Does agricultural product wholesale drive up distribution costs? An analysis of the necessary links in distribution

Agricultural product wholesale markets must charge fees, but this does not mean that the profits of agricultural product wholesale markets are higher than the average social profit; on the contrary, agricultural product markets are, to a large extent, livelihood projects operated on thin margins.

In October 2013, the overall Beijing consumer price index rose 3.4% year on year, but the price of fresh vegetables rose 51.3%. Statistical data show that in recent years agricultural product prices have risen year after year, and it has become the norm for the magnitude of change to be far greater than the increase in the CPI. According to data from the Beijing Xinfadi market: from 2011 to 2013, vegetable prices fluctuated greatly, but on a year-on-year basis they basically ran at levels higher than the same period of the previous year. In June 2013, vegetable prices were about 7% higher than in 2011. From 2007 to 2010 was a stage of relatively rapid growth and relatively large increases in vegetable prices. On June 30, 2010, vegetable prices were 23.35% higher than the same period of 2009, 58.46% higher than the same period of 2008, and 64.8% higher than the same period of 2007.

The continuous rise in agricultural product prices has drawn attention to the distribution costs of agricultural products, and there is considerable controversy over the rationality of the distribution links for agricultural products and the impact of agricultural product distribution costs on final prices. Some people believe that eliminating wholesalers and agricultural product brokers and reducing the distribution links for agricultural products can control the rise in agricultural product prices. We hold a different view. We believe that the root cause of high agricultural product distribution costs does not lie in the link of the “wholesale market.” Agricultural product trading markets are necessary as a wholesale link. The existence of agricultural product wholesale markets not only does not drive up distribution costs, but actually reduces them. “The proportion of agricultural product distribution costs in the retail price” is a ratio. The proportion of China's agricultural product distribution costs in the retail price is higher than that of developed countries such as the United States and Japan. The reason lies not only in the numerator, “agricultural product distribution costs,” but even more in the denominator, “agricultural product retail prices.” In terms of the relative position in the price systems of different countries, China's agricultural product prices are far lower than those of developed countries. The production characteristics of agriculture determine that rising agricultural product prices in China are a long-term inevitable trend.

The necessary links in agricultural product distribution

As an intermediate link professionally engaged in commodity distribution, wholesale assumes the function of “large-scale collection and large-scale dispersal,” realizes the function of concentrating large numbers of producers and retailers and quickly completing transactions, reduces the number of social transactions, and saves commodity distribution time.

In theory, the wholesale link is an indispensable part of the agricultural product distribution chain. For a long time, China's household-based agricultural production model has determined that the wholesale distribution link must concentrate scattered products and pass them on to retailers and consumers, connecting the small-scale production of millions of households with the ever-changing large market. If retailers were to purchase directly at the field, because the purchase volume is small and purchasing efficiency is low, packaging costs, transport costs, labor costs and process losses would only be higher than under the distribution method through wholesale markets. Therefore, whether it is a primary wholesale market or a secondary wholesale market, its role in agricultural product distribution is irreplaceable.

In practice, whatever exists has its rationality. The distribution method chosen by market participants must be the most economical, that is, completing the movement from producer to consumer with the greatest speed and the least cost. More than 70% of China's agricultural products pass through the distribution channel of wholesale markets. On the surface, the existence of agricultural product wholesale markets increases distribution links, but in reality, adding one distribution link not only does not increase transaction costs, but instead shortens commodity distribution time and saves distribution costs. After passing through the wholesale link, agricultural product prices do not rise but fall. If wholesale markets are “avoided” and a “small but complete” distribution method is adopted, agricultural product prices will only be higher, not lower.

Although “farmer-supermarket direct supply” saves the distribution costs spent on the wholesale link, it is constrained by China's conditions of a vast territory, a large population and dispersed production. Whether in total scale or in variety, “farmer-supermarket direct supply” is difficult to grow on a large scale in a short time. On the “supermarket” side, in order to achieve economies of scale, most supermarkets have certain scale requirements for farmers or cooperatives. However, on the “farmer” side, each farmer produces a limited variety and a relatively small total volume, making it very difficult to assemble the types and quantities of agricultural products required by supermarkets. In addition, an important link in “farmer-supermarket direct supply” is that professional cooperatives process and package agricultural products, turning them into commodities before pushing them into supermarkets. But fewer than 10% of China's farmers have joined agricultural cooperative organizations, and the role they can play is very limited. Most small and medium-sized supermarkets do not have a complete logistics and distribution system, and their relatively low level of modernization makes it difficult to support timely and effective distribution of agricultural products and to carry out distribution processing of agricultural products, so “farmer-supermarket direct supply” still has relatively high distribution losses. The differences between “farmers” and “supermarkets” in scale and degree of organization mean that direct agricultural product distribution models such as farmer-supermarket direct supply cannot replace wholesale at the current stage, nor will they become the main channel for agricultural product distribution for a considerable time in the future.

“Quasi-public welfare” nature

Agricultural product wholesale markets are public welfare undertakings of the government in many countries. For example, the agricultural product wholesale markets of the United States and Japan are all established with government investment, and fiscal support for agricultural product wholesale markets also includes tax exemptions and subsidies for infrastructure improvements. China's agricultural product wholesale markets do not belong to the government's public welfare undertakings, but are operated by enterprises, and the policy preferences and infrastructure subsidies they enjoy are very limited. In a market economy, the operation of wholesale markets themselves bears a heavy burden. Taking the Beijing Xinfadi market as an example, market operations require paying the wages of more than 1,700 employees, paying various taxes and fees, and covering expenses for water, electricity, and equipment operation and maintenance. These expenditures all come from the entry fees, exit fees and fixed stall fees charged by the market. In order to recover expenditures, agricultural product wholesale markets must charge fees, but this does not mean that the profits of agricultural product wholesale markets are higher than the average social profit; on the contrary, agricultural product markets are, to a large extent, livelihood projects operated on thin margins. The Xinfadi market charges entry fees of no more than 2% of the transaction amount for different types of agricultural products, and for some agricultural products the charging ratio is even lower than 1%.

Every distribution link consumes a certain amount of distribution costs and obtains a certain profit, and wholesale is no exception, but this does not affect the “quasi-public welfare” nature of China's agricultural product wholesale markets. Specifically, agricultural product wholesale markets undertake many public welfare functions.