Produce preparation costs

1. Produce preparation costs • Cleaning, such as removing soil and foreign matter • Trimming, to remove unwanted leaves, stems or roots • Grading, to separate produce into similar sizes and quality - time cost - higher costs can be expected to result in higher returns

2. Packaging costs • It provides a convenient way of handling and transporting the produce • It provides protection for the produce • It can be used to divide the produce into convenient units for retail sale - different functionaries may use different type of packaging

3. example • Assume that oranges are packed 20 kg at a time in wooden boxes which, with occasional repairs, can be used for 10 trips. A box costs Rs. 10, repairs and cleaning during its life costs Rs. 2 and each time the box is transported back empty to the producing area costs Rs. 1. • What will be the packaging cost per kg of orange?

4. Packaging cost = [(10+2)/10]+1 = Rs. 2.20 per box = Rs. 2.20/20 = Rs. 0.11 per kg

5. Handling costs • Farmer or labourer loads produce on to cart • Labourers unloads produce at assembly market and it is weighed • Wholesaler or his employees repackages the produce in wholesaler’s containers • Produce is carried to and loaded on wholesaler’s truck • Produce is unloaded at wholesale market and weighed • Produce is repacked in retailer’s containers • Produce is unloaded at retailer’s store

6. Transport costs • Assume that there are 40 meter cube of space available in the truck to be used for transporting tomatoes and that it costs Rs. 500 to hire the truck. A container of 0.2 meter cube holds 8 kg of tomatoes. • What will be the transport cost per kg of tomato?

7. No. of containers = 40/0.2 = 200 • Transport cost = Rs. 500/200 = Rs. 2.50 per container = Rs. 2.50/8 = Rs. 0.31 per Kg

8. Product losses - quantity • Assume that, 10 percent loss occurs in marketing of tomatoes to the trader. The trader buys tomatoes from the farmer at Rs. 5 per kg and marketing costs are Rs. 2 per kg for the tomatoes originally purchased. The selling price of tomatoes is Rs. 8 per kg. • What will be the costs, revenue and margin of trader per kg of tomato?

9. Produce cost = Rs. 5 per kg • Marketing cost = Rs. 2 per kg Total cost to trader = Rs. 7 per kg • Sale revenue = Rs. 8 x 0.9 kg = Rs. 7.20 per kg • Margin of trader = Rs. 0.20 per kg

10. Product losses - quality • Assume an example involving a consignment of 100 kg of tomatoes as follows: - 50 kg sold at Rs 2.00 - 20 kg sold at Rs. 1.40 - 20 kg sold at Rs. 1.00 - 5 kg sold at Rs. 0.40 - 5 kg can not be sold due to very poor quality • Calculate the average selling price of tomato?

11. Revenue 50 x Rs. 2.00 = Rs. 100 20 x Rs. 1.40 = Rs. 28 20 x Rs. 1.00 = Rs. 20 5 x Rs. 0.40 = Rs. 2 • Av. Selling price = 150/100 = Rs. 1.50 per kg

12. Storage costs • Assume that a warehouse is hired for 120 days of the year at a total cost of Rs. 60000 for storing 250 bags of potatoes, each containing 100 kg of potatoes. • The present market price of potato is Rs. 5 per kg and the bank interest rate is 10 percent per year. • Calculate the cost of storage?

13. Storage cost = 60000/250 = Rs. 240 per bag = Rs. 240/100 = Rs. 2.40 per kg • Opportunity cost of money per kg = Rs. 0.17 • Total storage cost = 2.40+0.17 = 2.57 per kg

14. Market Margin • Price spread/ Market margin: • Price paid by consumer – price received by the producer - Marketing cost - Profits of various market functionaries • Producer’s Price: • PP = price received by farmer – marketing cost incurred by farmer • Producer’s Share in Consumer’s Rupee (PC): • (PP/PC)*100

15. Marketing Margin of a Middleman: • MMM = sale price - purchase price - cost incurred by middleman • Marketing Cost: • MC = Marketing cost incurred by farmer + Marketing cost of all middlemen

16. Market efficiency Particulars A B C Consumer price 1000 1000 1000 Marketing costs 300 500 300 Margin of intermediaries 200 100 400 Price received by farmers 500 400 300 Value addition 500 600 700 Market efficiency