares, respectively.2 While it is not known exactly why the yearly average addition to the area under production has increased, it is probably due to the need to use more land as: l) the quality of seed stock deteriorates; and 2) more marginal land is diverted into potato production. Most of this increase (87 percent) has been in the province of Cartago, and except for the province of Alajuela, the number of hectares in potato production in the rest of Costa Rica has decreased. 2Direccion General de Estadistica yCensos, Censo Agropecuario: 1973 (San Jose: MECI, 1974); Idem, Censo Agropecuario: 1950 (San Jose: MECI, 1952). 66 Land tenure. Most potato farmers own their own land--85 percent. For those who do not own land or wish to expand the area under cultiva- tion they may rent land or enter into a crop sharing arrangement. Only 17 percent of the farmers rent land while 54 percent are involved in some form Of share cropping. With regard to share croonino. usually one farmer will put up the seeds and the other the land. Beyond that, various arrangements are made for labor and other input costs. Often the owner of the land will also prepare it for planting, and from then on the costs are shared. When the potatoes are sold, the profits are also shared. The term for this type of arrangement is a medias for "halfing." Generally, when it occurs, it is the larger farmer who puts up the seeds, and the smaller farmer who gives the land. This is one means by which the large farmer is able to plant in many different micro-climatic areas. Inputs Machine and animal power. Almost all of the potatoes are planted and harvested using manual labor and oxen. Tractors, however, are used in clearing and preparing the land for planting. It is estimated that almost 40 percent of the land is prepared by the use of tractor.3 While all tractors are owned by large farmers, they Often rent them out at a fixed rate per land area. Oxen are used for land preparation and also for transportation. Many farmers own a pair of oxen, but they are also available for renting at a fixed rate per day. 3Kenneth Shwedel and Victorino Elizondo, Estudio de Mercadeo de la Papa en Costa Rica y Posibilidad, Utilidad y Viabilidad de la Union Regional de Cooperativas de la Provincia de Cartago (San Jose: INFOCOOP/AID, 1976), p. 36. 67 Chemical ipputs. The use of chemical inputs is very widespread. Fertilizers, herbicides, fungicides and insecticides are used through- out the growing period. Before harvesting, the farmer has the Option of accelerating the harvest by cutting the potato vines or applying defoliants. The use of chemical inputs is increasing. This is due to: 1) a common opinion held by growers that larger quantities of fertili- zer can compensate for the lower productivity of poor seeds; and 2) the invasion in the late 1960's of potato fields by the polilla. Overall input prices have doubled between 1972 and 1975, however, it appears that as of early 1976 prices have stabilized and in some cases fallen.4 It is still too early to determine the long-run effects on potato pro- duction from the increased input price level. ooooo, Costa Rica, at this time, has no national certified potato seed industry. The practice has been to import seeds and save part Of the production from one planting to the next. Continued impor- tation of seed stock has allowed production to increase over the last 23 years. When importation has been restricted, growers have relied on inferior domestic farm-produced seeds. Presently, this is the situation in Costa Rica. Importations have been restricted due to certification difficulties. The domestic seed stock is limited and quality is poor. This has produced shortages of potatoes in the market and increases in the price of seed. Costs Production costs of potatoes may be divided between: 1) materiel costs, 2) labor costs, and 3) other costs. The overwhelming percentage 4Tierra Blanca Cooperative, Input Supply Division, purchase orders, 1972-1976. 68 of potato production costs originate with the materiel costs, and of these seed costs are the most important expenditure (Table IV-3). Since Costa Rica does not have a national certified potato seed indus- try, besides importing seeds, farmers will save part of the production 5 This creates a problem as as seeds-from one planting to the next. seeds need to be stored under proper conditions and chemically treated to prevent sprouting. Losses in seeds stored run from an average Of 6.5 percent for large farmers to 8.3 percent for small farmers. While storing the seeds is widely practiced, it is more Often the large far- mer who stores potatoes--88 percent of the large farmers store potatoes for planting compared with 59 percent of small farmers. Those potatoes which the large farmer does not plant on his land are used in crop- sharing arrangements and/or sold to other farmers. Comparing the rate of seeding per manzana (Table IV-4), one reason for greater use by small farmers may be that purchased seeds are inferior to those retained by larger farmers. The fact that seeds may either be purchased from another farmer or be retained from one planting to the next raises the question as to the price for retained seeds: 1) they may be valued at the average pur- chase price for seeds in the region, or 2) they may be valued at a price which reflects the cost of storage from harvest to planting. In (Table IV-6, the effects of the two alternative seed prices on total costs are compared. It was decided to use the first price alternative which will be referred to as "retail price." It is considered that the farmer has the option of either selling the seeds or using them on his 5The domestic seed stock is limited and of poor quality; thus, when importation of seeds have been restricted, there have been shortages of potatoes in the market and increases in the price of seeds. 69 Table IV-3. Cost of Materiel, Transportation, and Land per Carga Har- vested for Small and Large Farms Small Percent of Large Percent of Item Farms Total Cost Farms Total Cost (colones) per Item (colones) per Item Fertilizer 298.57 30.4 288.66 35.0 Insecticies, herbicides, etc. 33.61 3.4 29.21 3.5 Liquid fertilizer 13.34 1.2 8.40 1.0 Seed 582.68 59.3 445.35 54.0 Transportationa 8.13 .8 3.87 .5 Land 46.74 4.8 49.57 6.0 Total 983.07 '100.0 825.06 100.0 of planting. aCost of transporting materiel from place of purchase to place Source: Farm level survey for this study. Table IV-4. Fertilizer and Seed Use, by Farm Size Fertilizer Fertilizer Seed Seed Size (cwt per (cwt per (carga of seed (carga of seed manzana) carga) per manzana) per carga harvested) Small 28.26 2.3 3.16 .26 Large 30.97 2.5 2.08 .17 Source: Farm level survey for this study. own land. farmer equal to the retail price of those seeds. The next largest expenditure is for fertilizer. Thus, each carga of seeds has an Opportunity cost to the Most of the fertilizer is purchased from the cooperatives in the area, or from 70 Table IV-5. Man-days for Potato Production Activities per Carga Har- vested for Small and Large Farmers Percent Percent Small Large Activity Farms 0f T°t°' Farms °f T°ta' (man-days) Man-days (man-days) Man-days per Activity per Activity Clearing and Pre- paration of Land 4.62 30.8 1.75 17.6 Planting 1.38 9.2 1.26 12.7 Listing 1.28 8.5 .63 6.3 Applying Insec- ticides, Liquid Fertilizer, Etc. 1.68 11.2 1.46 14.7 Cutting Vains .47 . 3.1 .28 2.8 Harvestinga 5.55 37.0 4.55 45.8 TOTAL 14.98 100.0 9.93 100.0 aIncludes selection of potatoes. Source: Farm level survey for this study. distributers in Cartago. Small farmers as a result of the effectiveness 0f Production COOperatives in the area pay approximately the same price as large farmers, $93.10 and $95.35 per cwt, respectively, for their fertilizer. With respect to other input and transportation costs, prices to both groups are also approximately equal, rather it is the intensity of use that varies. Large farmers use a wider range of insecticides, her- bicides and defoliants while small farmers use greater amount of liquid and granulated fertilizer. Small farmers pay more in transportation costs because: 1) they purchase more seeds which are costly to trans- port; and 2) large farmers receive quantity discounts from truckers. 71 ..>c=m8 menu com xm>c=8 Pm>mp Econ "mueaom mm.mmop mm.m¢m m~.Nmo_ cm.emm mm.emm m~.nom mmemm mm.cmm_ mm.mepP _m.mkmp mm.mm__ mo.mmpp m_.meop FPoEm Amocopouv Amocopoov Amm=o_oov Amm:o_ouv Amocopoov Amocopoov mumou comm 8m8ou comm mumou comm mmmou comm momma comm mpmoo comm Esau —Pmmmm scams mpmmmFocz Locum memmm Locum mpmmmposz coco; mepmm Locum opmmoposz Loam; mo mNPm spee88 8P88e88> 8F_e88 op88_c8> 8_ee88 888a 8_ee8e area >PPEma mocu sprang mote umou comm ccm coco; seesam pcmcmoowo coca: cmp8o>emz mmemu con mumoo cowuuacoca cumuoa magma omgmm ccm PFmEm com meowmae=mm< .mu>~ oPQMk 72 Small farms use more labor than large farms (Table IV-S). Much of the labor for small farms comes from the family as opposed to hired labor. To compare family labor use to hired labor use for the large and small farmers, a ratio was constructed of hired to family labor per manzana. For the small farmers, there are 1.15 hired laborers for each family worker, while for the large farmers there are 2.47 hired laborers for each family worker. The relative importance of family labor in the production of potatoes raises the problem of how to value that labor in the cost cal- culations. For the purpose of constructing a budget statement, three alternative price assumptions were considered for famliy labor: 1) family labor was considered to be free to the farmer, 2) family labor was priced at the existing wage rate in the region, and 3) family labor in slack periods was given a zero value while family labor used during key periods in the production process (planting and harvesting) was valued at the full wage rate--i.e., a weighted average price based on the percentage of work performed during key periods.6 The difference in total costs per manzana under each of these assumptions as well as those assumptions referring to seed costs, discussed above, are shown in Table IV-6. Throughout the remainder of this study, the third price alternative will be used and referred to as "varying family labor costs." It is considered that this alternative realistically reflects the situation confronting the farmer. Table IV-5 appears to confirm this selection: small farmers, compared with large farmers, use more labor, 6Pan A. Yotopoulas and Jeffrey B. Nugent, Economics of Develop- ment: Emperical Investigation (New York: Harper & Row Publishers, 1976), p. 83. 73 of which a larger component is family supplied, during slack periods, i.e., when labor costs are lowest. When family labor has an Opportunity cost equal to the effective wage rate, small farms use proportionally less labor than is used by the large farmer. Comparing the production costs under different input cost assump- tions (Table IV-6), the small and large farmer costs are very close. There was no difference between the costs for the two groups at the .05 level of significance, under any of the alternative seed or labor cost assumptions. Average cost of production functions were calculated for all of the growers and for each group separately. The functions, presented in Table IV-7, were examined to determine whether small and large farms 7 The results showed that the operate along different cost functions. small and large farmers were operating along two different cost functions indicates that they are operating at two different scales of production. Comparing the two production functions over a large range (Figure IV-l), small farmers are able to produce potatoes at a lower per unit cost. Small farmers, therefore, have the potential to supply potatoes 7This was done by comparing the sum of squares of the residuals of the separate cost functions for each level of Operation with the difference between the sum of squares of the residual of the function for all farms: ss - (ss 55 ) difference = SSall farms small + large An F statistic is calculated by taking the ratio of SSdifference deflated by the additional degrees of freedom, to sssman + sslarge deflated by the sum of the degree of freedom.. If there is a difference between the two funct1ons, the SSdifference will be large as (sssman + SSlarge becomes smaller. William Mendenhall, Introduction to Linear Models and the Design and Analysis of Experiments—(Belmont, Ca.: Wadsworth Publish- ing Co., Inc., 1968), pp. 176-179. 74 Table IV-7. Farm Level Average Potato Cost Functions per Carga Har- vested for Small and Large Farmsa Size Ab Bb R2 Small Farms 6.57 2.75 .21 (.21) (1.2) Large Farms 6.48 14.86 .54 (.11) (3.6) aThe functional form used was: LnY = A + B/X where: Y = cost per carga X = cargas harvested bStandard error in parentheses. Source: Farm level survey for this study. at a lower cost than are being presently supplied by large farmers. It will be shown in subsequent chapters, however, that when the costs of marketing activities are taken into consideration, the level of small and large farm production approaches a sub-system equilibrium level of output and that the LFSS is able to produce and marketypotatoes at a lower cost. X1219 Average yield on small and large farms is equal to 12.2 cargas (219 cwt) and 12.6 cargas (227 cwt) per manzana, respectively. Per farm production is equal to 14.4 cargas and 60.6 cargas for small and large farms respectively. Classifying output8 by: 1) first grade--those 8It is recognized that this classification is very subjective, allowing for a large range of potatoes falling between first and refuse, however, it is the one used by participants in the system. 75 . NI>H m wank “mULaom mm>gzo “moo mmmgm>< Pm>m4 scam ._->H mczmmu mcommo 3M 3 3 3 .u c r b1 1 d T *1’ 4+- #1- 1r- '1!- "P D l‘ .éom [Y «a nu Jéom n! 0 mm If 3 nu 4.83 mm 2:3 mmcfllv L+ N no .60: 3 ”0 1r a no no 76 potatoes fairly large and relatively free of deformities, 2) seconds-- small potatoes and/or those which are highly damaged or deformed;9 and 3) seeds-~potatoes which are stored from one period to the next. Large farmers are losing fewer potatoes (Table IV-8). This benefits the large farm with respect to their profit statement, first as a return from more sales, and second as an asset in the form of potato seeds. These seeds, as stated above, are then used for the next production period; they may also be sold to other farmers, or used as part of a crop-sharing arrangement. Table IV-8. Classification of Potato Production by Grade and Farm Size . First Second S;::m0f Grade Grade (peigzgt) (percent) (percent) Small 64.0 12.3 23.7 Large 65.5 9.8 24.7 Production Decision It would be expected that changes in productivity would be highly correlated with price movement, but when price is unknown, or highly variable to the point that probabilistic parameters are almost meaning- 10 less, other decision-making rules are adopted. Mack, in her discus- sion on the costs of uncertainty, indicates overconservatism or 9These are rarely sold, most often they are: l) kept for house- hold consumption; 2) given to the farm workers; 3) used for animal feed; and/or 4) thrown-out. 10Ruth P. Mack, Planningion Uncertainty: Decision-Making in Busi- ness and Government Administration (New York: John Wiley & Sons., Inc., 1971). p. 5. 77 resistance to change as a consequence of Operating within an uncertain environment. In such situations, the farmer would adopt a standard operating procedure which would, year after year, result in a constant input mix causing per unit output to remain stable. Price, To examine the relationship between price movement and output shifts, farmers were asked if they could identify the months of highest and lowest prices (Table IV-9). Since there were no long-term records of farm level prices, wholesale prices were used. It will be seen in Chapter VIII that for that one year where wholesale and farm level Table IV-9. Percent of Small and Large Farmers Identifying the Months of Highest and Lowest Prices According to the Wholesale Price Index Small Farmers Large Farmers Month (percent) (perCent) Highest 39.1 58.8 Lowest 69.6 58.8 No Idea 13.0 8.8 Source: Farm level survey for this study. prices were available, both tended to move together. Thus it would be expected that an index of farm level prices for potatoes closely follows the wholesale price index. Using the wholesale price index constructed ll by Villasuso and Vargas, January was the month of highest prices while September was the month of lowest prices. 11d. M. Villasuso and Alvaro M. Vargas, Indices Estacional de los Precios a1 Por Mayor y al Por Menor de 18 Frutas_y Hortalizas en Costa Rica (San Jose: IFAM-PIMA, 1973), p. 80. 78 As would be expected, most farmers know when prices are generally at their lowest, since that is the period when they are all on the market. That the small farmers are not as able to identify the month of generally highest prices relates to the fact that they are not on the market at that time. The small farmer's knowledge of prices is asso- ciated with the months that he physically enters the market (i.e., is selling his production at the Cartago market). Besides knowledge of seasonal price patterns, the ability to accurately gauge short-run changes in price will substantially influence expected total revenue. Farmers were asked what would be the next Sun- day's potato price on the Cartago market. The price they gave was compared with the actual price for the following Sunday at the Cartago market. In both cases, the difference was large, however, it was larger for the small farmer, reprsenting a difference of 40 percent from the average price. More important, however, is that a large percentage of farmers did not know what price to expect on the following Sunday-- 61 percent of the small farmers and 23 percent of the large farmers, respectively, were unable to estimate the next week's price. The inability of small farmers to formulate expected prices, especially given the fact that prices are highly volatile at the farm level (see Chapter VIII) suggest that price expectations may not play an important part in their marketing decisions. Since prices in the Cartago and San Jose markets are related, knowledge of price movements in San Jose would aid in formulating the eXpected Cartago price. Farmers were asked what was the previous day's wholesale price in San Jose. Those same farmers who were unable to formulate an expected farm level price, were generally unable of the 79 San Jose wholesale price. For those farmers able to answer, the differ- ence between what was thought to be the wholesale price and the actual price was considerably smaller than at the farm level. This is probably due to: 1) the fact that prices fluctuate less at wholesale which allows for more accurate estimation of prices, and 2) farmers have actually heard the San Jose price and were reporting a fact rather than an estimation. To examine price responsiveness, farmers were asked if the area they plant in potatoes has changed over the last five years (Table ll-lO).12 It was considered that change in land area would be the best expression of a possible response to price changes, since total produc- tion could easily be affected by varying the land area under cultivation. It would be possible, however, that for a given five-year period the grower could be very responsive to yearly price changes, but by aver- aging out the change there would be little variation in area; i.e., increasing land area in some years decreasing the land area in other years. Therefore, they were also asked if they would plant more land the following year--March 1976 --(Table IV—ll). The results are espe- cially interesting since the interviews were conducted during a period when potato prices were at a record high.) Furthermore, the ratio of onion to potato prices, which had remained fairly stable around 1.5 from 1970 to 1973, fell to 1.3 in 1974 and then rose at the time of the interviews to 1.8. The ratio of potato prices to factor prices which was falling from 1972 to 1974, rose to above the 1972 level in 1975. 12Time series data regarding area planted by farm size was not available. 80 Table IV-lO. Percentage of Small and Large Farmers Planting More, Less, and the Same Land Area in Potatoes Between 1970 and 1974 Size More Land Less Land No Change (percent) (percent) (percent) Small . 29.2 4.1 66.7 Large 23.5 17.6 58.8 Source: Farm survey for this study. Table IV-ll. Percentage of Small and Large Farmers Who Plan to Plant ‘ the Same, More, or Less Land Area in Potatoes in 1976 Size More Land Less Land No Change (percent) ° (percent) (percent) Small 27.3 13.6 59.1 Large 29.4 35.3 35.3 Source: Farm level survey for this study. Over the past five years, a large portion of the farmers planted the same area in potatoes, and for 1976 about half of the small growers will continue to plant the same area. For the larger grower, only slightly over a third intend to continue planting the same land area, the other two-thirds are changing their production strategy. To further examine the relationship between potato price and production a linear equation with production of potatoes in year t as a function of the deflated, lagged potato prices, as well as lagged prices of other locally grown products was used. At first, the price of carrots was included in the equation, but since the price movements of potatoes and carrots were highly correlated, suggesting multicoliniarity, 81 the latter was dropped from the equation leaving only lagged potato and onion prices as the independent variables. Five different forms were tried (Table IV-12); 1) production in year t was assumed to be a func- tion of price in the previous year, or in other words, a one-year lagged response, 2) since most potatoes are planted in the early part of the year, the March price, just before planting begins, was assumed to be influential, 3) similarly, the first harvest in year t is planted late in year t-l, thus, the price closest to planting was assumed to influ- ence production decisions, 4) since planting takes place twice yearly, it was assumed that an average of the price previous to each planting season would substitute for the one period lagged price in the farmer's price estimation calculations, and 5) a combination of a one-period lagged potato price with the onion price just before planting assumed that potato production decisions would be influenced by last minute changes in onion prices. Since no Cartago time series price data exists, the San Jose wholesale price was used a proxy for farmer price. For the period that prices are available for both locations, they tend to move together, although the Cartago price is characterized by larger weekly fluctuations. The results (Table IV-12) show a relationship between price movements and potato production. Calculated at the average, supply was price elastic for all five equations. Since small farmers are not as knowledgeable of prices as were the large farmers, it is suspected that the supply responsiveness reported in their equation was due to changes in large farm agriculture. Large farmers were seen to be more flexible in their production strategies, giving a greater weight to price move- ments in their decision-making matrix. The small farmers, on the other Table IV-12. Results of Linear Equations Examining Potato Production 82 as a Function of Potato and Onion Pricesa Ab 8b 6b Equation 333845.6 41053.3 -l4180199 .59037 (3685.4) (9882.3) (4473764.8) Equation 503744.7 4383.44 -15547947 .53866 (67736.5) (9145.7) (4280088 3) Equation 322628.4 24954.04 -526884l.9 .30575 (44605.1) (11028.5) (3091282.3) Equation 382286.19 20558.82 -10167351 .30987 (82945.1) (13839.8) (5025508.4) Equation 455346.09 11479.87 -l38284.58 .62072 (47250) ( 6369.7) (4023831.4) aThe functional form used was Y = A + BX1 + CX2 where y = production of potatoes (cwt) X1 Equation 1: Delated average wholesale potato price in year t-l Equation 2: Deflated average March wholesale potato price in year t Equation 3: Deflated average August wholesale potato price in year t-l Equation 4: Deflated average March and August wholesale potato price in year t Equation 5: Deflated average wholesale potato price in year t-l b Source: 1964-1973. Standard error in parentheses. r)— (- Deflated average wholesale onion price in year t-l Deflated average March wholesale onion price in year t Deflated average August whole- sale onion price in year t-l Deflated average March and August wholesale onion price in year t Deflated average March whole- sale onion price in year t Ministry of Agriculture, Unpublished Farm Production Records, 83 hand, demonstrate a predisposition towards planting the same land area. Given the fact that small farmers are less aware of price movement, it is most likely that their decision to maintain the same land area in production reflects a risk reduction strategy in the face of uncertain- ty due to fluctuating product and factor prices. Potato Production as Part of the Whole Farm Operation Potato production is the major enterprise on most of the farms in the Cartago region. For those farmers which were interviewed, approx- imately 70 percent of the total nonpasture land was used for potato production. 0n the rest of the land, numerous other crops were grown, with onions being the most common (74 percent of the farms), followed by carrots (38 percent of the farms). Half of the farms also had dairy operations, however, there were no small farms with more than three cows. It would be expected that the farmer makes his production and marketing decisions based on factor and product prices for the different _farm enterprises. As seen in Table IV-12, the cross elasticity of potato supply with onion prices is negative and very elastic. Based on the actions of the large farmers with respect to changes in potato prices, they are probably more involved in making short-run marginal adjustments in the enterprise makeup of their farm Operation. The small farmers probably follow the same pattern with the other enterprises as with potatoes, that is, maintain input allocation more or less constant over time. Additionally, it appears that small farmers further attempt to reduce risks of large product price fluctuation by planting more crops. There were 52.2 percent of the small farmers growing more than one other crop besides potatoes, compared with 31.5 percent of the large farmers following the same strategy. 84 Farmer Characteristics Residence. Most of the farmers live on or close by the land they work. The number of farmers sampled who live in Cartago (including San Rafael) is small--on1y eight percent of the small farmers and 21 percent of the large farmers live in Cartago. It is not quite correct to consi- der those farmers who live in Cartago as absentee landlords who devote the major part of their energies to nonagricultural activities. Rather, they have generally been born in the rural areas and have moved to Cartago to be closer to the center of economic activity--suppliers, the trading center, banks and the Ministry of Agriculture office are located in Cartago--as well as for social reasons. Education. Costa Ricans enjoy a relatively high level of educa- tion, especially when compared to other Central American nations. The average level of education for potato farmers is 4.7 years, or the equivalent of almost a fifth grade education. The distribution of education is given in Table IV-13. While some education is very common, the large farmers are distinctly better educated, almost two-thirds of them have had more than a fourth grade education. One of the possible reasons for the difference in education may relate to age. Sixty percent of the large farmers are under 40 years old while only 37.4 percent of the small farmers are under 40 years of age. As more schools were built in the rural areas, younger farmers probably had a better chance of acquiring an education. Attitudes. In order to gain an insight as to how farmers tend to view their social environment, seven attitudal questions styled from Table IV-13. Number of Years of Formal Schooling Completed by Small and Large Farmers 0-1 2-4 5-7 10-12 Size Years Years Years Years (percent) (percent) (percent) (percent) Small 21.4 42.9 35.7 -- Large 10.5 21.1 52.6 15.8 Source: Farm level survey for this study. 13 were asked. Underlying this approach is other LAMP related research the assumption that one with a "more modern" outlook would respond dif- ferently and that responses to each question could be scaled on a con- tinuum where one end would stand for traditionalism and the other modernization. Distinguishing between modernation and traditionalism represents an "analysis of socio-psychological variables which facili- tate or hinder the evolution of an increasingly complex, technologically sophisticated society, a society whose members are capable of performing the tasks demanded by industrialization and who show the initiative and entrepreneurial drive which contribute to sustained levels of economic growth."14 The future orientation of an individual relates to the ability to defer gratification over ah extended time period. A traditional person would tend to collapse the time frame into the very immediate future by 13David L. Peacock, "The Adoption of New Agricultural Practices in Northeast Brazil: An Examination of Farmer Decision-Making" (Ph.D. dissertation, Michigan State University, 1972). 14Harold Riley, et al., Food Marketing in the Economic Develop- ment of Puerto Rico (East Lansing: Michigan State University, Latin American Studies Center, 1970), p. 10. highly discounting returns over time so that they rapidly become nega- tive. Table IV-l4 shows no difference between the large and small growers. Table IV-l4. Response to Question Examining Future Orientation, by Farm Size ‘ Question: "Do you believe that it is better to receivea¢90 within one year than ¢30 ?Il Size today. YES N0 N0 OPINION (percent) (percent) (percent) Small 16.7 50 33.3 Large 16.7 50 33.3 aWhen it appeared that the interviewee did not understand the question, it was reworded as follows: "If you were to win ¢30 in the lottery, would you rather receive the ¢30 right now, or wait a year and receive ¢90?" Source: Farm level survey for this study. Fatalism is the extent to which one accepts outcomes as given, feeling that he has no control over his future. Three questions were used to explore this attitude. The first contrasts planning to letting events take care of themselves. A traditional response would express a belief that the future cannot be controlled, rather events will occur as they may. The second asks whether it is better to have luck than knowing how to farm well. Again, the traditional response would favor luck, since skill would imply control over one's destiny. Finally, respon- dents were asked if the best thing for one's children would be to become a farmer. It was considered that the farmer viewed his children 87 to some extent as an extension of himself, thus, a yes response would again show a belief in the lack of his ability to change the status quo. The responses to these questions are given in Table IV-15. Taking these three questions as a group, small farmers tend more towards the answers expected of a person with a traditionistic outlook. .Irust refers to the confidence that one has with other members of the society. The traditional attitude tends to view other members of society with little confidence, reserving trust only for members of the family. Two questions were used (Table IV-l6): the first asked if one could be a partner with a person who was not a family member. The traditional response would reject associations with nonfamily members. The second question asked if he felt that other farmers were envious of his position. Since trust also requires an open relationship between the participants, the more traditional person would feel that his neighbors also look upon him with distrust. The apparent contradiction between the results of questions A and B relate to the fact that there already exists a form of partnership for planting potatoes, discussed above, which is fairly common. Thus, this pattern of behavior has developed over years to where it is now an accepted standard operating procedure. Innovativeness refers to the willingness to experiment with a new or different process. As the process gains wider acceptance, it ceases to be new and different. The attitude most closely associated with modernity would be one which expresses a willingness not to wait, but to be among the first to try a new process. It is the large farmer who in this case is most likely to be among the first to try something differ- ent (Table IV-l7). 88 Table IV-15. Responses to Questions Testing Fatalism, by Farm Size -A- Question: "Do you believe it is better not to plan because the future will take care of Size itself?" YES N0 N0 OPINION (percent) (percent) (percent) Small 61.5 15.4 23.1 Large 57.9 26.3 15.8 -3- Question: "To make money, do you believe it is more important to be lucky than to know how to Size 91a"?" YES N0 N0 OPINION (percent) (percent) (percent) Small 50.0 25.0 25.0 Large 15.7 63.2 21.1 -c- Question: "Do you believe that the best for your children is to stay here as farmers?" Size YES N0 N0 OPINION (percent) (percent) (percent) Small 38.5 53.8 7.7 Large 15.7 63.2 21.1 Source: Farm level survey for this study. Table IV-l6. 89 Responses to Questions Testing Trust, by Farm Size -A- Question: "Do you believe that one can be a partner with another person, even if he is not a Size fam11y member? YES N0 N0 OPINION (percent) (percent) (percent) Small 69.2 7.7 23.1 Large 84.2 10.5 5.2 -3- Question: "Do you think that the other farmers don't like to see you get ahead of them?“ Size YES N0 N0 OPINION (percent) (percent) (percent) Small 83.3 8.3 8.3 Large 83.3 11.1 5.6 Source: Farm level survey for this study. Table IV-17. Response to Question Testing Innovativeness by Farm Size Question: "When a new technique for potatoes is developed, do you believe that it is best to wait, letting others try it to see Size what happens?" YES NO NO OPINION (percent) (percent) (percent Small 46.2 53.8 -- Large 36.8 63.2 -- Source: Farm level survey for this study. 90 The answers to the above questions were equally weighted and scaled from one to three, with one being the expected traditional answer and three representing the answer that would be attributed to modernity. The results showed that the large farmers leaning towards attitudes most characterized with modernity (2.1), while the small farmers were tending more towards attitudes associated with a traditional view of one's environment or society (1.9). The difference between the two means is significant at the .05 level. This indicates that the larger farmers hold a different perspective than the smaller farmer. For the system as a whole, the farmers tend towards the center, that is, for a particular facet they may be very traditional while on another they will express an opinion associated with modernity. Group Activities As of March 1976, there were three groups representing the inter- ests of potato growers. The oldest and most important is a private organization of mostly large farmers from the Cartago region. Founded in the late 1960's and located in Cartago, Agricultores Unidos S.A. Operates as an input supplier to its shareholders. It attempted to market its shareholders' production, but failed due to problems of allocating its market access among the stockholders. Besides its input supply activity, AgricultOres Unidos has organized successful lobbying campaigns in favor of policies supported by its shareholders.15 The Ministry of Agriculture, as well as other governmental agencies, turn to Agricultores Unidos shareholders to represent the grower's point of 15For example, in September 1975 they organized a successful campaign against the importation of potatoes for tablestock. They did this by use of the press and radio as well as by meeting with high government officials. 91 view various boards and special commissions. The result of these acti- vities has been to identify the policy-making process with the large farmer welfare and give them first access to new economic opportunities coming from government programs. There are four potato production cooperatives functioning in the Cartago region. Except for the Tierra Blanca cooperative, which was in- volved in marketing potatoes and is now experimenting with bottling figs for wholesale distributors, the cooperatives' activities are limited to providing production credit and input supply sales. Although the cooper- atives count as members 70 percent of the potato growers in the Cartago regions, their influence is considerably less than this number implies. The COOperatives are not represented on any boards nor commissions formed by the government. It appears that most of their efforts are directed towards working within the national cooperative movement and not trying to exercise influence in regional affairs. Thus, these cooperatives which includeiimajority of the small farmers is not involved in influenCing the policy-making process, except marginally' through the national cooperative movement. The exception to the apparent isolation of the cooperatives in regional and national potato policy-making has been the Tierra Blanca cooperative. ihilate 1974, at the urging of the Tierra Blanca cooper- ative a group was formed to promote the idea of a regional marketing cooperative. The members included representatives from the four cooperatives in the region, government Officials who live and farm in the region and a few younger large farmers. They have begun to challenge _Agricultores Unidos as the representative of potato grower interests. They have also expanded upon the earlier idea of a regional cooperative, in favor of a marketing board. As a result of their efforts, a law was 92 introduced in the Costa Rica Congress that would establish a vegetable marketing board. Since October of 1975 they have tried to coordinate with potato assemblers, and as of February 1976 one assembler has actively participated in the group. Summary Potato production is seasonal, being planted twice yearly to take advantage of the rainy season. Micro-climatic areas allow for potatoes to be planted and harvested throughout the year, if only in limited quantities. The growing period lasts generally 4-48 months, but the exact time is determined by the micro-climatic conditions where plant- ing takes place. The farmer can accelerate potato harvesting two weeks by cutting or chemically defoliating the plants. Over the past 26 years, potato production has tended to become concentrated on large and small size farms at the expense of the medium size operations. It is considered that existing technologies for potato production in Costa Rica are not adaptable to intermediate size farms. The number of large farms has remained fairly constant, but they now produce a larger percentage of the national potato crop. Addi- tionally, their output per hectare has greatly increased. Small farmers have increased in number; they have also increased output per hectare, but not by nearly as much as large farmers. Although it appears that large farmers are becoming more impor- ‘tant than small farmers in terms of total potato production, the actual costs of production are almost the same for the two groups of farmers. When comparing the production cost structure for the two groups, over a large range the small farmers were seen to be capable of producing 93 potatoes at lower costs than large farmers. The reason for the growing importance Of large farm agriculture in the potato production-distribu- tion system is not, therefore, due to strictly production cost advantages. It will be seen that many of the institutional arrangements used for trade favor the large grower and limit the ability of the small farm to expand output to take advantage of potential production level economies of scale. Characteristics of the two groups of farmers showed the large farmers to be better educated. The large farmers were also somewhat more nontraditional in their attitudes than the small farmers. A review of the organizations operating within the potato production-distribution system showed that the small farmer has had little representationiriany of these organizations--except for the cooperatives. Only with the recently formed group advocating a Market- ing Board has the influence of the small farmer, as represented by the cooperative leaders, extended into Cartago and beyond. Before that, Agricultores Unidos being the region-wide farmer organization was able to turn the Opinions of their members--i.e. mostly large farmers-~into policy and allowed them to benefit from government programs. Differences between large and small growers were seen to exist with respect to knowledge of prices. At all levels in the distribution channel for potatoes, the Small farmer is less informed and/or has a less accurate idea of prices. It is suggested that the small farmer, having to rely on poor price information, has adOpted risk reduction strategies. They tend to maintain the same land area in potato produc- tion in the face of varying potato prices. Large farmers, on the other hand, are more responsive to changes in price, e.g. the determination 94 of the land area to be planted. Another strategy used by small farmers to reduce risks is to diversify farm activities over three or more crops. Large farmers have not diversified their operations to this extent. The small farmer, by adopting these above mentioned strategies to reduce risks, has isolated himself from the rest of the production marketing system in the sense that he does not respond to changing conditions within the system. These strategies have allowed the small farmer to continue to exist, but not to grow. CHAPTER v FARMER POTATO MARKETING As the harvest approaches the farmer begins to formulate a mar- keting strategy. Alternatives are formulated around traditionalpractices but his perception of the price situatioh price expectations and the direction and magnitude of short-run changes in price. His perceptions of the system in which he operates will determine the alternatives which he considers as feasible. His.strength yjs a vj§_other participants in the exchange process, as well as the institutional arrangements governing trade, will influence the outcome of that exchange, and this will, in turn, affect his future production and marketing decisions. Harvesting The first decision which is faced by the grower relates to date of harvest. There are two components influencing the harvest date. The first is when and where planting occurs. By planting in different micro- climates, the farmer can vary periods when he is ready to harvest. Table V-l shows the number of different locations where growers plant potatoes. Location in this context refers , to different areas within the region and not to the number of fields planted within one area. Among small farmers, 76 percent cultivate all their potatoes from within one micro-climatic region; the large farmers, on the one hand, are able to diversify their production among different regions. The importance of this is seen in Table V-2 which shows the number of months 95 96 Table V-l. Number of Different Location of Potato Fields, by Farm Size Only 1 2 3 or more Size Location Locations Locations (percent) (percent) (percent) Small 76.0 20.0 4.0 Large 29.4 47.1 23.5 Source: Farm level survey for this study. Table V-2. Number of Months Selling Potatoes, by Size of Farm 2 or less 3 4 5 more than 5 Size months months months months months (percent) (percent) (percent) (percent) (percent) Small 52.0 24.0 20.0 4.0 -- Large 11.8 29.4 23.0 11.8 23.6 Source: Farm level survey for this study. each group is harvesting throughout the year. By harvesting more months, the large farmer is participating in the market for a longer time period, establishing himself as a steady source of supply. His physical pre- sence in the market over longer periods of time permits him to learn the intricacies of the exchange process, as well as to develop his skills as a trader. It was seen in Chapter IV that the large farmer has more knowledge of potato price movements and of potato prices at different places in the distribution channel. This is due, in part, to his con- stant contact with the market. Additionally, by harvesting over a longer period of time, the large farmer: l) spreads price risk over several months, and 2) is able to sell some potatoes in higher price periods. 97 The other alternative available to the farmer is the short-run option of speeding up the harvest by chopping the vines, or applying chemical defoliants. This permits the farmer to harvest potatoes about two weeks earlier than normal. This Option is used by only 45 percent of the farmers, divided evenly between large and small farmers. The other alternative of leaving the potatoes in the ground offers limited possibilities due to risks of infection and attack by worms. Except for potatoes planted above 2700 meters, harvest begins within one or two weeks after the potatoes reach maturity. Thus, in the short-run the grower can time his entry into the market by approximately two weeks on either side of the expected harvest date.1 Interestingly enough, there is little storage of harvested pota- toes for future sales as tablestock (as opposed to seeds). None of the sampled farmers stored potatoes, and only one grower during the course of the investigation for this study was found to be storing potatoes, having begun four months previous. Technically, it is feasible to store potatoes with the climatic conditions near the top of the volcano. However, there are economic factors which discourage storage. When the initial costs of the potatoes put into storage are included in calcula- ting the operating capital requirements, costs in setting up a storage operations become very high?? Additionally, financing for this activity 1The relation between the short-run harvest option and weekly price fluctuation are examined in Chapter VIII. 2Kenneth Shwedel and Victorino Elizondo, Estudio de Mercadeo de la Papa en Costa Rica y Posibilidad, Utildad y Viabilidad de la Union “Regional de Cooperatives de la Provincia de Cartago’(San Jose: INFOCOOP/ A10, 1976), pp. 87-101. 98 would have to come from the farmer himself, since none of the banks loan money for what is considered to be a high risk operation.3 Negotiation When the grower is ready to harvest, he usually goes to the city of Cartago to negotiate the sale of his production. Every Sunday morn— ing between the hours of 10:00 a.m. and noon, potato growers and assem- blers gather at the southwest corner of the Cartago municipal market to buy and sell potatoes. During the first hour, no trading takes place. It is at this time that payment from the previous week's sales are made. Also, both growers and assemblers spend the hour talking to each other, gathering information as to the supply on the market and exchanging impressions of demand in San Jose. Around 11:00 a.m., trading begins and normally lasts until noon. Small growers bring a sample of 10-15 representative potatoes from their fields. Negotiations between small farmers and assemblers are based on this representative sample. The large farmers, on the other hand, do not generally bring samples to the Cartago market. Assem- blers accept the word of the large grower that his potatoes are of acceptable quality. After some bargaining, the grower and assembler enter into an oral agreement regarding: 1) price of potatoes per carga (l8 cwt) based on the sample quality, 2) the amount of potatoes in cargas which are to be purchased, 3) the day or days when the assembler will pick up the potatoes, and 4) the amount to be readied for each pick up. Before the 3Potatoes are thought to be highly perishable. This opinion has resulted in potato storage being considered as a very risky proposition. 99 farmer returns to his farm, the assembler usually gives him the sacks-- in bundles of 10, each to contain 180 lbs. of potatoes. At no point is the agreement anything stronger than an oral agreement. In some instances, the assembler will retain possession of the sample as a gesture that a deal has been made, however, this is not a common practice. Also, it should be noted that at no time during the negotiation does any money change hands. The following Sunday after the arrangement was made, during which time the potatoes were picked up and sold, the grower and assembler again meet at the Cartago market. The assembler then pays the grower the price agreed upon less "a discount for potatoes of inferior quality." (The discount most of the time has very little to do with the quality of the potatoes; rather it varies according to prices received in the San Jose market. Perceptions of the market. The way in which the farmer perceives the market to be working will influence his choice of production and marketing strategies. Small and large farmers were asked how many assemblers are usually at the Cartago market. The average large farmer's response of 51 was very close to the number of assemblers identified by this study--56 assemblers. A large percentage of the small farmers were unable to answer the question--72 percent-~while those who did answer greatly over-estimated the number of assemblers--127 assemblers was their average response.) Farmers were also asked if the assemblers sold potatoes on credit to wholesalers (Table V-3). As will be seen in Chapter VI, most large assemblers sell on credit while most small assemblers trade in cash-- this is an important difference which affects their scope of operations and ultimately affects the farmer. Again, large farmers appear to be 100 Table V-3. Farmer's Knowledge of Assembler Selling Policy, by Farm Size Believe Assemblers Believe Assemblers Did Not Size Sell on Credit do not Sell on Credit Know (percent) (percent) (percent) Small 44.0 8.0 48.0 Large 52.9 29.4 17.6 Source: Farm level survey for this study. somewhat more knowledgeable than small farmers. Nearly half of the small farmers did not know whether or not assemblers sold to wholesalers on credit. The responses to these two questions suggest that the small farmer's perception of the potato marketing system differs from that of the large farmer. Grower Assembler Contact. Large growers tend to sell regularly to the same assembler (Table V-4). While it is not a formally specified relationship, it does exist. This lends a large measure of stability and predictability to the LFSS.4 The growers and assemblers know that they have an assured outlet and a stable source of supply. Often the assembler serves as a source of information for the grower, suggesting that harvest be accelerated or postponed a week or two to take advantage of anticipated San Jose prices. Operating together, they form a rela- tively highly coordinated, albeit informal, vertical system. 4Jones reports that similar types of arrangements are found among African farmers and traders. "Farmers found it advantageous to establish long-term relationships with assemblers who, over a period of years, paid them a fair price." The traders, in turn, would enter into these relationships in order to "attempt to overcome these problems of iden- tifying buyers or sellers and/or of achieving a satisfactory price, all at moderate cost." William 0. Jones, MarketinggStaple Food Crops in TrOpica] Africa (Ithaca: Cornell University Press, 1972), pp. 241—254. 101 Table V-4. Percentage of Farmers Who Sell to the Same Assembler by Farm Size Sell to Same Sell to Different Size Assembler Assembler (percent) (percent) Large 76.4 23.6 Small 45.0 55.0 Source: Farm level survey for this study. Although 45 percent of the small farmers sell to the same assem- bler, upon close examinatino the relationship between the small grower and assembler is different than that of the large grower and assembler. 0f the small growers who sell regularly to the same assembler, 17 per- cent sell to relatives compared with no sales to relatives by the large farmers sampled. Additionally, 65 percent of the small farmers have frequent nonbusiness contact with the assemblers who regularly purchase their potatoes. Only half of the large growers, on the other hand, have frequent nonbusiness contact with assemblers. The regular relationships bewteen the small growers and assem- blers, it appears, are based on kinship or personal friendship while the large growers' regular relationships with assemblers are based less on friendship or kinship than on an economic mutuality of interest. This is further suggested by the fact that 67 percent of the small growers regularly sell to an assembler who lives and works in the nearby rural area, that is, they sell to their neighbors. This compares with only 28 percent of the large growers who regularly sell to rural assemblers. 102 Briggs, Although both large and small farmers trade in the same marketplace, they receive different average prices. Table V-5 shows the average high and low price received by both groups of farmers between September 1974 and September 1975; it also shows the average difference between the agreed-upon Cartago market price and the price which was eventually paid to the farmer (discount). The fact that large farmers receive higher prices in both categories should not come as much of a surprise. They are more aware of price movements, and through a strategy designed to take advantage of the different micro-climatic Table V-5. Average High and Low Potato Prices and Discounts Received by Farmers Between September 1974-1975, by Farm Size Average Difference . Average L9” Between Negotiated Size H19h Pr1ce Pr1ce Price and Price Paid (colones) (colones) (colones) Small 1483.12 837.50 102.50 Large 1607.69 927.27 70.45 Source: Farm level survey for this study. locations for planting, they are able to time their entry into the mar- ket to best take advantage of price fluctuations. More important, however, is that the difference between the agreed upon price and that which was paid the following Sunday, was lower for the large growers than for the small growers. As mentioned previously, the large growers are on the market during more months of the year, and during certain periods they are almost the only source of supply. This gives them more bargaining power in dealing with assem- blers; if an assembler offers lower prices or discounts heavily during 103 periods of large supply, the large grower can retaliate during periods of shortage by offering his production to another buyer. Another factor which accounts for the lower discount is the size of sale. The large growers negotiate an average of 12 cargas (218 cwt) per sale compared to 4.4 cargas (79 cwt) per sale for the small farmers. An assembler could fulfill his weekly needs for potatoes by dealing with one or two large growers instead of three to six small growers. This allows the assem- bler to enjoy certain economies of administration having to coordinate with only one or two suppliers. Bargaining Power. The ability to deal from a position of power is, in part, the result of an accurate evaluation of the way in which the market sub-system Operates. During the time that a farmer is sell- ing his production, he is in fact learning about the operation of the market. The large potato farmer, by selling during more months than the small farmer, it was pointed out, acquires a better understanding of the marketing sub-system. Furthermore, it is not uncommon for the large grower to be present at the market even if he is not harvesting potatoes. In effect, he invests in the acquisition of information as to how the market operates. This information is used to determine production deci- sions as well as to estimate his position yjs a_vis other growers and assemblers. It is suggested that large farmers use this information to time their entry into the market. They are in a position to demand higher prices from the assemblers during periods of large supply because of their awareness of the assembler's dependence upon them during periods of short supply. The small farmers, on the other hand, generally sell only a few months of the year, usually during the months of large potato supply. Thus, small farmers do not acquire the necessary knowledge of 104 the potato market to identify alternative strategies which could enhance their bargaining power. Alternative Arrangements for Selling Potatoes Up to this point, discussion has focused on exchange negotiations taking place only at the Cartago market. Two other institutional arrange- ments are used for selling potatoes.5 The grower has the option Of sell- ing his production to wholesalers in San Jose. To sell in San Jose, the farmer must wash and transport the potatoes to the San Jose wholesale markets. At the market, he is competing against assemblers who have esta- blished relationships with wholesalers similar to those that exist between large growers and assemblers. The grower who sells at the San Jose market wishes to be paid in cash, while assemblers extent credit. As a result, farmers are often forced to sell at a lower price.6 Between September 1974 and September 1975 the average high price received by farmers selling in San Jose was ¢1607.50 per carga and the average low price was ¢835 per carga. Those farmers exercising this Option were unable to obtain a higher price than the large farmer received at the Cartago market. During the period of peak supply, the resulting price was approximately equal to that of the small farmer who sold in Cartago. The actual returns to the farmer selling in San Jose were lower than the prices received indicate, since he had to bear the costs of washing and transporting the potatoes to San Jose. 5Farmers also sell directly to processors on a limited scale. Since this exchange occurs at the Cartago Market, it is not considered as a separate institutional arrangement for trading potatoes. GThe assemblers averaged between ¢l.47 to ¢6.63 more per cwt. 105 Given the expected price and returns from direct selling in the San Jose market, this is an activity carried on primarily by small far- mers. Leaving aside assemblers who also plant potatoes, only 5 percent of the large farmers sell in San Jose compared to 21 percent of the small farmers. The potatoes which enter the market through this channel amount to only 7 percent of the total marketed production. This option, therefore, is only marginally used and is of little importance in the overall distribution of potatoes. The other arrangement for selling potatoes is to negotiate the sale at the farm level. This seldom takes place; growers and assemblers from the same area go to Cartago to negotiate the sale. When farm-level exchange does occur, it involves the smallest producers bringing 100-200 lbs. of potatoes to an assembler who lives in the rural area. The terms of exchange are cash and include only the potatoes brought to the assembler's place of operation. The effect of this on the system is nil. Summary Most farmer first-handler trade takes place in the Cartago marketplace. Differences exist in the institutional arrangements for trade used by large and small farmers. Large growers tend to regularly trade with the same assemblers. This has led to greater coordination between the large farmers and assemblers. The large farmers by spread- ing out their harvest are able to provide the assembler with a steady supply of potatoes. The assemblers, for their part, provide the farmer With important market information and advice. Large farmers receive higher prices than the small farmers. In Part, this is due to the willingness of the assembler to paya premium to "maintain regular trading partners. Additionally, the higher product 106 prices may be due to the fact that trade with large farmers lends itself to administrative economies of scale for the assembler. More important, however, the large farmers are in a better bargaining position than small farmers. Part of the reason for their relative strength is that large farmers are more aware of the workings of the marketing sub-system and consequently develop strategies to improve their position. The reliance on regular trading partners is not as important for small farmers as compared with large farmers. When the small farmer sells regularly to the same assembler, the relationship is based more on friendship or kinship than on a perceived mutuality of economic necessity. Because the small farmers often trade with different assemblers, they are required to bring a representative sample of their potatoes. Usually, most small growers traditionally enter the market during the same months, resulting in large quantities of potatoes on the market with accompanying low product prices. The small farmers by adopting risk reduction strategies which emphasized maintenance of traditional practices in the face of greater uncertainty, instead of developing greater coor- dination with assemblers, place themselves in a position of relative weakness. Some farmers do attempt to sell directly in the San Jose wholesale markets. These growers, however, face certain barriers: l) relation- ships which approximate a high degree of vertical coordination exist between assemblers and wholesalers, and 2) assemblers provide certain services to the wholesaler, e.g., credit and a constant supply through- out.the year. To overcome these barriers, the grower would have to become a full-time wholesaler. It is the small grower who tends to use the San Jose market as (an alternative outlet. He does so because at the time: 1) there is 107 little activity on the farm, 2) he uses family labor to wash, dry and bag the potatoes, which he probably values at zero cost, and 3) he is probably unable to find off-farm employment resulting in his opportu- nity cost being close to zero at that moment. Thus, the use of the San Jose wholesale market is not really an alternative commercial out- let for the small grower, rather it serves as a source of employment as he undertakes some of the functions of an assembler. CHAPTER VI THE ASSEMBLY PROCESS As potatoes move through the marketing channel from farmer to consumer, the first level of exchange is between the grower and the assembler. The assemblers are middlemen specializing in purchasing potatoes at the Cartago market from growers. They wash and classify the product before selling it, usually to wholesalers in San Jose wholesale markets. They are the link which cOordinates grower activities with the rest of the system. The assembler's role is a key one in the coordina- tion of the production-marketing system, and its performance will influ- ence the welfare of the growers as well as other participants in the system. There are 56 assemblers who regularly purchase potatoes from growers in the Cartago region. Of these assemblers all but three live and work in the Cartago area.1 Of the remaining 53 assemblers 57 per- cent live and have their wash houses located in the Cartago suburb of San Rafael. The other 43 percent live and work in the rural areas of the Cartago region where potatoes are produced. Assembler Characteristics General Characteristics Large assemblers are considered as those who handle 16,200 or more cwt of potatoes. They represent 54 percent of the total number of 1Of these three, two are from Alajuela, and the third from San Ramon. 108 109 assemblers, yet they handle 70 percent of the total volume of potatoes that passes through the Cartago marketplace. The small assemblers, who represent 46 percent of the population, handle the remaining 30 percent of the potatoes. No one assembler can be considered as dominating the market; the largest assembler handles 8.7 percent of the potatoes, and the largest three assemblers control 24.8 percent of the market. The amount of potatoes handled in 1974 ranged from 749 cwt for the smallest assembler to 33,696 cwt for the largest. The small assem- berls handled an average of 9,243 cwt of potatoes in 1974 compared with 20,596 cwt handled by large assemblers. One half of the assemblers handle other products besides potatoes, although on a much smaller scale. These are crops which also grow in the region--onions, carrots, and beets. With the latter two products there exists a complementarity of resource use since they are also washed before being sold in San Jose. Small assemblers tend more towards diversification into other product 1ines--60 percent of the small assemblers handle other products besides potatoes compared with 42 per- cent Of the large assemblers. Many assemblers are also potato farmers, and two large assemblers wholesale potatoes in San Jose. In total, 64 percent of the assemblers grow potatoes. While potato growing serves as a sideline for many assemblers, more of the small assemblers (70 percent) than larger assemblers (58 percent) grow potatoes. There are two points which should be noted: 1) most of the assemblers have a real connection with farm production giving them an advantage in negotiating with growers who know little of the assembly Process; and 2) small assemblers have yet to specialize in distribution activities to the degree that characterized large assembler operations. 110 Trends in assembler size. TO obtain an idea as to changes in the amount of potatoes that assemblers marketed, they were asked if their annual volume had changed over the past five years. With both groups the percentage of those answering that they are marketing more potatoes was the same (33 percent) however, there is a larger percen- tage of small assemblers who are handling less potatoes--45 percent of the small assemblers compared to 25 percent of the large assemblers. When asked if they could handle more potatoes, 75 percent of the large assemblers answered affirmatively compared with 50 percent of the small assemblers. In almost all cases, those who felt that they could physi- cally handle more potatoes were also of the Opinion that they would not be able to market them. Not being able to market more potatoes indi- cates that there are additional barriers at succeeding levels in the channel. Conditions of entry. Since historical data concerning the number of assemblers was not available, each assembler in the sample was asked if the number of buyers in the Cartago marketplace had changed over the last five years.2 While this would not give a quantitative measure of change over time, it was considered that it would give an indication of the direction of change and ease of entry into the market. Only 4.5 percent responded that the number of assemblers has decreased, 63.6 percent indicated that there are more assemblers now than five years ago, the rest indicated that the number has remained constant. The consensus that the number of assemblers has increased indicates that 2The term "buyers" was used instead of "assemblers" (acopiadores) because the participants within the system do not differentiate this group or their function by the use of a separate term, rather all those who are neither farmers, retailers, nor consumers are middlemen (intermediarios). ‘ 111 entry is relatively easy; however, when asked if it is easy to become an assembler, only 45.5 percent answered affirmatively. Of those who felt that it is easy to become an assembler 60 percent are small assemblers. The probable reason for this difference is that each respondent inter-. preted the question to mean an assembler such as himself. What appears, therefore, is a picture of relatively easy entry as a small assembler with entry as a large assembler being more difficult.3 Among the difficulties of achieving large assembler status is the fact that large assemblers have established specialized Operations held together by a series of informal agreements with growers and wholesalers. Furthermore, the exchange process is financed by credit from the growers to the assemblers. If someone unknown to the growers attempts to pur- chase potatoes he will find that unless he can pay cash at time of delivery it will be impossible to negotiate a transaction. This fact alone has limited almost exclusively the assemblers to those from the Cartago region. When one wishes to enter the market as an assembler, even if he is known, he may have to pay cash for the potatoes he pur- chases. This results in those who enter the market doing so on a small scale, financing their entry with savings or with a small family loan until they are able to trade on credit. Education. Compared with growers, the assemblers are better educated. The average number of years' schooling is 5.5 years. Between the two groups, the large assemblers are better educated, aver- aging 7.2 years of schooling, compared with 3.5 years of schooling for the small assembler (Table VI-l). 3Among the small assemblers, 30 percent had been Operating for less than five years. There were no large assemblers who were operating for less than five years. 112 Table VI-l. Number of Years of Formal Education Completed by Assemblers by Size of Assembly Operation Years of Education Size 0 1-3 4-6 7 or morea (percent) (percent) (percent) (percent) Small 20 30 40 10 Large 0 16.6 50 33.2 aOne large assembler attended the University. Source: Assembly level survey for this study. Modernity To examine the manner in which the assemblers perceived their environment, as measured along a traditional-modernity continuum, the same sets of questions were asked of assemblers that were asked of growers.4 Future orientation. Although the assemblers appear to have a somewhat longer planning horizon than farmers, they nevertheless seem unwilling to defer gratification for long periods of time (Table VI-2). The large assemblers, however, are somewhat more likely to be future oriented. Fatalism. Questions A and B in Table VI-3 show the large assembler to be less fatalistic, expressing a belief that his destiny can be shaped by the force of his own activities. In question C, how- ever, both groups express a similar opinion with respect to their child- ren's future. An interesting anomoly within the marketing system may 4The questions were the same except that in some cases termino- logy was changed to refer to assemblers and their activities. 113 Table VI-2. Response to Question Testing Future Orientation by Size of Assembly Operation Question: "Do you believe that it isbetter to receive ¢9O within one year than ¢30 7H ‘ Size today. YES NO NO OPINION (percent) (percent) (percent) Small 20.0 80.0 0.0 Large 33.3 58.3 8.3 Source: Assembly level survey for this study. explain this response; while the intermediary may be looked upon as an undesirable part of marketing system, to become an intermediary for many farmers is perceived as a form of upward mobility. This would explain the fact that a large number of assemblers are satisfied with their position having first been farmers, and project this forward into the desired ambitions for their children. Trust, The level of trust that assemblers have with nonfamily peer group members appears not to be very high (Table VI-4). The assem- blers' answers to question A differ markedly from those given by growers. Among growers it is common to enter into a partnership for planting potatoes or other crops. Supported by a set of institutional arrange- ments for defining the conditions and obligations of partnerships, i.e., a medias, a level of trust has developed among growers. For the assembler, however, there are no socially defined arrangements for partnerships.- Innovativeness. Both groups appear to hold similar attitudes with respect to the adoption of new innovations (Table VI-5). This is 114 Table VI-3. Responses to Questions Testing Fatalism by Size of Assembler -A- Question: "DO you believe it is better not to plan because the future will take care of Size itself?" YES NO NO OPINION (percent) (percent) (percent) Small 80 20 -- Large 50 50 -— -3- Question: "To make money, do you believe it is more important to be lucky than to know how to Size sell?" YES NO NO OPINION (percent) (percent) (percent) Small 60.0 20.0 20.0 Large 33.3 58.3 8.3 -C- Question: "Do you believe the best for your child- ren is to become an assembler?" Size YES NO NO OPINION (percent) (percent) (percent) Small 50.0 40.0 10.0 Large 33.3 41.7 25.0 Source: Assembly level survey for this study. 115 Table VI-4. Responses to Questions Testing Trust by Size of Assembler -A- Question: "Do you believe that one can be a partner with another person even if he is not a 5' family member?" 1ze YES N0 N0 OPINION (percent) (percent) (percent) Small 20.0 70.0 10.0 Large 50.0 33.3 16.7 -B- Question: "Do you think that other assemblers don't like to see you get ahead of them?" Size YES N0 N0 OPINION (percent) (percent) (percent) Small 70.0 20.0 10.0 Large 66.7 33.3 -- Source: Assembly level survey for this study. Table VI-S. Response to Question Testing Innovativeness by Size of Assembly Operation Question: "When a new technique for handling and selling potatoes is suggested, do you believe it is best to wait, letting Size ‘ others try it to see what happens?" YES NO NO OPINION (percent) (percent) (percent) Small 70.0 30.0 -- Large 66.7 25.0 8.3 Source: Assembly level survey for this study. 116 surprising since there has been a differential rate of adoption with respect to a recent innovation--the use of electric fans for drying potatoes. All but one of the large assemblers are using electric fans for drying while only half of the small assemblers dry potatoes with electric fans. As with growers, the answers to these attitude related questions were scaled to determine where the assemblers would lay on a continuum running from traditionalism to modernism. With 2.0 representing the mid- point, the results for the large and small assemblers were 2.0 and 1.5 respectively. This apparent modernity of the large assemblers as con- trasted with the traditionalism of the small assemblers will be seen to be consistent with manner in which large assemblers organize their assembly operations. Pergeption of the Potato MarketingySystem Assemblers were asked to identify the months of highest and lowest wholesale potato prices. The answers they gave were compared with the high and low months obtained from an 8-year monthly index of wholesale potato prices.5 While neither group was able to identify very accurately the month with the highest wholesale price, the large assemblers were more aware of the month Of low potato prices (Table VI-6). The fact that in both groups many assemblers did not correctly identify the months of high and low wholesale prices may relate to the fact that assemblers consider periods of high and low prices rather than specific months, i.e., December through February were associated with high prices. What 5Juan M. Villasuso and Alvaro Vargas, Indices Estacionales de los Precios a1 Por Mayor y al Por Menor de 18 Frutasyy Hortalizas en Costa Rica (San Jose: IFAM-PIMA, 1973), p. 80- 117 Table VI-6. Percentage of Assemblers Who Correctly Identified Month of Highest and Lowest Wholesale Potato Prices and Percentage of Assemblers Who Could Not Answer, by Size of Assembly Operation Knew High Knew Low Unable to Size Month Month Answer (percent) (percent) (percent) Small 30 3O 30 Large 33 66 16.6 Source: Assembly level survey for this study. is more important, however, is the fact that there were some assemblers, especially among the small assemblers, who were unable to answer either question regarding high and low prices. Since the assemblers are in competition against one another, know- ledge of one's competitor is imperative in determining a strategy to follow. All of the assemblers when asked how their price compared with that of other assemblers were able to respond, which reflected at least a subjective level of knowledge concerning their relative position. When asked if it would be better for their business with more or less ,assemblers, 75 percent of the large assemblers compared with 40 percent of the small assemblers felt that a smaller number would be best. The difference in the knowledge of the system in which they oper- ate is not that large, but nevertheless it exists. The large assembler better understands whatis occurring around him. This is seen in: 1) his opinion that a reductioniricompetition would be best for him, and 2) his decisions not to handle more potatoes because that would mean a lower price. The large assembler's knowledge Of the system along with his tendency towards modernity have caused him to take decisions that 118 have resulted in a different organizational format for the assembly function--an actively coordinated vertical system--bringing higher returns and greater stability. ‘Exchange Process It has been explained that farmers and assemblers gather on Sun- days at the Cartago market to negotiate the exchange of potatoes. Fur- thermore, it was stated that a relationship exists between large growers and assemblers whereby the grower regularly sells to the same assembler or assemblers. The assembler, for his part, is willing to enter into this relationship and pay the grower a premium in order to routinize the acqusition of potatoes. These relationships mark the beginning of what will be termed an actively coordinated system. All system are coordi- nated--otherwise they would not be system. It is the nature and amount of coordination which determines the efficiency of a system. Passively coordinated systems would be those where no participant or group of par- ticipants takes the lead in organizing the exchange-distribution process. In an actively coordinated system one participant, or group of partici- pants, will assume the role of channel captain providing leadership and direction with respect to the nature of the system's activities. The ability of the channel captain to provide quality leadership will deter- mine the extent to which the system is coordinated and its performance. 6The perfect market model would be an example of such a system, where price is the coordinating mechanism, and participants are assumed to receive and accurately interpret all price signals and then be able to respond in a "logical" manner. When the basic assumptions on which this model are postulated, are violated, the passively coordinated sys- tem may result in a poorly coordinated system which does not contribute to the economic develOpment of the system's participants nor to society at large. 119 Assembler-Grower Level Contact At the grower-assembler level 43.4 percent of the total quantity of potatoes are exchanged on the basis of a relationship whereby farmers regularly sell to the same assemblers--39.3 percent between growers and large assemblers with the remaining 4.1 percent between small assemblers and growers. As a percentage of the total amount traded per group, this represents 52 percent for the large assemblers, compared with only 16 percent for small assemblers. The large assemblers have begun to par- ticipate in or form an actively coordinated system, which has allowed them to routinize the acquisition of over half of the potatoes which they purchase. To facilitate this arrangement assemblers often make tentative agreements prior to the Sunday Cartago Market regarding the quantity of potatoes to be purchased. The exchange, however, is not formalized until the grower and assembler meet at the Cartago Market and agree upon: 1) price, 2) exact quantity, and 3) the days that the assembler will pick up the potatoes. The relationship is used to facilitate vertical coor- dination as assemblers often will advise growers with respect to the harvesting and selling of potatoes. If price changes appear imminent assemblers will suggest that harvest be accelerated or delayed to take advantage of the short-run fluctuations. This involvement of assemblers in the decision-making process of their growers is practices by 50 per- cent of the large assemblers. Upon terminating the negotiation the assembler and grower agree on the day or days that the assembler will pick up the potatoes and the amount that the grower must prepare for each pick-up. The schedule is arranged by the assembler, and relates to number of days per week he 120 sells in San Jose. Those who sell daily in San Jose likewise receive potatoes daily. Generally, they pick up potatoes in the afternoon, hold- ing them through the night to be washed the next morning. The prepared potatoes are taken to San Jose early the second morning for sale that day. Those who do not sell daily in San Jose also schedule the pick-up of potatoes approximately 36 hours before leaving for San Jose. To pick up the potatoes the assembler uses his own truck if he has one; if not, he pays a trucker a fixed rate per sack according to the distance between the assembler's location and the place Of pick-up. Connecting growers with assemblers, if was seen that the large growers are the ones who enter into relationships or arrangements for the sale of their product. Likewise, it is the large assembler who establishes this type of arrangement with growers to purchase potatoes. Large assemblers and large growers are, therefore, trading among them- selves. The actively coordinated system then is comprised of essen- tially large farmers and large assemblers who trade together recognizing the mutual advantages that arise from this exchange relationship. Size of transaction. Small assemblers handle an average of 191.7 cwt per week, while large assemblers handle almost two and one half times that amount, 452.9 cwt weekly. Large assemblers purchase in average size lots of 234 cwt per transaction compared with 140.4 cwt per transaction for small assemblers. Both groups need to make about two transactions per Sunday market to acquire the potatoes they require for the week. Preparation The potatoes are brought from the field to the assembler's wash- ing facility. The preparation involves three stages: 1) washing, 2) 121 drying, and 3) sorting and packing. The potatoes are prepared in wash houses (lavenderos) generally located alongside the assembler's house. The wash houses are usually wooden structures with cement floors, and are often used as a garage. The average size wash house used by small assemblers is 138 square meters compared to 310 square meters for wash houses used by large assemblers. For both large and small assemblers most of the wash house area is used for drying. Potatoes are washed by hand in wooden or cement troughs which hold approximately 18 cwt of potatoes. After rinsing, the potatoes are extended on the floor, often over burlap bags, and, if the assembler has a fan it is used to accelerate the drying process. During the dry season potatoes are often set outside in the metal baskets to dry. More often than not, and especially during the rainy season, the potatoes are not adequately dried before they are packaged for sale in San Jose. While the use of fans has resulted in potatoes being dryer it does not guarantee a dry product. The problem is complicated because potatoes are packed in 100 pound plastic rather than burlap sacks.7 The plastic pre- vents air from circulating which, when held by wholesalers for a number of days, accelerates potato deterioration. When the potatoes are ready to be bagged they are classified by size and appearance. Those potatoes which are fairly large size and not damaged are selected as top grade potatoes. Smaller or damaged potatoes 8 are used to fill the sacks, being placed near the bottom, or sold to 7Small, 5 to 10 pound, perforated polyethelene bags are sometimes used by supermarkets. 8There is very little selling of potatoes by grades. Usually they are all mixed together, occasionally, however, there will be bags Of small, or highly damaged potatoes entering the market. 122 potato chip makers. The unsaleable potatoes are either given to the workers or thrown away. Although potatoes are received in 180 lb. bags, they are sent to San Jose in 100 1b. bags. After the bags are filled with potatoes, they are sewed closed and weighed. The weight is noted on a tag bearing the assembler's name or initial which is then attached to the bag. This is accepted by the wholesaler as the true weight of the potatoes with only limited spot-checks. The amount of potatoes which are lost during washing and packaging does not differ significantly between large and small assemblers.9 Part of the losses may be attributed to potatoes of poor quality racked by the grower. Poor handling--potato sacks are often thrown and drOpped-- further add to losses. Additionally, it is considered that part of the losses at the wholesale and retail level can be attributed to improper drying and packaging. Assembler-Wholesaler Contact Almost all of the potatoes (92.7 percent) sold by assemblers move through San Jose. Six percent are distributed directly to larger hotels, restaurants, hospitals and supermarkets. The assemblers who direct delivery make arrangements as to quantity of potatoes from one delivery period to the next. Another 1.2 percent of the potatoes move directly to the San Jose Central Retail Market located in the downtown 9Losses estimated for October 1975--19.4 percent and 19 percent for small and large assemblers respectively--were relatively large due to: 1) it being the rainy season, and 2) extensive worm damage to the tubers before harvest. During the rainy season the potatoes enter the washhouse covered with mud. Thus, there are weight losses as the mud and dirt is washed off, as well as losses from those potatoes which were of poor quality but nevertheless packed by the farmer--either purposely or through inefficient post-harvest selection. 123 area. The largest supermarket chain in the country, through a wholly owned subsidiary, has entered into a formal contractual arrangement with two of the large assemblers for potatoes as well as for other crops grown in the region. The assemblers deliver potatoes bulk packed (100 lbs.) 10 The rest and in 5 lbs. plastic bags to the supply company warehouse. of the potatoes are traded in San Jose's wholesale markets. Within San Jose there are two wholesaling areas. The oldest is the Borbon Market and its surrounding buildings and streets located in the downtown area. The other area where wholesaling takes place is at the 10th Avenue or San Jose Wholesale Market. This market was constructed in late 1960's in hopes of removing wholesaling activities from the down- town area, more fOr the elimination of urban problems than for marketing reasons. For a number of years after its construction the market remained idle, wholesalers and assemblers preferring the traditional location at the Borbon Market. In November of 1974 the city of San Jose, which owns the 10th Avenue Market, prohibited trucks from loading and unloading around the Borbon Market obliging assemblers and whole- salers to use the San Jose Wholesale Market. In the ensuing year the San Jose Wholesale Market became the center for wholesaling activity, while the Borbon Market area's importance as a wholesale center decreased 10This supply company has been operating since late 1974, and has established three assembly centers in the key vegetable producing areas of Costa Rica. These centers are staffed by direct hire personnel or by contract with local assemblers. Each center is equipped with a short- wave radio which permits the warehouse to be in constant contact with the rural suppliers and change orders if necessary. In addition to this phase of the operation, they are planning to enter into direct contractual arrangements with some farmers as well as becoming involved directly in the production of certain key fruits and vegetables. They have intro- duced a rudimentary but practical grading system, paying higher prices for top of the line products. In February of 1976, the parent company, the supermarket chain, began an advertising campaign advising consumers of their top quality produce, using the same description of quality as used for grading in their aseembly centers. 124 markedly. With respect to potatoes, only 6.8 percent move directly into the Borbon Market, the rest go to the San Jose Wholesale Market. Those that go directly to the Borbon Market do so as part of an agreement between the wholesalers and assemblers involved. The potatoes which pass through the San Jose Wholesale Market, are sold to: 1) truckers who redistribute the potatoes throughout the rest of the nation; 2) wholesalersifitmiboth wholesale markets who sell to retailers and consumers; and, 3) on a very reduced scale, to retail store owners. Although potatoes arrive daily at the market, Monday and Thursday are the major market days. Table VI-7 shows the distribution of asseme blers who arrive at the market each day. Most of the small assemblers trade two or three days per week, while the large assemblers are usually at the market five or six days per week. Table VI-7. Percent of Assemblers who Trade at San Jose Each Day, for All Assemblers and By Size of Assembly Operation 5' Mon. Tue. Wed. Thu. Fri. Sat. 12e (percent) (percent) (percent) (percent) (percent) (Percent) Small 87.5 50.0 12.5 100 50.0 37.5 Large 100 83.0 66.6 100 91.6 91.6 Source: Assembly level survey for this study. arrive between 2 and 4 a.m. Wholesaler-assembler trading begins The assemblers who sell inthe San Jose Wholesale Market usually between 3:30 and 4:00 a.m., lasting until about 6:30 a.m. at which time retailers begin to arrive. Since trade between wholesalers and assemblers 125 lasts for about three hours, any time spent selling much over three hours would indicate difficulty in negotiating exchange. Large assem- blers spend an average of 3.6 hours in the market selling their product. This compares with small assemblers who spend 4.6 hours selling in the San Jose Wholesale Market. The small assemblers ship an average of 59.4 cwt per trip to San Jose and need 4.3 transactions to sell that amount. Large assemblers, on the other hand, average 95.4 cwt per trip, yet need only 2.6 transactions. Besides selling in smaller lots small assemblers are less likely to sell on credit than large assemblers. While 83.3 percent of the large assemblers sell all their potatoes on credit, only 50 percent of the small assemblers do so. A possible reason for not selling on credit is that small assemblers are less likely to own a truck. Since most hired transportation is on an immediate payment basis, the assembler who uses a trucker may face a cash-flow problem if he trys to sell on credit. On a routine basis 91 percent of the potatoes are traded on credit. Conse- quently, one who does not extend credit is at a disadvantage in the market. Of the total sales by small assemblers, 21 percent are cash ' and carry compared to only 5.3 percent cash and carry for the large assembler. Potatoes sold during the week on credit are paid for on the last trading day of the week, i.e., Saturday. The assembler visits each client to collect. 'This process involves most of the morning and some- times lasts into the early afternoon. There is little difference as to the time needed to collect by both groups of assemblers, about five hours. At the time of collection the assembler and buyer often go through a renegotiation process. Defaulting on payments, or postponement from one week to the next, while it does occur, is not frequent. 126 The nature of the relationship bewteen certain growers and assem- blers which approximates a regular or fixed arrangement for the exchange of potatoes has been discussed above. A similar, if not somewhat more formal relationship exists between assemblers and their buyers. Usually, the buyer informs the assembler at the time of delivery of the quantity of potatoes which should be brought for the next delivery. Potatoes traded through this type of an arrangement account for 43.2 percent of all assembler sales; 8.3 percent from small assembler-buyer exchanges and the other 34.9 percent from large assembler-buyer exchanges. For the large assembler, exchanges originating out of these arrangements represent 47.3 percent of his total sales. If this figure is compared with the 52 percent of the potatoes which the large assembler receives under a similar arrangement from growers it shows that approximately half of his trade takes place within a highly vertically coordinated market- ing system. Furthermore, if this trade is considered as a low risk operation then it is the large assemblers who monopolize low risk trade. The high risk trade is shared by the large assemblers--accounting for the other half of their transactions--and the small assembler. The relationship that the large assembler has with his buyers, together with selling in larger lots and trading on credit results in his receiving higher prices with less variability, measured by the abso- lute difference between the average high and low prices (Table VI-8). In periods of limited supply, the small assembler can command almost as high a price as the large assembler. During periods of over-supply the small assembler is at a disadvantage, since buyers trade first with their regular suppliers--the large assemblers--while paying a premium for year-round stability. The small assembler who does not have regular 127 Table VI-8. Average High and Low Prices per th and Differences Between Them by Size of Assembly Operation High Low Absolute Size Price Price Difference (colones) (colones) (colones) Small 144.50 53.20 91.30 Large 147.27 64.18 83.04 Source: Assembly level survey for this study. clients is forced to lower his price to be able to sell his potatoes. The option of selling potatoes to retailers while feasible is not prac- tical in that it often involves selling in lots smaller than one bag; additionally the assembler Operates under a time constraint since he has to return to supervise that day's activity at the wash-house. Taking the potatoes back to the wash-house may imply a transport cost and it means he will be faced with selling them again, meanwhile the quality will deteriorate. Furthermore, he will have to refuse to pick up pota- toes from growers with whom he has made prior arrangements. Thus, the option he generally selects is to lower his price to sell all his potatoes. Costs of Operation The assembler upon negotiating the purchase must still pick up the potatoes, wash, bag, and sell them, usually in San Jose. To carry out these activities family help plays an important role in the labor force, especially for the small assembler. Family labor comprises 65 percent of the small assembler's labor force compared with 49 percent of the large assembler's total labor force. The extensive use of family labor raises 128 the question as to how it should be valued in the cost calculation: 1) at the wage rate paid to hired employees, or 2) at a rate reflecting an opportunity cost equal to zero. There is also the question as to what value should be placed on the assembler's labor:‘ 1) as a worker, or 2) as an administrator. Total costs, calculated under the different labor cost alternatives, are presented in Table VI-9. Table VI-9. Cost per th of Potatoes Handled by Small and Large Assem- blers Under Different Labor Cost Alternatives Zero Cost Wage Rate Zero Cost Wage Rate Family Labor Paid to Family Labor Paid Family Size Assembler Paid Family Labor Assembler Paid Assembler Paid Wage Rate and Assembler as Administrator as Administrator (colones) (colones) (colones) (colones) Small 7.35 9.42 8.93 11.05 Large 6.07 6.74 6.71 7.39 Source: Assembly level survey for this study. It was decided to value family labor as being free to the assem- bler. The family members who work with the assembler are generally his children, dividing their time between school and work. It is unlikely that they could obtain alternative part-time employment at a pro-rated wage rate comparable to that paid to hired labor. Thus, their opportunity cost was set at zero for the purpose of calcularing assembler costs.n 11It is recognized that the opportunity cost of family labor pro- bably lies between zero and the wage rate paid to hired labor. The decision as to the correct Opportunity cost, however, would be somewhat arbitrary since there are no clear guidelines for valuing family labor in this case as existed for valuing farm family labor. Since a zero cost family labor favors small assembler cost calculations, it was con- sidered that its use would contribute to highlighting the cost disad- vantage of the SFSS. 129 It was also decided to value the assembler's wage as that of a hired worker. It was considered that the assembler views the residual return as his wage as an administrator; his other activity as a worker is therefore valued at a worker's wage. The per cwt average weekly fixed and variable costs were calcu- lated under the above mentioned labor cost assumptions using October 1974 cost data collected for this study (Tables VI-lO and VI-ll). The cost of the raw material, i.e., the potatoes, were not included nor was Table VI-lO. Variable Costs per th of Potatoes Handled by Small and Large Assemblers Concept (CSTSALS) (ctlgggs) Labora 2.67 1.57 Transportation to wash house 1.88 1.98 to market 1.11 1.11 Sellingb .28 .19 Collectingc .09 .05 Utilities .10 .06 Material .38 .32 TOTAL 6.51 5.28 aLabor used in washing and preparing potatoes. bValue of time spent negotiating sale in market. cValue of time spent collecting for potatoes sold on credit. Source: Assembly level survey for this study. 130 Table VI-ll. Fixed Costs per th Handled by Small and Large Assemblers Concept (GETSALS) (ctlgggs) Building .62 .63 Trough .008 .003 Baskets .18 .14 Fans .02 .01 Scales .01 .008 TOTAL -838 -791 Source: Assembly level survey for this study. a value attributed to potato losses, since both value and quantity changed throughout the month. Transportation costs were calculated using fixed rates by distance per unit transported regardless of whether or not the assembler utilized his own truck. It was pointed out that assemblers, especially the small assemblers, handle other products besides potatoes. The costs reported here do not reflect an attempt to allocate total costs among all products handled. The reasons for this decision relate to the following: 1) potatoes are the most important product handled, with other products handled usually during periods Of short potato supply; and 2) only one assembler was found to be handling other products during the period in which the interviews were conducted. The average cost per cwt handled is ¢l.28 lower for the large assembler. To further examine assembly costs an average cost function was calculated for both large and small assemblers (Table VI-12 and Figure VI-l). Using the same statistical procedure discussed in footnote 6 of Chapter IV, the large and small average cost assembly functions were 131 Table VI-12. Assembly Operation Average Cost Function per Carga of Potatoes Handled by Small and Large Assemblersa Size Ab 8b cb Rb Small 78.49 437.73 .063 .96 (25.1) (38) ( 11) Large 23.03 1947.1 .016 .36 (133) (2292) (.05) aThe functional form used is: v = A + B/X + cx2 where: Y X cost per carga cargas handled bStandard error in parentheses. Source: Assembly level survey for this study. seen to be different at the .05 level of significance. This implies that the two groups of assemblers were operating along separate cost functions. The small assembler handles an average Of 191 cwt per week at a cost of ¢7.35. Even if he were to expand his operation to the point of least cost output as indicated by the average cost function his cost would only fall to ¢6.67--still higher than large assembler costs. Thus, it appears that as long as small assemblers continue functioning along this cost curve, they will not be able to achieve a cost advantage over the large assemblers. Technical efficiengy. Two criteria were used to compare the Operating efficiency of both groups of assemblers. Labor costs for the large and small assemblers were the largest single cost component. To measure the efficiency of labor use, therefore, input-output ratios for labor were calculated. For the small and large assemblers the ratios 132 mp .NF-H> wpnmk .umpccmz mmgmu emu mm>g=u .uzu wmmgm>< Pm>84 x—nemmm< .~-H> mmamcu mm wv an bu m w a) v I» A) A) 1+. v 41. m L. mam—nammmq mag-3.1V .6mfi mgmpnsmmm< PFoEm 119. .ébd aw "mogaom mgzmwm 80863 838 1903 N0103 133 were .444 and .192 respectively, showing thelarge assembler to be more efficient in labor use. The relative efficiency of the large assemblers is further seen when it is noted that the number of workers is approxi- mately equal for the small and large assemblers--4.77 workers to 4.83 workers respectively. The second aspect of the assembly process influencing efficiency and, thereby affecting costs, is the usage of fixed assets. The assem- blers were asked to estimate the number of cargas that they can prepare per eight hour day. This figure was then compared with the actual amount Of potatoes that they prepare. The large assemblers work at 90 percent of estimated daily capacity compared with 87 percent estimated daily capacity for small assemblers. While this difference based on an eight hour working day is small, difference in intensity of use is apparent when the actual working hours and days worked per week are com- pared. The large assemblers operate an average of 8.6 hours a day, 5.4 days a week, for a total of 46.44 hours per week. The small assemblers prepare potatoes an average of 7 hours a day 3.1 days a week, or 21.7 hours of use per week. The large assembler operates very close to full capacity. The small assembler has an excess capacity, which based on a six day work week would easily permit the doubling of his output. This, however, would present other problems, Specifically the acquisition and sale of those additional potatoes. Other costs. Assemblers were asked what they would consider a fair price to pay the farmer, and paying that price, what price they would have to receive in order to meet their Operating costs and to earn a fair profit. It was considered that this would permit further examin- ation of the cost differences between the two groups. The small 134 assembler felt that he needs a price of ¢18.33 per cwt to meet the costs of performing the assembly function. This compares with ¢l3.60 per cwt for the large assembler. The actual costs Of operation reported in this chapter were subtracted from the assemblers' estimated costs. This was equal to ¢10.98 for the small assemblers and ¢7.53 for the large assemblers. Part of this amount would include the losses of potatoes, and returns to assemblers. Since losses of potatoes are approximately equal, it appears that the small assembler needs a greater return to cover costs from Operating in a higher risk environment. Summary Assemblers are the link connecting growers with the rest of the system, thus their ability to efficiently carry out the assembly function directly influences farmer welfare. Large assemblers were seen to be more efficient. They have established regular trading partners, both at the farm and wholesale levels, thereby permitting greater vertical coordination. It is considered that by providing the leadership for the vertical channel the large assemblers: 1) reduce their risks, 2) rou- tinize assembly operations, and 3) are able to more efficiently use fixed and labor resources. The large assemblers, furthermore, operate at lower per unit costs, yet they receive a higher price on selling potatoes in San Jose than did the small assemblers--by being able to offer the wholesaler better trading conditions. The large assemblers' ability to operate at lower costs and command higher prices in the wholesale .market permit them to pay higher farm level prices to growers. Small assemblers were seen to be operating at a cost disadvan- tage compared to large assemblers. The differences in cost structures relates to the organization and scale of the assembly activity. The 135 small assembler relies to a much lesser extent on regular trading part- ners. They are somewhat more traditional and know less about the pota- toe marketing sub-system. Furthermore, entry into the market as a small assembler is relatively easy. These factors make it difficult for small assemblers to establish a more efficient vertically coordinated channel for marketing. As a result, small assemblers face higher costs due to greater risks and uncertainties, yet receive generally lower prices in the San Jose market. In order to reduce some of the risks involved in assembling potatoes, small assemblers have diversified their operations by handling other products and by farming. Furthermore, due to the higher costs, small assemblers pay a lower price to those farmers from whom they purchase potatoes, i.e. the small farmers. CHAPTER VII POTATO WHOLESALING Introduction San Jose is the national distribution center for potatoes, as well 1 There as for most other fruits and vegetables grown in Costa Rica. are two wholesale markets in San Jose, the Borbon Market with its surrounding buildings and streets and the 10th Avenue or San Jose Whole- sale Market. The physical conditions in the two locations are far from ideal. In the San Jose Wholesale Market potato wholesalers rent 8 or 16 square meter fenced-in stalls within a covered rectangular shaped structure. Tarps are used to enclose and to protect the stalls, nevertheless the potatoes remain somewhat exposed to the elements. There are no storage facilities in the market aside from the one to two day supply held for immediate sale. None of the stalls have electrical nor telephone outlets. In the Borbon area, potato wholesalers operate inside dark and damp buildings whose only technical advantage is the protection from rain, sun, and wind. Some wholesalers only rent floor space, either paying a fixed rate per week or a set fee for each sack of potatoes brought into the market. Others rent stalls which have flore- scent lighting and telephone connections. While there are special areas for storage in the Borbon Market, technically they are unsuitable for this purpose. The areas are located in the corners< m=w>oz ngpcoz .F-HHH> mzsmwa memo» :2 22 Num— :2 as" $3 mean 32 82 mean on mm j .. me om mm oo 3 2 ms «:0 8 L: nocopou mm om no 156 .mvgoumc mmmcucsn cmcmw—nzacs .mucmFm wggmwh "mogsom .mfimp pm=m=< - enmp pm=m=< .paxcaz omapzmo asp pa mwuwca ounpoa apxmmz .N-HHH> weaned «sum: #2 53:2. :2 sea: 8 3 3 mm on m». _ 8 3 S m emu coo“ omma acmH Oman ooom cmmm oomN omNN auuuw mo=o_oo coon 157 potato prices. Thus, the larger the ratio, the wider the range of prices around the mean price, implying that the market was characterized by large price fluctuations.7 In the case of the Cartago market, this ratio was equal to 44.4 percent. While there are definite seasonal patterns in price movements, week to week fluctuations show no dominant tendency for prices to move in one direction or another, nor to remain stable. During the course of the year from August l974 to August 1975 there was no period longer than three weeks where price movements were constant in one direction. The weekly instability reflected in the magnitude and directions of price flexibility makes planning difficult. It also means that accurate infor- mation on price fluctuations will result in large gains for growers. Assemblyglevel. Prices paid to assemblers by wholesalers are also characterized by frequent weekly price fluctuations, but these are not as volatile as in the Cartago Market (Figure VIII-3). Using the prices paid by the National Production Council (CNP) for potatoes at the San Jose Wholesale Market, the average 1975 price paid to assemblers was ¢l0l.98 per cwt. Calculating the ratio of the standard deviation (37.06) to the average price, the result was 36.34 percent. The reason that wholesale prices are less volatile when compared with farm prices relates to: l) assemblers provide marketing services whose costs are relatively stable, 2) assemblers may have made short-term inventory adjustments which would dampen price fluctuations, and 3) the size of the assemblers' markups vary inversely with supply conditions. 7David L. Peacock and Hectar Sarmiento, "Price Fluctuations in the Domestic Market for Fresh Produce," USAID Staff Paper, Bogota,Colombia, l974. (Mimeographed.) 1EN3 .mugoumg mmmnuean nmsmwpnsaca .pwucaou cowpuauoca chowpmz "mogsom .mNQF .pmxcaz m_ammpo;z whoa cam 5;» cw mempaeamm< ouapoa 0» came maowca »_xamz .m-HHH> meampa mayo: 8 3 9 mm on 3 8 a 2 m mm. co.~ mn.~ on." mt.“ on." mm.” om." ucaoa Log ,uoco—ou 159 Daily and weekly prices paid to assemblers show no dominant ten- dency to move in one direction nor the other. Between August l974 and August 1975, however, there was one period of sustained increases in price followed, shortly, by a period of sustained decreases in price. Daily prices at the beginning of the week were compared with those at the end of the week for l975. During 34 percent of the weeks prices rose, while during 36 percent prices fell, the other 29 percent of the time prices closed at the same level at which they began the week. Differ- ences between the high and low prices within a given week fluctuated by as much as 26.l percent. This was in September when most small farmers were selling potatoes. Retail level. At the retail level, the average l974 monthly price was ¢l.4l per pound,8 with a standard deviation of .39. Taking the ratio of these two, gives 27.7 percent variation around the average price. This is lower than at the other two levels, as would be expected since at each level in the channel more marketing services are added. Potatoes Compared with Other Crops Using the standard deviation alone as a measure Of market vola- tility, potato prices, compared with those of other fruits and vegetables, are among the most volatile (Table VIII-2). However, when potato prices are compared with other crops grown in the Cartago area, they appear to be, except for beets, relatively more stable. 8This is based on unpublished information gathered by the Direccion General de Estadistica y Censos. .l l - llll‘lllll‘l’ll‘ {Tull 160 Table VIII-2. Standard Deviation of the Wholesale and Retail Price of Ten Fruits and Vegetables in Costa Rica, 1964-1972 Product Standard Deviation Standard Deviation of Wholesale Prices of Retail Prices Onion 0.596 0.493 Lettuce 0.250 0.184 Oranges 0.444 0.378 Potatoes 0.301 0.270 Papaya 0.288 0.270 Pineapple 0.178 0.177 Beets 0.240 0.213 Tomato 0.386 0.342 Yuca 0.185 0.166 Carrots 0.375 0.262 Source: Juan M. Villasuso, Intermediarios y Margenes de Comercialiaz— cion de Productos Agricolas en Costa Rica (San Pedro, Costa Rica: Universidad de Costa Rica,'1976), p. 34. Marketing Margins and Returns Size of Margins The actual size of assembler gross margins varied throughout the period of August 1974 - August 1975 from 04.32 to ¢38.27 per cwt; the mark-up on potatoes varied from 4.1 percent to 58.5 percent (Table VIII-3). The margin at the assembly level during this period appeared to be cal- culated neither by adding a fixed percentage nor a fixed cost to the purchasing price. Rather, the size of the mark-up was negatively 161 Table VIII-3. Cartago Market Price, Prices Received by Assemblers, Gross Margins and Assembler Markup per th, August 1974 - August 1975 Cartago a Prices Received Gross Marku Month Market Price by Assemblersb Margins ( e cegt) (colones) (colones) (colones) p r August 36.37 57.50 21.23 58.5 September 38.81 56.25 19.44 50.1 October 50.03 70.00 19.97 39.9 November 72.24 102.50 30.26 41.9 December 66.67 92.50 25.83 38.7 January 80.56 109.00 28.44 35.3 February 86.46 115.00 28.54 33.0 March 69.74 88.40 18.66 26.8 April 66.75 84.20 17.45 26.1 May 104.38 108.70 4.32 4.1 June 152.80 166.00 13.20 8.6 July 141.67 173.00 31.33 22.1 August 108.73 147.00 38.27 23.9 AVERAGE 82.70 105.39 22.84 31.5 Sources: aTierra Blanca Cooperative, unpublished purchase records. bNational Production Council, unpublished purchase records. correlated with the relative price level (-.77).9 This implies that assemblers varied their margins in response to changing supply condi- tions which had the effect of dampening, somewhat, price fluctuations, but also Of spreading out the returns to their operation over the year. Detailed wholesale and retail price information was not availa- ble for the comparable period of August 1974 - August 1975, therefore, the two levels were grouped for analytical purposes (Table VIII-4). As with assemblers, the gross margin and mark-up varied in size throughout 9A Spearman rank correlation coefficient was used to test the relationship between price and mark-up and was significant at the .01 level. 162 Table VIII-4. Prices Paid to Assemblers,Received by Retailers, Gross Margin and Markup per th, August 1974 - August 1975 Price Paid to Price Received Gross Marku Month Assemblersa by Retailersb Margin ( ercent) (colones) (colones) (colones) p August 57.50 87.20 29.70 51.7% September 56.25 N.A. -- -- October 70.00 96.61 26.61 38.0 November 102.50 116.80 14.30 14.0 December 92.50 121.30 28.80 31.1 January 109.00 148.30 39.30 36.1 February 115.00 146.80 31.80 27.7 March 88.40 123.00 34.60 39.1 April 84.20 120.10 35.90 42.6 May 108.70 133.20 24.50 22.5 June 166.00 191.80 25.80 15.5 July 173.00 206.80 33.80 19.5 August 147.00 196.70 49.70 33.8 AVERAGE 105.39 140.71 31.23 25.8 Sources: aNational Production Council, unpublished purchase records. bDireccion General de Estadistica y Censos, unpublished records. the year. Likewise, the size of the mark-up was negatively correlated with the relative price level (-.72).10 Returns Farm level. Using the price information presented in this chap- ter and in Chapter V the average l974-1975 price paid to small farmers and large farms per cwt was ¢77.01 and ¢78.79 respectively. The cost of production, was ¢68.l6 per cwt for small farmers and ¢57.44 per cwt for large farmers. This represents a return of ¢8.85 or 13 percent on the 1oA Spearman rank correlation coefficient was used to test the relationship, and it was found to be significant at the .02 level. ' .L~”, w‘ 163 small farmers' investment. For the large farmers, the return was equal to ¢21.35 or 37.2 percent on their investment. Assembler level. The average 1974-75 price paid to assemblers was ¢105.39 per cwt. TO calculate the operating costs, data presented in Chapter VI was used. The costs of operation was ¢7.35 per cwt for the small assembler and ¢6.07 per cwt for the large assembler. This resulted in net average return (i.e. less the cost of the potatoes) of ¢21.03 for the small assembler and ¢20.53 for the large assembler. To calculate the rate of return on investment presents a problem as to whether or not to include the value of the potatoes as part of the assemblers' investment. The assemblers appear to Operate as brokers, since they pay the farmer only after the potatoes are sold. Furthermore, to conclude that the assemblers receive the potatoes on credit is not completely accurate. During the courSe Of the research for this study one person who was not an established assembler was trying to purchase potatoes on the Cartago Market. The price he paid in cash was essentially the same as the assemblers eventually paid large growers. Thus, it may be concluded that capital for purchasing potatoes was free to the assemblers. The rates of return, therefore, as presented in Table VIII-5 under the two alternatives: 1) potatoes as free to the assembler; and 2) potato costs included in the assembler's total cost. Wholesale level. Using the assumptions regarding the size of the wholesale mark-up discussed in Chapter VII, it was possible to estimate an average l974-75 wholesale and retail price—-¢124.78 per cwt and ¢l.41 per pound, respectively. Since wholesalers sold both to retailers and to consumers, a weighted price received by wholesalers was calcu- lated for the two market locations--¢131.98 for wholesalers in the Borbon 164 Table VIII-5. Rate of Return to Assemblers Under Different Capital Investment Assumptions for Potato Costs, by Size of Assembly Operation Potatoes Free Potato Costs Included Size to Assembler in Total Costs (percent) (percent) Small 286 24.9 Large 338 24.2 Source: Assembly level survey for this study. Market area and ¢126.04 for those lOOated at the San Jose Wholesale Market. Using the costs presented_in Chapter VII the return was equal to ¢16.44 in the Borbon Market area and ¢13.40 in the San Jose Wholesale Market. Since wholesalers purchased a portion of the potatoes in cash and received the rest on “credit" from the assembler, a weighted average was used to calculate the rate of return on investment for the wholesalers in the two locations. The return on investment was 64.4 percent and 48.2 percent in the Borbon Market area and the San Jose Wholesale Market, respectively. Trends in the Size Of the Margin. It appears that over time 11 demonstrated that retail 12 marketing margins have increased. Villasuso potato margins rose over the period 1964-1972. Green and Alfaro's data for 1958 show an average assembler margin of 12.5 percent. It is 1lJuan M. Villasuso, Intermediarios y Margenes de Comercialiaz- cion de Productos Agricolas en Costa Rica (San Pedro, Costa Rica: Uni- versidad de Costa Rica, 1976), p. 25. 12R. E. L. Green and Gregorio Alfaro, Pattern of Movement and Prices of Potatoes, San Jose Market, November 1958 to October 1959 (San Jose, MAC/STICA, 1960), p. 23. 165 suspected that the increase is due to rising costs rather than a change in the behavior of the middlemen. Between 1958 and 1974, the Consumer Price Index rose from 87.62 to 181.96 (l964=100). While the Consumer Price Index does not say anything specifically about potato marketing costs, it does show that the general price level rose during this same period. There is no reason why the costs of marketing should not have followed that same trend. Summary Prices in the potato production-marketing system have increased over the ten year period from 1964 to 1974. Seasonal fluctuations, which characterize the potato market, result in the lower prices during the period when small farmers are most likely to be on the market. The small farmer's price position is further deteriorated by the fact that assemblers vary the size of their mark-up inversely to the market price, thereby spreading their costs and returns over the entire year. In periods of high prices they barely cover their costs, sometimes operating at a loss. When the supply of potatoes on the market increases causing prices to fall, they widen their mark-up. Thus, the small farmers, who are most likely to be selling during periods of large supply, are in effect, subsidizing the operation of the distribution system for the periods when large farmers are most likely to be on the market. This results in an income transfer from small growers to large growers, thereby further disadvantaging small farm agriculture. In response to wide and uncertain price fluctuations which char- acterized the potato market sub-system, large and small growers were found to adopt different strategies to reduce risks (see Chapters IV and V). Small farmers tend to maintain traditional practices, which in 166 effect, result in most small farmers simultaneously entering and exiting the market causing large price fluctuations. Small farmers also are more likely to plant other crops besides potatoes, yet prices for these products are more volatile than potato prices. Since there is a proba— bility for a higher return for these other crops, however, the small farmer seemingly uses this as a hedge against low potato prices. The large farmers, on the other hand, were found to adopt a stra- tegy of vertical coordination, thereby reducing market uncertainties and increasing average prices received. This also reduced the marketing costs per cwt for the LFSS. I The rate of return on small assembler operations is approximately equal to that of large assembler Operations. By paying a lower price for potatoes to small farmers, the small assembler is able to overcome higher per unit costs. Thus, small farmers are subsidizing assembly level inefficiencies. CHAPTER IX CONCLUSIONS AND RECOMMENDATIONS FOR THE COSTA RICAN POTATO PRODUCTION-MARKETING SYSTEM In Chapter II a set of hypotheses were put forth in order to identify sources of differences between the LFSS and SFSS, as well as to point out where these differences could possibly place the SFSS at a dis- advantage vis a vis the LFSS. In this chapter, these hypotheses will be examined based on the information presented in Part II. From the examin- ation Of the hypotheses, policies and programs will be recommended, which, it is suggested, will improve the position of small farm agricul- ture within the Costa Rican potato production-marketing system. Examination of the Hypotheses This study has attempted to demonstrate that small farmers operate and trade within a sub-system separate from that which characterizes large farm Operations and trade. The differences in the sub-systems were hypothesized to relate to differences in participant resources and perceptions, as we11,as to differences in institutional arrangements governing exchange. Arising from these differences would be a divergent behavior on the part of the participants of the two sub-systems. This, in turn, would result in dissimilar sub-system performances. The major differences between the two sub-systems identified in the study are summarized in Table IX-l. 167 I'rill 168 003F0000 mmw>00 0:0 .mpaasm 0pnmpm mew—0m -mpocz mmucmgmzu :0?“ -muwswxmz “weoga cowum~ -wpmwumnm puzuoga 3003.00 wees L0 mgucos 0 004305 00:00L0 .003>00 gmpnsmmmm 000 umm>cmg 030000 .gmpnswmmm guw3 0000300 um=m0< :0?» 10~wswx02 pmwoga cowum~ -wpmwumgm 0000000 0000500300 0:.. Fpmm :00 0; pcaoe< c030 -0Nwewx02 030030 cowpmu -Pewmgm>vo 4000030 L00>_00 mgucoe N 004305 a 00:00L0 .3000; 00:3 umm>gmg wmmem>m xgmeopmau 050004 anmum cowpwu -wewmam>_a 0030022 xwmumcum covmgm>< xmwm- mpmow Orsocoumu :0w00NwF0F000m- 30w>050m umgzmeom 00:3050m 304 304 000040 a cowum>0ccuu umc3msom umg3wsom 304 304 xpwsmm 002-0003»- :04 304 :00: :03: amCFapaa- 40:3050m 00:3020m ums3oeom 304 cowumpcmwgo 00000;- mwuzppuu< 304 50?: 304 304 030402 >0_P00 :0 mucospmcH- .<.z 0000 .<.z 40000 pamuxmv 0000 000004 0» mm000 ppmsm *0 muwpmwcmpumgmzu comm: m0 comwgmgeou .anH mpnmh 169 ”0002000 000Em 00 2000000 0000000000 00000 0 00 000004002: .00003nm 0000000 0:0 0000000: .2 30000 .0000 .mmum_ .000 .0000; .000000000 00000—0>00 :0 0500mzm 00000000: 0000 :0 000000 00000000 :0 00:050m 0000000000000 o<0\aumo 0:0 00 000000000 00000 :.0m0u 00000 00000 < ”00000m 0_000__aa< 002 u .<.z mm.om0 mm.mo—0 no.00 mm0 .<.z :0Emm0c0mzm 00m 00 .<.z 00000 0:0: :00: :00: mm.PNO 00.000 00.nm0 .¢.z NNN :0Emm0cwmam .<.z Rpm >00mm000z 0oz zc0z 0000050000 0500 00 0000 0000 :00: :00: mo.PNO mm.mo—0 mm.m0 Nor .<.z 0>00000m 00 000000 mom 00 .<.z A0czoe0 00000 00 0000 200 304 304 mm.m0 Fo.mm0 00.000 .<.z omm 0>000F0m 00 000000 .<.z on x00mm000z 300 0000050000 0200 00 0000 0000 :04 304 0000000 002- .030 000 00000 00>00000 00000 0m000> 004003- 5.030V 0c0~c0z 000 0000>u 00pp0m 005000 00 005:0 00pne0mm< 00 0000000000- >000000u 000000 0000003 00: 0- 00002000000 0.030V 000m 0m000>o 00 000m- 0000000000 00020m 0000000- . 00005000m< m0~0m 000000004- 00000E0mm< 00004 000E000 0m004. 0000050mm< 000Em 000200“. :05 E00mxmlnzm 000004002 0000000000 00004 E00mxm10=m 000004002 0000000000 000Em 000000000000000 003:00co0 .0-x0 00000 170 Participants It was hypothesized that differences with respect to the indivi- dual participants would relate t0: 1) resource control; 2) perceptions; 3) modernity; and 4) position. The participants in the Costa Rican potato production-marketing system, however, appear to be a relatively homogenous group. They are concentrated in the same general geographic area and possess the same ethnic and cultural background. Wide variation in land size, which would dicotomize farms along minifundia and latifunda lines, is also absent. Nevertheless, there are definite differences between the participants Of the large farm vs. small farm sub-systems, which, as will be seen, contribute to variance in the performance of the two sub-systems by defining and placing limits on the range and quality of alternatives available to each group. The LFSS participants appear to have more and "better" resources under their control. With respect to the inputs for the production process, the large farmers are able to achieve a superior position by their production of potato seeds. They are able to satisfy their needs with the best quality seeds and/or sell or use remaining seeds as part of a crop sharing arrangement. By using the seeds as part Of a crop sharing arrangement, the large farmer has been able to time his entry into the market to coincide with higher product prices. With respect to other inputs, except for the use of tractors and land area, there is little difference between the two groups Of farmers. It should be pointed out that large farmers are most likely to use trac- tors. Similarly, many Of the large farmers who own tractors and oxen often rent them to other farmers. 171 Assemblers are also differentiated by the control of inputs. Large assemblers are more likely to have electric fans and a larger area for drying potatoes. This has permitted themixihandle a large volume of potatoes. Furthermore, by being able to handle a large flow-through, the fixed costs per unit are significantly reduced. T. W. Schultz has stated that "the acquired capabilities Of farm peOple . . . like capital goods, are produced means of production."] Variation, therefore, in the levels Of human capital are important in differentiating between the two sub-systems. For both farmers and assemblers, the LFSS participants have a higher level of formal education than those of the SFSS.2 But, more important is the difference in the level Of market knowledge. The SFSS participants have a poorer under- standing of the structural variables of the potato marketing system, and their knowledge of current market conditions is limited. Knowledge is acquired, i.e., "skills and related knowledge can be improved and enhanced thorughout life."3 It is suggested here that participants of the LFSS have purposefully undertaken investment activi- ties to improve their level of human capital. The large farmers are present at the Cartago marketplace every Sunday whether or not they have potatoes to sell. In this case, the cost of acquiring this increased human capital was lower for the large farmers since they often live in Cartago. 1Theodore W. Schultz, Transforming Traditional Agriculture (New Haven: Yale University Press, 1964), p. 175. 2Huffman in a study of education on decision-making concludes that those "with more education are able to grasp changes quickly and adjust more quickly and accurately to them." Wallace E. Huffman, "Decision- Making: The Role of Education," American Journal of Agricultural Econo- mics 56 (February 1974): 86. 3 Schultz, p. 175. 172 Differences between the level Of knowledge, in part, indicate that the two groups hold a different perception of the potato production- marketing system. Furthermore, differences in perception relate to the participants' "general orientation towards the basic aspects Of life."4 This orientation or value set has Often been conceptualized in terms of modern versus traditional attitudes. These concepts represnt abstrac- 5 which provide an indication as to one's thinking 6 tions or ideal types and feelings, as well as to ways of doing and organizing. While other socio-economic variables are Often the overriding determinant in parti- cipant behavior, those who tend to hold modern opinions also tend to behave in a manner consistent with these attitudes.7 Comparing the participants of the two sub-systems, it was seen that the SFSS participants tend to be somewhat more traditional than LFSS participants in their attitudes. Assemblers demonstrate, as a group, a more modern set of values. However, the large assemblers appear to hold attitudes more in common with large farmers than with small assemblers. It was not possible to clearly identify differences in role nor in position between the participants of the two sub-systems. Institutional Framework Although farmers and assemblers from both the SFSS and LFSS trade in the same marketplaces, it was hypothesized that: 1) trade would be 4Joseph A. Kahl, The Measurement of Modernism: A Study of Values in Brazil and Mexico (Austin: The University of Texas, 1968), p. 9. 5 Ibid., p. 3. 6Alex Inkeles and David H. Smith, Becoming Modern: Individual Change in Six DevelopingyCountries (Cambrdige: Harvard University Press, 1974), p. 16. 7 Ibid., p. 259. 173 overwhelmingly with other participants Of the same sub-system; and 2) exchange within each sub-system would be characterized by a different institutional framework. The differences in the institutional framework of the two sub-systems were said to relate to: 1) exchange rules; 2) acquisition Of information; 3) risks; 4) conditions of entry; and 5) scale of Operation. Table IX-2 shows the trade between farmers of each sub-system and first buyers. The large farmers are least likely to seek alternative outlets for the production (i.e., direct selling in San Jose). Small Table IX—2. Percentage of Farmers Selling to Alternative First Buyers Large Small San Jose Assemblers Assemblers Wholesaler Total (percent) (percent) (percent) Small Farmers TO 19 60.3 20.7 100 Large Farmers To 80 14.9 5.1 100 Source: Farm level survey and Assembly level survey for this study. farmers sell most of their potatoes to small assemblers, but they also use alternative outlets. Small farmer-large assembler trade is often the result of long standing friendships of small farmers with large assem- blers of lived and worked in the same rural areas. Selling directly in San Jose is considered to be a form of employment for the farmer whose Opportunity costs are temporarily set at zero. Thus, when small farmers trade outside of their sub-system it is not necessarily the result of dissatisfaction resulting from intra-sub-system trade. 174 The arrangement for trade varies between sub-systems. LFSS trade is characterized by an informal set Of agreements between farmers, assemblers, and wholesalers, thereby establishing fixed trading partners. While this is essentially an informal arrangement, it is not uncommon for information and advice to be exchanged for the common benefit of the trading partners. Trade within the SFSS takes place without extensive use of infor- mal arrangements. Small farmers and assemblers, as a result, Operate under conditions of greater uncertainty with respect to assured outlets and sources of supply. The free flow Of market information and advice is absent. This may account, in part, for the inaccurate knowledge Of the market system by SFSS participants. The SFSS is less stable in terms of the composition of its parti- cipants. Between 1963 and 1973, the number of small farmers increased, while the number of the largest farmers remained constant. Likewise, for assemblers entry into the SFSS is relatively easy. The fact that there are frequently new and different growers and assemblers trading in the marketplace makes it difficult to develOp a highly coordinated sub—system based on informal agreements for trade. In the LFSS, on the other hand, the same group of assemblers and growers continually trade with one another, thereby facilitating the establishment of informal arrangements for coordinating trade. The same situation exists at the assembler- wholesaler level. Large assemblers are well known and always visible, encouraging wholesalers to enter into relationships with them for the supply of potatoes. The size of Operation varies between the two sub-systems. Large growers, producing more, also sell in larger size units.- Large assem- blers, likewise, handle more potatoes and in larger lots. lilllv I'll... ill ill-'00.! 175 The difference in the scale Of operation and the condition of entry also relate to other institutional differences in trading arrange- ments. Physical inspection of the potatoes is more prevalent inthe SFSS since neither farmers nor traders have the confidence in one another that exists among LFSS participants. Trade between small assemblers and wholesalers is more likely to be conducted on a cash and carry basis. Partly this is due to the assembler's lack of confidence in the whole- saler, but also it is due to the necessity of paying cash for the shipment of his potatoes to San Jose. These differences in trading arrangements, furthermore, work to limit the amount of cross sub-system trade. The importance Of informal agreements for coordinating sub-system activity should not be underestimated as they represent a movement towards an actively coordinated vertical commodity channel. Similar behavior is found in other parts Of the world. A study of the Michigan potato industry found that "chip processors have long maintained verbal agreements with potato growers or shippers"8 and that they were paid according to the going market price. From this verbal arrangement, Michigan growers and processors are now moving to written contracts. Behavioral Relationships As a result of differences in participants and institutional arrangements, it was hypothesized that differential behavioral patterns would emerge for each sub-system. Differences in participant behavior were said to center around: 1) risk aversion strategies; 2) organization of economic unit and trade activities; and 3) reaction to poor system performance. 8Kelly M. Harrison, Stephen 0. Sparks and M. Fabre, The Michigan Potato Industry: A Market Analysis, Agricultural Economics Report No. 294 (East Lansing: Michigan State University, 1976), p. 16. 176 The factors which discourage the development of informal arrange- ments for trade within the SFSS were identified above. As a result, the SFSS was said to be operating under conditions of higher risks and greater uncertainty. To protect themselves, the SFSS participants have developed a set Of standard Operating procedures which emphasize risk reduction. The small-farmers, for example, undertake more crop produc- tion enterprises than large farmers. Small growers were seen to have less knowledge regarding prices and price movements. The fact that they make their decisions based on custom appears to be a technique designed to protect themselves from price uncertainties. In the face of the uncertain economic conditions which prevailed at the time of this study,for example, the small farmers planned to follow the same production strategy for the 1975-76 crop as for the previous years' crops. Large growers, by way Of contrast, vary the land area dedicated to potatoes according to their perception of potato market conditions. Furthermore, the large growers, more aware of price movements, were seen to follow a strategy which allows them to sell potatoes throughout the year. The SFSS appear less willing to engage in new activities to improve performance. The use of fans by assemblers is a case in point. Direct deliveries to supermarkets represents a new way Of organizing trade which is practiced almost exclusively by the large assembler. Large and small growers show little difference with respect to innovative production related activity. Performance Characteristics Performance, being the stream Of consequences ensuing from parti- cipant behavioral patterns, was, therefore, hypothesized to be different 177 for each sub-system. Differences were said to relate to: 1) cost and returns; 2) production levels; and 3) stability of supply. Furthermore, it was suggested that differences in performance are , in part, the result of the LFSS's ability to lower and shift the cost of externali- ties generated by the productiOn-marketing system. To best evaluate the performance hypotheses, it is necessary to examine the performance of the entire potato production-marketing system as well as that of the two sub-systems. System Performance While the total population, the percentage Of urban dwellers and real per capita income all have grown, per capita potato production has decreased. Certain technical and natural phenomena may, in part, account for the failure of potato production to keep pace with expanding poten- tial demand. The high cost and poor quality of potato seeds is a major production-related bottleneck. The seasonality Of production combined with a lack of storage facilities works against the regular release of potatoes onto the market. Market-related variables also impede the orderly functioning Of the system. Knowledge of price levels and movements is low among all participants. Additionally, there are wide weekly fluctuations in price which force growers to Operate within an uncertain environment. Asseme blers, likewise, face large weekly and daily price fluctuations in wholesale markets. 178 Although prices were rising, costs were also rising at a faster rate than potato prices, which lowered returns to potato production.9 This price policy of assemblers and wholesalers who vary the size of their margins throughout the year--being largest during the months of high production--and an inelastic demand for potatoes, interact to further reduce the returns of potato producers who are on the market during periods Of large supply, i.e., the small farmer. There has been no attempt to change the nature of the demand for potatoes. The wholesalers, except for the practice of varying marketing margins, do not undertake any specific activities to promote the consump- tion of potatoes. The only area where some innovation may be said to have taken place is in a few retail establishments which sell potatoes in pre-packed five-pound polyethelene bags. The inability of the marketing system at the wholesale level to handle large volumes of potatoes limits the ability of farmers and assem- blers to expand production. Furthermore, the nature of wholesale and retail Operations, i.e. large numbers Of merchants each trading in small lots, discourages the introduction of many managerial and techni- cal innovations which could lower the costs of potato marketing. Com- pared with poor performance elsewhere inlhe system, transactions between farmers and assemblers at'the Cartago market result in some efficiencies in the marketing system. .Buyers and sellers are able to visually 9Between 1957-58 and 1974-75 production costs have risen faster than potato prices thereby lowering the rate of return. Expressing the colon difference between costs and price in real terms (l964=100), the colon return on investment has dropped from ¢l6.90 to ¢10.10. R. E. L. Green,An Economic Study_of the Production and Marketing of Potatoes in Costa Rica (San Jose: STICA/AID, 1958); Tierra Blanca Cooperative, Purchase records; Farm level survey for this study. 179 estimate the quantity that is available by the number of growers who have arrived to sell. Information flows freely among both groups in the hour prior to trading. For the assemblers, the Cartago market allows them to purchase potatoes without actually having to go from farm to farm to negotiate transactions. By arranging the quantity and date of pick-up, the assembler is able to organize his operation to maximize the use of his managerial time and equipment. The grower is also able to better plan, knowing the day that he must ready the potatoes for pick-up. Transactions in the Cartago market, however, have resulted in growers assuming most of the short-run risk-bearing function for the entire system. Yet as will be seen, this risk is not evenly shared by all growers. Sub-System Performance The LFSS's extensive use of informal agreements for trade between participants allows for greater vertical coordination, and has permitted the LFSS to reduce some of the risks and Operating costs arising from inefficiencies within the potato production-marketing system. The SFSS, on the other hand, functions under conditions of higher risks and costs. The participants of the SFSS, not having formed similar relationships, have adOpted different strategies to cope with potato production-marketing system inefficiencies. Thhse strategies, while allowing them to continue Operating, have resulted in relative stagnation Of this sub-system. Figure IX-l, which represents a hypothesized demand curve for potatoes based on the discussion in Chapter III, demonstrates the effects of regular arrangements for trade. From A to B, the demand curve is very price elastic. At 8, urban demand is satisfied, and the demand curve turns highly price inelastic until C at which point it becomes 180 Price Quantity Figure IX-l. Hypothesized Demand Curve for Potatoes profitable for truckers to handle potatoes for rural distribution. The amount of potatoes handled under regular arrangements would be given by a point closest to, but to the left of, 8. Thus, those who supply potatoes through regular arrangements face the price elastic portion Of the demand curve. On any given day, the potatoes handled under regular arrangements are received first, leaving the residual demand to be satisfied by the rest of the potatoes on the market. When total supply is greater than 8, regular arrangement trade will result in a price near P, since wholesalers are willing to pay assemblers a premium in periods of large supply to maintain their informal supply relationship during periods of short supply. The rest of the trade will be along B-C or B-D. When total supply is less or equal to B, then all potatoes are traded along A-B. This would explain, in part, the fact that even in periods Of over-supply the LFSS, which monopolizes regular arrangement trade, receives higher prices. It would also account for the small difference in price arising frOm the two sub-systems' trade during periods of scarcity. 181 By not entering into informal agreements to regularize trade the SFSS has placed itself at a comparative disadvantage. Trade along B-C being very price inelastic, results in larger price fluctuations relative , to small changes in supply. Therefore, those who trade along this por- tion of the demand curve not only face lower prices, but also must deal with larger fluctuations in price, under conditions of greater uncer- tainty. Small growers have reacted to these conditions by maintaining Output at a constant level.10 Another area of difference in sub-sector performance relates to the relative bargaining power of large growers compared to the small growers yis a yi§_the other participants in the system. To negotiate from a position Of strength requires that one be the only, or among the few, owners of something that the other party desires strongly, and/or be able to do harm to the other party if he does not honor his commitments. The large growers supply the market throughout the year. The assembler who wishes to be on the market throughout the year must depend on the large growers to assure a steady supply. Thus, large growers are in a position to demand higher prices--partly for the costs Of their services and partly due to their negotiating strength. The small farmer, on the other hand, is not in a position to impose his will on the assembler. On the contrary, by entering the market during periods of peak produc- tion, the small grower has no special power over the assembler. Since small assemblers are on the market throughout the year, they also will deal at times with large growers for the supply of potatoes. TO be able 10When there is no discernible pattern in price fluctuations or the patterns are unknown, one way in which returns may be maximized-- assuming prices are randomly distributed around the mean--is by adopting a strategy which presupposes a mean price level and produce accordingly, i.e. maintain output at a constant level. 182 to pay the higher prices demanded by the large growers while operating at high per unit costs, small assemblers may make up the difference by paying lower prices and making larger discounts to small growers. Thus, the large farmer's relative strength over small assemblers results in an income transfer from small to large growers. At the assembler-wholesaler level stability and mutual necessity have also influenced the nature of transactions so as to favor the LFSS. Wholesalers need a steady and assured supply of potatoes. The small grower who occasionally enters the wholesale market during times of large production is not a reliable source of supply. Small assemblers likewise appear to be unreliable sources of supply. Their numbers are changing and they are not physically in the San Jose Market on a daily basis. Furthermore, they require payment in cash. Large assemblers, on the other hand, are at the San Jose market almost daily offering a steady supply of potatoes on credit. This permits the wholesaler, by entering into a relationship with an assembler, to serve as a guaranteed source of potatoes and to provide credit to his retailer clientele. In return, the wholesaler serves as an assured outlet for the large assembler's potatoes even during periods of over-production. The large assembler by dealing with wholesalers through fixed relationships is able to reduce the time involved in negotiating transactions. This is a very important concern to the assembler who has to return to the wash house to super- vise the collection and preparation of the next shipment of potatoes. By entering into fixed relationships, the LFSS has been able to achieve scale economies. The source of these economies are two-fold. First, various organizational efficiencies are available. Buyers and sellers are able to routinzie parts Of the transaction process: 1) 183 extensive time need not be spent searching for clientele, 2) inspection of sample quantities does not take place, and 3) certain conditions of trade are previously known and accepted by all parties, e.g., credit sales. They are able to better plan their activities, thereby maximiz- ing returns to managerial talents. Risks are also reduced since exchange on acceptable conditions is always available. Furthermore, the exchange of information between the participants at the different verti- cal levels permits LFSS participants to prepare themselves for short-run changes in the potato production-marketing system. Secondly, economies are achieved through the size Of Operation. Knowledge Of assured sales allows the participants to develop larger size operations and thereby reduce fixed costs per unit handled. The size Of each exchange is also larger which further reduces per unit transaction costs. To see the effects of the different cost structures on the two sub-systems, the production and assembly cost functions,]] presented in Chapter IV and Chapter VI, were summed (Figure IX-2).12 The inclu- sion Of marketing costs eliminates the production level advantage Of the SFSS. It should be further noted that at the optimum sub-system levels of production, farm level production costs are approximately HWholesale costs were excluded because there were difficulties comparing the scale of activities. Furthermore, the small size of the sample presented additional methodological problems to determine a sub- sector cost function. 12French and Gillette state that with regard to combining assembly and packing cost curves, "[T]he task now is simply one of addition." Ben C. French and D. G. Gillette, Cost of Assembling and Packing Apples as Related to Scale of Operation, Michigan Agricultural Experiment Station Technical Bulletin 272 (East Lansing: Michigan State Univer- sity, 1959). p. 39. ’1 III 1|; 184 .NP-H> 0000p 001>H 0000» "000000 .mE00mzmlnzm 5000 00004 0:0 F0050 0:0 00 m0000000 00 00000 000 m0>000 0000 00000>< .muxH 003000 wcommu 000 00 00 00 00 0 v 4 .1 .r v .f 4 .r .p 11 000 111111 3041» .r 1» mm0m a: no 1. MN fig 0 nb .88 I. .0 1: no .0 3 nu no nu .00: U .0 185 13 Since the marketing functions have such an important influence equal. in determining the sub-sector cost structure, programs designed to reduce production costs along would result neither in a large relative nor absolute competitive advantage to the small grower, and may, in fact be most beneficial to large growers. Finally, it was seen that differences in performance were related to the LFSS ability to influence the direction of system change in their favor. Until 1975, the only area-wide orgaization of farmers re- presented large grower interests. When the opinion of the potato growers was sought, it was this group which was consulted. The large farmers are the ones in closest contact with policy-makers and best able to take advantage of new programs and opportunities. They are also able to effectively lobby against government programs which they perceive to be harmful to their interests.14 This access to the decision-making structure has allowed them to shape, somewhat, the direction of the system according to their perceived needs, and, to an extent, over-ride the equity criterion in program design. Recommendations This study has indicated that there are both production and mar- keting Opportunities for improving system performance. The marketing 13This is arrived at by comparing the optimum sub-system levels of production shown in Figure IX-3--27 cargas for the SFSS and 75 cargas for the LFSS--with the costs for the respective levels of output as shown in Figure IV-l. Likewise this could be arrived at by substituting the sub- system optimum production figures into the farm level cost function given in Chapter IV. 14In August 1975, when the price of potatoes rose very high, they organized a campaign to prevent the government from importing potatoes. I I :lullni ‘Ill-l 7 ll ll.llll III 11 I“ .. 1|. 1'" 1“ 186 Opportunities, it is considered, must be given equal emphasis, if not priority, if the situation Of small farm agriculture is to improve. The cost structure of the marketing activities reversed the competitive production advantage of the small farmers, while the institutional arrangements for trade induced small farmers to adOpt risk reduction strategies which have tended to slow SFSS growth. Development of Marketing Skills C Knowledge regarding the functioning of the marketing system and price movements was poor among all participants, and relatively poorer among SFSS participants. Public reporting of market information should raise the level participant knowledge, while providing equal access to SFSS participants, at a minimal acquisition cost. Information would be gathered on weekly prices at the Cartago market as well as daily prices at the San Jose Wholesale Market. Other types of information would be gathered at the market places, such as: l) approximate number of buyers and sellers; 2) number and size of transactions; and 3) conditions of potatoes reaching the markets. Estimated area planted and crop fore- casts would also be regularly reported. The availability Of market information alone does not guarantee that system performance will improve. Participants must be made aware of both the availability of the information and its potential uses. The Agricultural Extension Service, or another appropriate agency should work with farmers, especially the smaller farmers, to expand their marketing skills. This would entail using market information to design a production plan which would have the farmer selling his potatoes when expected returns would be highest. Other activities would include programs or seminars with farmers to explore new alternatives for 187 marketing p0tatoes--e.g. forward contracting--as well as techniques for product improvements--e.g. field handling Of potatoes. Similar sets of activities should be undertaken with assemblers and wholesalers. Programs would be designed to expand managerial skills, such as record keeping. New alternatives for marketing potatoes--e.g. contracting, product promotion and vertical integration--would be explored. Furthermore, emphasis would be placed on developing new techniques for processing and handling potatoes. Group Action for Small Farmers The production level advantage of small farmers is lost due to the inability of the SFSS to generate market level economies of scale. In part, this is due to large numbers of small farmers producing and selling small lots Of potatoes. Lower returns to small farmers, in part, are also due to their limited bargaining power. It is suggested there- fore that small farmers be organized into a group or groups for the purpose of coordinating and negotiating the sale of potatoes. This farmer bargaining group (FBG) would represent farmers in negotiations with assemblers. Once an agreement for the sale has been reached, the FBG would be responsible for seeing that its members abide by the conditions Of the agreement, i.e. a given number of potatoes Of a standard quality are to be readied for assembler pick-up on a certain day. Assemblers, for their part, would be willing to enter into regular arrangements for the purchase of potatoes, since trade with the FBG would offer the same administrative economies and security as does trade with large growers. Through increased coordination between small growers and assemblers as well as by providing assemblers with adminis- trative economies, the FBG should be able to achieve higher and more 188 stable prices for its grower members. As the FBG develops, it may consider other activities to strengthen the position Of small growers. It could negotiate directly with large retailers or with the National Production Council. It may consider joint ventures with potato proces- sors. Finally, the FBG could also be expected to effectively represent the interests of small farmers before government agencies, consumers, and others. Storage The potato production-marketing system is characterized by large seasonal fluctuations in price resulting from a marked seasonality of production. Small farmers by generally selling potatoes during periods Of peak supply, would be the ones who would most benefit from a program designed to smooth out the supply of potatoes entering the market. A program to develOp a storage capacity could assure a steady supply of potatoes entering the market throughout the year. Additionally, by establishing a storage capacity within the system, the large weekly fluctuations should be greatly reduced; potatoes could be harvested and stored when the market price begins to fall due to short-run supply increases. This would reduce much Of the risk of weekly price fluctua- tions. Storage activities may be undertaken solely or concurrently by a government organization, a farmer's organization, or by private indivi- duals. It appears unlikely that a government agency would undertake this activity. The National Production Council, the government organi- zation under whose jurisdiction such a program would fall, is unwilling to undertake this type of activity due to the risks inovlved in handling 189 semi-perishable products.15 Although they do not wish to handle potatoes, it is considered that they would resist the estalbishment of a new govern- mental agency to perform essentially the same functions for which they are responsible. Private storage may be either by farmers or by merchants. It is doubtful that merchants would openly engage in storage activities for fear of being accused of speculation. Storage at the farm level would be possible; it is most likely, however, that it would be large farmers who would initiate a storage enterprise as a part of their farm Opera- tions. Large farmers would be best able to meet the high costs and [overcome, somewhat, the cash flow problems associated with beginning a storage enterprise. If small farmers did not directly participate, nevertheless, they would benefit somewhat from higher product prices as large farmers withhold potatoes from the market. The feasibility of a farmer organization storing potatoes was exa- mined by the National Institute for Cooperative Development (INFOCOOP).16 It was calculated that the rate of return would be 11.9 percent, or almost equal to the cost Of short term capital (12 percent). This figure allows for storage of six months with an assumed loss of ten percent of the potatoes handled. The advantage of this type of program is that the acquisition cost of the potatoes are included in the Operating costs. Farmers would be paid at the time they placed their potatoes in storage, which would overcome the capital problems associated with on-farm storage. Additionally, the risk would be shared by the farmers 15Statement of the director of the CNP in a meeting with Cartago potato farmers. 16Kenneth Shwedel and Victorino Elizondo, Estudio de Mercado de la Papa en Costa Rica, y Posibilidad, Utilidad y Viabilidad de la Union .%%gional de CooperativasEHe la Provincia dE'Cartago, (San Jose: INFOCOOP/ D, 197670 PP. 81-100. 190 as a group rather than born by the individual farmer. The major disad- vantage is that non-members will also receive some of the benefits reflected in higher product prices during peak production periods as the farmer organization storage operation removes potatoes from the market. Yet non-members would not share the costs, nor assume any Of the risks. Capital Improvements The final market-related program would be one which considers loans for capital improvements by potato merchants. The major area for investment would be in washing and drying equipment. Better washing and 'drying techniques would allow assemblers to handle a larger volume of potatoes. These potatoes, by being completely dried before being re- bagged, would reduce losses in the rest of the channel and contribute to a longer shelf life of the product. As indicated, there were no adequate storage facilities at either wholesale market. Assuming the market administrators would permit the building of storage facilities, this would help reduce losses from pilferage and spoilage. Finally, capital could be made available for the development and introduction of marketing innovations. The processed potato industry is an example Of an area where a large initial capital investment is necessary. By the development of the processed potato industry, demand for potatoes would become more elastic to the benefit of the entire system, but, as explained above, especially to the small farmer. Potato Production Potato production costs are very high. In part, this is due to the limitations on achieving least cost production levels owing to marketing inefficiencies. Yet, even without taking into consideration 191 the effects of marketing inefficiencies, production costs are high. Presently, the government Of Costa Rica is developing a domestic certified seed industry. Due to the high costs and poor quality of potato seeds now being used, this program is of special importance. However, it will be at least four more years until the industry can be expected to supply demestic needs (based on 1974 estimates). Until that time, seed costs will continue to be high, favoring the large farmers who both produce and sell seeds. If potato demand significantly expands, the new domestic seed industry will not be able to adequately respond with the required amount of seeds, thereby slowing down the development of other programs advocated by this section. It is suggested, therefore, that the government Of Costa Rica permit the importation of potato seeds. The level of importation would rise over the next three years so as not to provoke a sudden increase in production. As the Costa Rican seed industry begins to sell certi— fied seeds, the quantity of imported seeds could be reduced. This program would result in immediate production cost reductions which, combined with the above mentioned marketing programs, should stimulate the potato production marketing system while improving the position of small growers. CHAPTER X IMPLICATIONS FOR POLICY AND ORGANIZATION OF SMALL FARM AGRICULTURE The conclusions of this study were presented in the last chapter in the context of the Costa Rican potato production marketing system. The implications of the conclusions will be considered in this chapter within the general context of small farm agriculture and its possible role in national economic development. Alternative strategies will be recommended to change institutional arrangements identified in this study as hindering the development1 of small farm agriculture. The possible effects on the performance of the SFSS will be discussed. Finally, areas for future research into marketing problems of small farm agriculture will be identified. Small Farm Agriculture The small potato farmers in this study were seen to be able to favorably compete with large farmers with respect to farm production. The actual costs and yields of the two groups are very similar. The results of this study do not differ from other production studies of small farm agriculture. Bachman and Christensen, for example, reviewing several studies on farm size efficiency indicated that small farms were Often more intensely cultivated and appeared to be reasonably 1By development it is meant increasing the welfare of this group of farmers in terms of returns to economic activities. 192 193 efficient.2 Furthermore, when the average cost curves for large and small Costa Rican potato farmers were calculated, the small farmer actually was seen to be in a position to produce over a large range at lower per unit costs. This suggests that the small farm, as a production unit, can contribute to needs of a developing society. By considering the position of the small farmer in a systems framework which includes marketing activities, it would appear that the possible contribution of small farm agriculture to national economic develOpment, under existing conditions, is limited. The costs of mar- keting small farmer production is higher than for the LFSS. These costs are often reflected back to the farmer in the form Of lower product prices and thus lower rates of return on investment. Higher risks in the SFSS--in part, contributing to the higher costs--have induced small farmers to follow strategies which emphasize risk reduction. The conclusions of this study indicate that for the SFSS market- ing activities are an important constraint hindering growth of small farm agriculture. Before marketing costs were considered, small farmers were seen to have the ability to produce potatoes at lower costs. Yet by the inclusion of marketing costs to determine the sub-system Optimum level of production, the farm level output required to achieve the sub-system optimum resulted in total small farmer production costs being approximately equal to total large grower production costs. Furthermore, if other SFSS are similar to Costa Rican potato SFSS, which was said to be near equilibrium, there would be little incentive 2Kenneth L. Bachman and Raymon P. Christensen, "La Economia del Tamano de las Granjas," in .Qgsarrollo Agricola ngrecimiento Economico, ed. H. M. Southworth and B. F. Johnson (Mexico: Union Tipografica Editorial Hispano Americana, 1970), pp. 264-75. 194 to increase production. By expanding output diseconomies of scale would occur, probably, lowering the returns to small farm agriculture. Generalizing from this study, it would appear to indicate that if small farm agriculture were to successfully play a role in national economic develOpment market-oriented programs should be given serious considera- tion. In the last chapter, it was seen that market-oriented programs could be designed which simultaneously improve both system performance and the poSition of small farm agriculture. Likewise, if other SFSS's are similar to the Costa Rican potato case, where the performance of sub-sector marketing activities restricts farm output, then market- oriented programs could increase the size of agricultural surplus avail- able to finance growth in the rest of the economy, while, nevertheless, improving the return to agriculture. Programs such as these would have the effect of incorporating small farm agriculture as an integral part of the national product-marketing system. PolicygImplications: Market Programs for Small Farm Agriculture The argument presented in this study should not be interpreted as one of advocating market reforms as the solution to the problems of small farm agriculture. It is recognized that for any particular case other variables--e.g., land tenure, capital requirements, etc.--may pose more immediate and overwhelming constraints. What is argued, how- ever, is that even if these constraints were removed, development of small farm agriculture would not necessarily follow due to limitations on growth arising from the marketing sector. Marketing programs should, therefore, be considered as part of an overall development program for small farm agriculture. 195 Before formulating specific policies, it is, of course, necessary for government to understand the workings of the particular production- distribution system as it applies to small farm agriculture. Neverthe- less, within the framework of the hypotheses put forth in this study, general policy areas and programs are identified below. They are directed at bringing about changes in the institutional arrangements for trade which would permit and encourage small farm agriculture to adopt new standard operating procedures consistent with a dynamic and vigorous production4marketing system. The program areas identified include: 1) technical assistance, 2) market information, 3) financing infrastruc- tural and capital improvements, and 4) group action. Technical Assistance Programs Of technical assistance,something akin to on-going exten- sion programs, should be develOped to work with small farmers and mer- chants so as to promote better marketing practices and greater coordination. The study of the Costa Rican potato production-marketing system identified the relationship between farmers and merchants as a key variable in explaining sub-system performance. Among the first activities of this type of program, therefore, would be to undertake a diagnostic study Of the particular production marketing system in queston giving special emphasis to the institutional arrangements for trade that exist between growers and merchants. Conditions which impede greater coordination between small farmers and the rest Of the system would be identified. This information would then be used to determine specific activities to undertake. 196 Educational efforts to make small farmers aware of system work- ings is a possible activity to be incorporated into a technical assis- tance program. In this study, it was seen that small farmers were often mistaken in their conception of the structure and conduct of the potato marketing system. It is considered that as long as small farmers' per- ception of the system in which they operate is incorrect and their knowledge of alternatives is limited, it is unreasonable to expect their decisions to result in improved performance. Activities could be designed to acquaint small farmers with different concepts and organizational forms of marketing within the context of the system in which they operate. Other activities in the area of technical assistance would be to help establish institutional rules for trade. This may include, for example, working with farmers and merchants to create a formal set of product grades which would be understood and recognized by all partici- pants. Another activity may be to help develop simple contracts between participants for the supply of agricultural products. Technical assistance programs should also work with merchants to attempt to improve administrative abilities and identify new marketing opportunities and techniques. With respect to the Costa Rican case, for example, it would be possible to work with assemblers to help them make better use of fixed capacity--such as renting out space for washing carrots or beets. Additionally, studies could be initiated to determine the feasibility of alternative techniques for handling products to reduce losses and extend their life in the distribution channel. Efforts should also be made to establish programs with government officials to develOp: 1) their awareness of the workings of the market- ing system; and 2) their abilities to formulate viable alternatives 197 to market related problems. At the upper levels of government, efforts would concentrate on developing systematic policy towards food marketing. At the lower levels of government, emphasis could be placed on: 1) improving the technical aspects of gathering adequate market statistics; and 2) developing technical marketing skills so as to be able to work with farmers and merchants in resolving market related problems. Market Information Throughout this study, it was seen that the SFSS participants were less knowledgeable than the LFSS participants of the market system in which they Operated. Whereas the large farmer, for example, invested in gathering market information through regular attendance at the Car- tago marketplace, the small farmer's knowledge of the market was largely restricted to the period in which he was selling products on the market. Information, additionally, was exchanged among members of the LFSS. The costs of gathering information therefore presents a barrier to small farm agriculture. Additionally, it is suggested that the decision as to which information to gather, i.e., that which would pay the highest return, presents a problem not only to the SFSS but also to the LFSS. Programs designed to gather and disseminate market information to aid in the decision-making process of system par- ticipants should facilitate improved market coordination. The types of information that the farmer may best use to his advantage in terms of higher prices are those that aid in effective decision-making covering areas from price negotiations to long-term planning. They would include: 1) spot prices at regional markets; 2) daily movements in quantities; 3) estimates Of quantities entering the market; and 4) historical data. The first three types Of information 198 are not necessarily new to market reporting, however, the fourth cate- gory merits further discussion. By historical data, it is meant information on long—term trends and movements within the system. This would imply presenting more than I'raw" data. As the information is gathered it could be analyzed and presented in an outlook type format. An example of this would be to give the day's price and relate it to seasonal production trends as well as to the monthly and yearly price movements. Information programs should also be directed toward merchants and consumers. For example, something similar to the USDA's Plentiful Food Program could be established whereby during periods Of large supply consumer demand could be stimulated with spot announcements suggesting ”weekly deals," encouraging the consumption of different products throughout the year, i.e., shift the demand curve. Technical assistance programs for merchants could be combined with information programs. For example, introduction Of new merchandising techniques could promote the sale of certain products as loss leaders during periods of peak production. Information must be presented in a form usable by the client. It is further suggested, therefore, that part of any information program would have to include training programs directed at the SFSS explaining what is being disseminated and how that would be incorporated into the planning process. For example, reporting a price at the market would require that the farmer realize: 1) that this may be an average price and notaiguaranteed government price; 2) that an average price is not necessarily the one he would receive; and 3) that the spread between the market price and the farm gate includes the costs of transportation 199 and handling. Finally, by placing this price in a yearly perspective relating it to movements Of volume and production, decisions may be taken which reflect more accurate information. It is important that this be directed at the SFSS; the participants within the LFSS, as demonstrated in this study, already know how to incorporate this infor- mation into the decision-making calculas. Financigg Infrastructural and Capital Improvements The effects of the cost structure of marketing activities on total system costs and performance in general, and on the SFSS costs and performance in particular, as shown in the Costa Rican case study, indicate the need for programs to improve the efficiency of the marketing sector. By reducing the costs of marketing, small farm agriculture could become competitive with large farm agriculture. Often, however, a particular improvement will require a large capital investment beyond the means of the small0:: .00000» .0< .0:HV =0000 00000 .0000000 00 000:0>000 0F 00 0000 00 00000< 00 0000000: 000 000F0:<= .00:0500 0000 «00:00 00:0 000 0x0>000 —0>0P 000000003 0:0 »_0E0000 .5000 APPENDIX A "0000000 0003002 :00000000000 :000000000 000000 :0000 00000 0:0 00 002 00::000 .F-< 000000 .\.oo_ 00.00500 0000:0(0 0.3 5.0%.... 340 05x3 000.. 2% 214 APPENDIX B THE ACQUISITION OF POTATOES FOR INDUSTRIAL PROCESSING Processors acquire potatoes by means of: 1) purchasing them directly from farmers; 2) buying directly from assemblers at wash-houses; 3) going to one of the San Jose wholesale markets to buy potatoes; and 4) utilizing a fixed arrangement with assemblers to supply them with potatoes. The most important form is through a fixed relationship with an assembler. This accounts for 60 percent of purchased potatoes for industrial processing. It should be noted that those processors who have entered into relationships are the largest potato chip manufacturers and two of the three nonpotato chip processors. The arrangements between these processors and the assemblers provide the processors a steady supply of potatoes throughout the year. This is of special importance since there is no storage of fresh potatoes in the system, and potato processors tend to operate with very low levels of inventory. Among the other arrangements for acquiring potatoes for process- ing, only some potato chip processors located in Cartago purchase directly at assembler washwhouses (19 percent) or from farmers (4.5 percent). The remaining 17 percent are purchased in the San Jose whole- sale markets by smaller chip manufacturers and one nonchip processor. 215 BIBLIOGRAPHY BIBLIOGRAPHY Agency for International Development. 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