Research Reports
A Study on Ways to Incorporate Local Traders of Agricultural Produce and Promote Participation in Contract Cultivation
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AuthorJeon, Changgon
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Publication Date2011.04.01
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Original
The purpose of this study is to find out economic functions of agricultural produce traders in production areas and analyze advantages and disadvantages of the forward contract commonly known as 'batteggi' for lump-sum buying and selling of agricultural produce on a future date. This study also suggests various ways of incorporating the traders into an organization and improving the trading method based on surveys of farmers and the traders.
Agricultural produce traders, along with producer organizations, are a key player in the supply of agricultural produce. They collect and ship agricultural produce on behalf of small farmers, handling as much as 70-90% of the total transaction volume of major field vegetables. According to a survey by the national association of agricultural produce traders and the data on the traders who are registered with retail markets, it is estimated that there are about 5,000 to 5,500 agricultural produce traders in the country, and the market value of fruit and vegetables they have traded in 2009 is estimated at more than 3.7 trillion won.
There are various economic functions of a forward contract. These include price hedging, future price setting, supply and production control, price risk management for consumers, provision of opportunities to gain speculative profits, playing the role of a supply channel, making the shipment system efficient, increase in social welfare, mitigation of price volatility, stabilization of income, provision of private finance, credit enhancement, elimination of labor shortage in farms, and playing the role of a future contract. But there are also problems with the forward contract. Since the forward contract is a non-standardized contract, it distorts the market and discourages Nonghyup's contract cultivation. Also, it encourages speculation by farmers and lowers the credibility of government policies.
Incorporation of local agricultural produce traders can take various forms, such as a corporation co-invested by the current trader association and related businesses, a corporation invested by large traders, a corporation co-founded with Nonghyup, a corporation jointly invested by producers and traders, and a corporation co-invested with a food company. There could be various ways of promoting the incorporation. These include switching the beneficiary of the current logistical support from individual traders to corporations, provision of the logistical support fund to local distribution corporations by making them eligible to receive financial support through the projects aimed at stimulating local logistics and stabilizing the supply of agricultural produce, provision of various types of logistical support to distribution corporations, and promotion of checkoff organizations and commodity-based associations.
Also, some improvements may be considered with respect to the forward contract. For example, breaching the contract may be banned by law and the downpayment may be eliminated by readjusting the penalty for breaching the contract to a realistic level. As for prerequisites to improving the forward contract, the following measures can be considered: standardization of the contract in a written format, disclosure of all information related to forward transactions, construction of a dispute settlement system for agricultural forward contracts, evaluation and provision of credit rating of contract parties, and standardization of the contract.
Researchers: Jeon Chang-Gon, Choi Byung-Ok, Kim Dong-Hoon
E-mail address: cgjeon@krei.re.kr
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