There’s a huge difference between the price Nepal’s smallholder and tenant farmers sell their vegetables at and the price that consumers pay for produce. No matter how high the vegetable prices get, Nepal’s farmers will not see a concomitant increase in their profit margins. It’s the rest of the players in the supply chain that links farms to retail outlets who actually benefit from such price increases. Below, we explain how the price markups are determined at the various nodal points in the supply chain, and who pockets the markups. Ultimately, it’s the consumers who pay for all the markups. And owing to the existing farm-to-consumer supply mechanisms, Nepal’s farmers are essentially cut out of the profit loop once their vegetables leave their farms.
The lopsided farmer-middleman relationship
The sale cycle begins with the farmers waiting with their vegetables for the middlemen to show up to buy their commodity. From here on, it’s the middlemen and wholesalers who run the show–both regarding supply logistics and in determining the vegetables’ market price. In the negotiation between the farmer and the middleman, the middleman has the leverage owing to several key factors, as explained below.
The farmers cannot play off one middleman against another. In most cases, the farmers sell one type of vegetable, say potatoes, to one middleman. The farmer is forced to play by the middlemen’s rules and sell his potatoes at the price the middleman has set.
Essentially, the farmer’s market is the middleman he usually does business with. Because becoming a middleman requires quite a bit of capital and connections, not many people can afford to become middlemen. That means for any given area, there are only a few middlemen that the farmers deal with, and most farmers continue to sell their vegetables to the middleman who regularly buys from them: thus, the farmer is obligated to agree to the price the middleman offers.
Various cooperatives have been set up across Nepal to collect vegetables in bulk and protect farmer interests, but in many areas, the middlemen still remain more powerful than the cooperatives and continue to call the shots.
Most smallholder and tenant farmers run the risk of their vegetables rotting for lack of storage facilities. Thus they would like to push their produce out the gate at the earliest. The middlemen know this, and exploit this farmer vulnerability to their advantage when negotiating farmgate vegetable prices.
For certain vegetables–such as onions and potatoes–the Nepali farmer also has to compete with the vegetables coming in from India. Many Indian agro companies benefit from economies of scale and from the subsidies for agriculture inputs their government provides them; a similar benefit is not provided to smallholder and tenant farmers in Nepal. India’s middlemen can thus sell their vegetables at very competitive rates to Nepal’s middlemen. Further, because of the large quantities of chemicals Indian sellers use, their vegetables have a longer shelf life than Nepali vegetables.
All these factors converge to weaken the Nepali farmers’ negotiating power with the middlemen.The middlemen fully understand the situation and take full advantage of it. Owing to these market forces and their perennial dependence on middleman capitalism, most Nepali smallholder and tenant farmers make just enough to get by. Many cannot rely on farming to get out of the poverty trap.
At the wholesale market
The next major markup on vegetables occurs at wholesale markets such as the one at Kalimati. Here, the role of the middlemen switches from that of buyer to seller. And thus begins the next phase of cartel games—between the middlemen and the wholesalers.
After having collected the vegetables in bulk, the middlemen ferry them to the wholesale markets. In most cases, the middlemen don’t double as wholesalers, and vice versa. One can only become a middleman if one has enough resources—that is, enough capital to either buy or rent trucks, and the right connections to ensure smooth operations along the supply chain. And one can only become a wholesaler if one has the capital to buy vegetables in bulk and the connections to ensure a seat at the wholesale markets.
At Kalimati, even before the trading of vegetables starts between the wholesalers and the middlemen, the middlemen will have, among themselves, agreed upon their price-floor (that is, the minimum rate they will sell their vegetables at). But at the wholesale market, the wholesalers have the upper hand over the middlemen because here it’s the middlemen (as was the case with the farmers earlier) who need to offload their vegetables to buyers as soon as possible. At this node in the supply chain, the same challenge–of a seller’s not wanting to be saddled with rotting vegetables–becomes a major determinant.
The transactions that occur between the middlemen and wholesalers are marked by a frenzy of trading rituals reminiscent of how brokers operate on a commodity-trading floor: over mobile phones, the middlemen’s agents constantly update their middlemen on the offers and counter-offers being made by the wholesalers, and having read the surges and dips in the bidding game, they make their bids accordingly. The middlemen’s agents at Kalimati already know the lowest price the cartel of middlemen have agreed upon, and they will try to push the price up, as high as possible, above that agreed-upon price point. The wholesalers, on the other hand, will try to drive down their procurement prices. For most Nepali agents, their biggest nemesis is the agent representing the middlemen selling Indian vegetables (these middlemen can work with cut-throat rates because, as mentioned earlier, they’ve paid less for their vegetables and also because their chemical-laden vegetables have a longer shelf life). And it’s usually only the Nepali middlemen who deal in green vegetables that don’t need to worry about the India factor. But no mechanisms kick in at this juncture to regulate either the rates that the vegetables are bought at by the wholesalers or the prices they quote to the retailers. Thus even if the wholesalers buy vegetables at a rather low price point, the cartel of wholesalers can jack up their prices–which the retailers will accede to because the retailers have zero clout.
At the retail end
The vegetable retailers will also add their markup before the consumer buys their vegetables. And their selling price–which varies from locality to locality and is further informed by the retail competition at the neighbourhood level–is what the end-buyers have to negotiate.
The perennial problem of the bloated middle
Most days of the year, the middlemen and wholesalers make their profits by manipulating the supply-chain mechanism outlined above. The go-to response provided by these traders when asked about increases in vegetable prices is that they are but bit-players in a market in which the commodity prices are determined purely by the laws of supply and demand. What they leave out in that claim is that they are the ones who tweak the supply mechanisms to benefit themselves. Indeed, during times of high demand (such as around festival seasons), they are known to create artificial scarcity in the markets and sell off their vegetables to retailers at exorbitant rates.
*For this explainer, we talked to farmers, middlemen, wholesalers, and other stakeholders in the vegetable sector.