By K. C. Soares, ContributorTHE SURVIVAL of a small business does not just rest with production. The small businessman must get reasonable returns on his investment.
Too often after labouring for days, weeks and in some cases years, the returns can barely cover the cost of production. The goods produced are usually bought by a "middleman" who in turn sells to the consumer and in a short time makes substantially more than the producers.
This scenario is even more pronounced in agricultural production. Here, a farmer may toil with his crop for up to four years without getting any returns. He has to overcome the vagaries of the weather, the inconsistent availability of labour, the cunning plots of the praedial larcenist and the devastation caused by pests and diseases.
On conquering these problems, the farmer is now ready to sell his produce. The farm is visited by a middleman who buys all the produce at a price that reflects a nominal return on the farmer's investment. This middleman re-sells the produce and within a few days makes a fantastic profit.
Let us look at a specific case. Take high mountain coffee for instance. The farmer has the problem of planting the coffee (frequently from borrowed funds), then has to tend the crop for 3 - 4 years before any returns can be achieved.
During this time, he has to fight with weeds, pests, diseases and the weather. On the maturing of the crop, he has to repel the advances of the praedial larcenist. On triumphing over all the adversities, he sells his coffee to a middleman at the rate of $1,950 per box. After paying all his expenses, the farmer makes a net profit of approximately $200 per box.
It costs the middleman approximately US $1.50 or JA $73.50 to process one pound of coffee. One pound of coffee is sold for US $16.00 or J$784 with 10 pounds fetching US $160 or $7,840. One box of coffee berries is processed to give 10 pounds of refined coffee The cost of processing 10 pounds is US $15.00 or JA $735. The net profit to the middleman is $7,840 less $1,950 and $735, which is $5,155, compared to the $200 profit made by the farmer.
So from one box of coffee the farmer makes $200 and the middleman makes $5,155. This of course cannot be fair as it is the farmer who faces all the problems.
To ensure reasonable returns on his investment the small businessman can adopt certain measures. Foremost among these is that he should make his business vertically integrated. This means he should produce, process (if necessary) and distribute to the consumer. This effectively cuts out the middleman. The extent of vertical integration will vary with the type of business.
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For instance, a cabinetmaker who sells to a large department store simply would have to acquire his own customers, say by way of advertising, and sell directly to them.
A coffee farmer would first have to roast his coffee beans, attractively package the beans and then distribute directly to the consumer. Advertising is necessary to create public awareness.
In the case of the farmer, additional capital investment may be required for venture integration. Farmers who cannot afford to vertically integrate their businesses should at least enter directly into contractual agreements with agro-processors of their individual products. The products should not be sold to middlemen.
Consider the case of a coffee farmer. He will be much better off if he buys a roasting machine, roasts his coffee, packages the final product and distributes it to wholesalers and retailers.
If he cannot afford to purchase a machine (due to lack of personal resources or funding) then he should enter into a contractual arrangement with a processor.
The farmer should not take any price offered but should insist on a price that reflects a reasonable return on his investment. If this is not forthcoming then he should withhold his coffee. This should be a collective effort.
One may argue that coffee is a perishable item and that farmers at some point will have to sell. Yes, coffee is perishable but the farmers do not have to sell if the price is not right. If the farmer is put to the test then he should be prepared to dump his coffee.
The processor has much more to lose. This act of withholding may initially create hardships for the farmers, or any other small businessman but in the long run they will be better off. Sacrifices will have to be made for the small businessman to progress.
K. C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com.
