Analyzing Marketing Margins and the Direction of Price Flow in the Tomato Value Chain of Limpopo Province, South Africa
Abstract
The Limpopo Province is home to South Africa’s tomato farming giants, some of whom also occupy the position of the largest producers of the commodity in the Southern Hemisphere. Regardless of its importance in the tomato industry of the country, there are few studies analysing the mechanism through which prices of tomatoes are determined and transmitted from the farm gate in Limpopo to the various provincial, local and international markets. This study attempts to fill the knowledge gap on the performance of Limpopo Province’s tomato markets by examining the marketing margins and the direction of price flow amongst the successive tomato marketing levels. By means of the Concurrent Marketing Margin Analysis approach, it w as established that the farmers’ portion of the consumer’s Rand is low. About 85.1% of the consumer’s Rand goes to pay for marketing margins. Granger causality tests show that both the wholesale and retail prices are caused by farm gate prices. The farm le vel is therefore key to tomato price determination in Limpopo Province of South Africa and pertinent policies that improve the commodity’s primary sector may potentially enhance the other sectors in value chain that depend on tomato production.
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Introduction
Agricultural productivity has improved throughout history because of economic progression, innovation, specialization, research and development (Fuglie et al., 2007; Fuglie and Nin -Pratt, 2012; Nin -Pratt, 2013). This has increased the productive capacities of farmers who in time have been able to produce in excess of what is needed for home consumption and subsistence. Such developments augmented the significance and complexity of marketing and have seen the establishment of arenas to facilitate the exchange of marketable surplus between producers and consumers.
In the context of the tomato industry of South Africa, it is highlighted in Department of Agriculture, Forestry and Fisheries (DAFF) (2011) that production of tomato occurs in all the nine provinces of South Africa by both commercial and emerging farmers. However, different provinces produce varied volumes due to environmental disparities amongst other factors. The Limpopo Province with its warmer climate plays the most vital role in the country’s tomato production. According to DAFF (2011) the province contributes about 3 590 ha to the country’s total area planted to tomatoes. Limpopo Tourism and Parks Board (2011), suggests that almost 60% of the country’s tomatoes are produced in Limpopo Province which is responsible for about 45% of the Johannesburg Fresh Produce Market’s annual turnover. However, the Limpopo Province’s tomato producing industry’s concentration is high which in economics sense means that a large share of total production is dominated by a few large producers. Limpopo Tourism and Parks Board (2011), indicates that only one farming company is responsible for about 40% of the province’s 60% contribution to South Africa’s total tomato production.
Even though the majority of tomato is produced in the Limpopo Province, the commodity is consumed in all parts of the country and is also exported thus; there is some degree of spatial separation between production and consumption. Such spatial distribution calls for the need for an efficient and effective marketing system to facilitate the movement of tomatoes from the point of production to the end user. Bringing the agricultural product from the agricultural enterprise to the consumer according to Saccomandi (1998), involves a series of functions and productive activities that interconnect. The process also depends on the current state of technology, the organization of productive activities and the spatial distribution of production and consumption.
Conclusion
An important conclusion drawn from the causal relationships between the farm gate, wholesale and retail prices is that the farm level is key to tomato price determination in Limpopo Province. It therefore means that current and past information on farm gate prices is useful in improving estimations of both wholesale and retail prices it causes. According to Guvheya et al. (1998), information on causality shows the direction of price flow between levels and thus helps in the identification of points of price determination along the marketing chain. In the light of this assertion, it can be concluded that tomato prices in Limpopo Province are determined at the farm level. With the farm level being key to tomato price determination in Limpopo Province of South Africa, pertinent policies that improve the commodity’s primary sector may by the ripple effect, potentially benefit the other sectors in the value chain who are also dependent on tomato production.
This this study has shown the importance of the farm level at deciding the market price for food. Governments in the developing economies such as South Africa are encouraged to intensify small scale farmers support programs so as to reduce industry concentrations as well as encourage fairer competition in the food producing sectors of their respective economies. This will ensure that agricultural produce prices will not be determined by a few major producers. A scenario where only one producer dominates a market potentially leads to situation where all price movements are influenced by this single player while the other farmers are simply price takers regardless of their cost structures.