Veggie logic

Vegetable prices have spiked even though produce is hardly scarce.

Official statistics have confirmed what housewives knew already, that the price of fresh vegetables shot up over the past year.

Almost three years into European Union membership, when vegetable imports are 15 times more than they used to be in 2003, an increase in the supply of vegetables into the Maltese market has pushed down the prices farmers got for their produce before accession. It hardly came as a surprise that farmers had to improve their product to compete with imported produce, and even settle for a cheaper price in the process. That is as it had to be according to elementary economics. Awkwardly, however, the same trend was not reflected in retail prices, as consumers have been paying more, not less, for their vegetables they buy from trucks, greengrocers and supermarkets.

The Central Bank governor, Michael Bonello, who noted that, though inflation had fallen in November 2006, there had been a sharp increase in food prices, at the end of December signalled a warning that not all is fine.

The upward leap in food prices, in fact, had been twice that of the previous year.

A breakdown of the food index provided by the National Statistics Office, confirmed the governor's concern, revealing how the price of vegetables increased by almost 24 percentage points between November 2005 and November 2006. Sugar also increased drastically, along with potatoes, fresh fruit and oils, unlike other items, such as frozen meat, bread, cheese, eggs and pasta, which remained pretty much the same.

Moving backwards to a year before membership, the data revealed that vegetable prices dropped drastically between 2003 and 2004, down from 172 to 127 percentage points, reflecting the lifting of trade barriers on May 1, 2004. That year, imports of vegetables increased by over 82 per cent over 2003.

A further decrease in prices - albeit slight - occurred between 2004 and 2005. In 2005, the volume of imported vegetables, excluding potatoes, reached 9.7 million kilos, an increase of 92 per cent over the previous year.

As expected, farmers' profit margins were eroded through fierce competition from imports. Initially, higher volumes of vegetables did put down prices for consumers, but the trend was not sustained. How come?

Once there is ample supply on the market, and once any shortage of locally-grown vegetables could be made up for through imports, why would have vegetables become pricier?

An approximate data gathering exercise carried out by The Times shows that consumers pay between one-and-a-half to three times more than what farmers obtain for selling their produce in the Ta' Qali vegetable market (Pitkali).

The exercise entailed listing 10 vegetables sold last Thursday in Ta' Qali - potatoes, tomatoes, aubergines, long marrows, round marrows, pumpkin, onions, carrots, cabbage and cauliflower. After the closure of the market that evening, a price list was drawn up from retailers in Rabat, Birkirkara, Zabbar, Sliema and Valletta. The average price for each item was worked out. Farmers passed on to The Times a list of average prices per kilo obtained by them that morning. The producers' prices were deducted from the selling price.

The results revealed that by the time vegetables moved in and out of the Pitkali market, prices had gone up by one-and-a-half to three times more than what farmers had obtained when selling the same produce in the vegetable market that same morning.

Cabbages, for example, were sold by farmers for 10c a kilo and reached consumers at an average 44c. Round marrows were sold to consumers for about 73c even though farmers only get about 30c per kilo.

Farmers obtained 25c a kilo for their tomatoes, even if tomatoes were going for 57c from retailers. There were significant differences in the selling price of potatoes, long marrows, pumpkin, aubergines, carrots and onions as well.

In the Central Bank governor's words, the increase in the food index in November 2006 suggested that "existing price setting mechanisms were not delivering the outcomes expected in a liberalised market environment".

A highly technical comment, which strongly implies that artificial forces are controlling the market.

According to farmers, it is the system of middlemen (Pitkala) that inflates vegetable prices artificially. Similar to traditional vegetable markets around the world, the Ta' Qali market operates with a number of licensed middlemen who are authorised to buy vegetables in wholesale from farmers and sell them to retailers.

"This archaic system ensures that, as practically everywhere in the world, farmers are always the worst off and it is the middlemen and retailers who yield the greatest profit," an observer very close to the industry said.

Farmers explained that when they sell their vegetables in Ta' Qali, the price for each item is set by auction, and this depends, to a great extent, on the availability of a vegetable at a given time and the demand for it. This means that there is no fixed price that farmers get for their produce.

Aware that middlemen in Ta' Qali "practically throw away" their produce, especially when there is a huge supply of the same vegetable, the farmers insisted that not all the blame should be placed on middlemen because retailers play a big role in inflating prices.

"Retailers bargain by threatening that they will buy imported vegetables if locally-grown vegetables are too expensive, and this is why we often have settle for less. They say 'take it or leave it'."

True to the farmers' claims, the selling prices compiled by The Times show that different retailers sell the same items for different prices. Prices also vary according to the localities where they are sold (see table).

All vegetable prices actually vary by up to 15c across the five localities chosen. In the case of tomatoes, the discrepancy between retailers in different localities was of more than 50c. A kilo of tomatoes cost 45c to 50c in Valletta, Rabat, Birkirkara and Zabbar, and 99c from a supermarket in Sliema.

Farmers resist producers' organisations

That prices of local vegetables are still blocked within the archaic structure of the Ta' Qali market can be explained, to a large extent, by the fact that local producers' organisations (POs) have hardly sprouted yet.

The concept practically bypasses the middlemen and retailers' system and encourages farmers to group together, package, market and sell their products directly to the consumers. In POs, farmers are shareholders and not just suppliers as in the old system. They are likely to get a better price for their produce and even share from the group's profits at the end of the year, according to the amount of vegetables they supply. Consumers would be better off buying from a PO as lower prices would be guaranteed, while farmers would be eligible for EU aid.

There is already a producer group in Gozo and two in Malta, but many Maltese farmers have not yet understood its benefits, says Joseph Farrugia, secretary of the Progressive Farmers Union, who is also involved in the Ta' Qali Producers' Group. Peter Axisa, chief executive officer of the Ta' Qali Producer's Group, said that though the EU and the government are promoting the formation of producers' organisations, farmers are sitting on the fence. "We are getting more farmers here, but it's a slow process," Mr Axisa said.

The Ta' Qali Producers' Group is currently washing, grading and packing potatoes and onions and hopes to market these and other produce directly to the consumer.

"Consumers get a better deal and better products from POs than if they had to buy through the normal channels".

Mr Axisa explained that a PO needs to make the necessary mark-up to cover packing costs. However, it can offer vegetables at more competitive prices because it does away with middlemen and retailers, going directly to the consumer.

Producers coming together effectively would mean that the local vegetable market will no longer be a closed shop.

"If we don't make this work, this time it will be the farmers' fault, and we can no longer blame the middlemen, the hawkers, the government or the EU," Mr Axisa said.

'Artificial' production costs

Though a producers' group would bring down vegetable prices for consumers and improve farmers' income, farmers' livelihoods rely, to a great extent, on government and EU subsidies. It follows that they would suffer greatly if aid had to be stopped.

Economist E.P Delia argues that the viability of the industry would be at stake if, say, farmers start being charged for illegally extracting underground water which, so far, does not come into production costs.

He says in a paper called The Economic Relevance Of Agriculture For Malta's Economy (APS Bank Publication, 2005) that since most farmers extract underground water illegally, and therefore do not pay for it, the "real" cost of water is not factored into the price.

Agriculture is the primary consumer of water in the Maltese islands. Even though official water consumption by agriculture is nil, agriculture and farms accounted for16.7 million cubic metres - 43 per cent - of all water consumption in 2000.

Therefore, Mr Delia claims, "the cost composition on which they are basing their projections for crop viability is distorted. Whatever profits are being made are higher than they ought to be and unit losses are correspondingly lower".

Costs would be even higher if the water had to be replaced and the damage to the water table accounted for.

Mr Delia concludes that unless policy makers encourage farmers to cultivate crops that are profitable according to cost and market price considerations which take into account water consumption and the new EU regulations costs, such as waste management plants, "growers will deem production unprofitable, stop producing and the entire chain of economic activities will not be activated".

With an increasing cost of diesel to run tillers, hefty electricity bills (most farmers use electric pumps to extract underground water), and costlier seeds, fertilisers and pesticides, farmers have seen their profits decrease even further.

According to Mr Delia, Malta faces a crucial question if it is to stop illegal water extraction, reduce high nitrates in soil and introduce certain farming waste regulations: "It's a question of whether we want agriculture or not. Do you think that if the government had to bill farmers for water drawn from boreholes any farmer will continue? That is the joke".

Besides the economic implications that a collapse of the agricultural industry would have, a decline would bring about a social crisis since farmers' way of life and their identity is closely linked to agriculture. It does not take much to predict an environmental disaster for the country as huge tracts of formerly cultivated land would be up for grabs for more building.