Too fat in the middle

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Supply chain needs trimming to ensure better deal for producers and consumers

A farmer drives an agri-machine to harvest rice on a paddy field in Ngai Cau Village, outside Hanoi. Rice has to take a very long journey from the field to the consumer, with prices being inflated several times by middlemen.

It might be tough to believe, but it is true. Consumers in Vietnam buy rice from shops at higher than export prices.

To see how it happens, one has to look at the journey rice takes from the field to the consumer.

First, unhusked grains are bought by a nation of traders at VND5,800 per kilogram. The rice, after being transported far away from the field and possibly being resold several times, is supposed to be delivered to milling plants at VND6,900 per kilo. However, to make sure they do not make losses, traders will add an extra profit margin of around 8 percent, pushing prices up to VND7,300 per kilogram.

Le Ngoc Lam, a trader in the Mekong Delta province of Dong Thap, says that's just the beginning of the story.

After milling, the polished rice will be sold to major wholesalers around the country for around VND12,000 per kilo. Then it will be distributed to retailers, once again from higher to lower levels, at up to VND15,000 per kilo.

When local consumers go to a market to buy some rice, a kilogram of their main staple can set them back VND20,000, or nearly one US dollar. That is approximately a four-fold increase from what farmers were paid in the first place.

Le Van Banh, president of the Mekong Delta Rice Research Institute, said the inflation of rice prices through the process has exposed serious weaknesses in Vietnam's goods distribution system.

"Local consumers have been paying even higher than export prices," he said. "Export prices can be VND10,000 per kilogram, but in the domestic market, the same variety can retail at VND15,000."

Banh recalled a rice fever in 2008, in which many people rushed to buy rice on false rumors of a rice shortage. The case shed some light on how the rice market is manipulated by traders, he said.

"But since then, food companies have continued to focus on exporting rice, leaving the local market in the hands of traders at different levels," he said.

A rice exporter who wanted to remain anonymous said the system is flawed, but it has been in place for years, which means traders and dealers have already got a firm hold of the market.

It would be very difficult for a company to launch its own distribution network and compete against this web of middlemen, he said, noting that exporting is thus a more viable option.

Rice is not the only product that has its price rising steadily as it moves towards customers.

Tran Nguyen Nam, deputy director of the domestic market department at the Ministry of Industry and Trade, said the fertilizer market, for instance, is made up of layer after layer of middlemen too.

Products circle around, instead of going straight from the start to the end of the supply chain, and eventually buyers have to accept whatever the accumulated price is, he said.

"A good distribution system will help solve all these instabilities in supply and demand and will help stabilize the market," he said.

Nguyen Thanh Ha, deputy sales manager at Thu Duc Wholesale Market in Ho Chi Minh City, said almost all vegetable products also have to go through four or five stages in distribution, each of which bears various kinds of costs, from taxes to transportation fees and fuel expenses.

That is why even though there is always ample supply, and at times oversupply of agricultural produce at wholesale markets, retail prices that end users have to pay are always high, she said.

Economic difficulties and weak consumption cause downstream prices to go up further because many retailers only store a small amount of goods, but many of their input costs and overheads remain unchanged, Ha said.

Consumers are the ones who hurt the most, bearing all the high costs, she added.

Julien Brun, vice president of the French Chamber of Commerce in Vietnam, said the country's supply chain is small but complicated, with so many suppliers at different levels and millions of intermediary traders. The middlemen dominate the market and make it hard to control prices and quality.

Brun, who co-founded the Vietnam Supply Chain Community, a non-profit industry group, said when the distribution network is too fragmented, there will be losses of goods in the supply chain, of up to 50 percent, and the resultant high prices will be passed on to consumers.

It is also not fair for farmers, who do not receive much from the final prices, he added.

The budgets of some cities are also affected by the extended supply chain.

Since 2002, HCMC has earmarked a large sum of money every year trying to keep prices from being inflated by retailers. The fund, used to provide interest-free loans to suppliers who can sell essential products at 5 to 10 percent lower than market prices, totaled VND45 billion (US$2.17 million) in 2002. It reached VND412 billion in 2011, before being cut down to VND288.6 billion this year.

Hanoi launched a similar scheme in 2010 with a fund of VND400 billion, which has been raised to VND477 billion this year. Even though the so-called price stabilization efforts have received mixed reactions from experts, other cities and provinces in the country are planning to follow suit.

Hoang Trong, lecturer at the Economics University in HCMC, said the money spent on such programs was too much given the limited results. Supermarkets have been given money to stabilize prices, but in fact up to 80 percent of consumers in the country still shop at traditional markets and many are still being ripped off.

More money should have been spent on developing better distribution networks, including small and medium supermarkets for low-income customers. When goods are made more accessible, prices will fall, he said.

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