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Are Trade Credits a Gain or a Drain? Power in the Sale of Feed to Pangasius and Tilapia Farmers in Bangladesh

Imranul Islam
Department of Food and Resource Economics, University of Copenhagen, Copenhagen,Denmark

Max Nielsen
Department of Food and Resource Economics, University of Copenhagen, Copenhagen, Denmark

Birgit Schulze Ehlers
Division of Food Security and Rural Development, University of Gottingen, Gottingen, Germany

Badiuz Zaman
Department of Economics and Sociology, Patuakhali Science and Technology University, Dumki, Bangladesh

Ida Theilade
Department of Food and Resource Economics, University of Copenhagen, Copenhagen, Denmark

Abstract/ Executive Summary:

Trade credits provide financing to buyers who might not, otherwise, be able to operate a business. However, sellers may use trade credits to exploit market power and this introduces a market failure that reduces efficiency and social welfare when compared to a competitive market. The objective of this study is to investigate the costs of trade credits for fish feed to fish farmers in Bangladesh and shed light on the power relation as perceived by the farmers and feed sellers. The sources of power are determined by factor analysis. A one-way analysis of variance is used to identify the most powerful party. The results indicate that trade credits were more expensive than cash payments and even bank loans for farmers. The excess costs of trade credits indicate that feed sellers exploit their power and the identification of feed sellers as the powerful party supports this indication. Trade credits, therefore, provide gains in financing fish production that may not otherwise take place, but their costs decrease efficiency. Policymakers can increase efficiency by implementing corrective measures such as ceilings on the costs of trade credits; however, the remuneration of risk must be allowed for trade credits to prevail.

Keywords: Trade credit; Power; Aquaculture; Fish feed; Bangladesh

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End Date:

Program Area: Socio-economic and Policy

Commodity: Pangus, Tilapia

Objectives:

Trade credits provide wealth by ensuring production, but may also induce inefficient allocation of resources through abusing market power. Therefore, improved knowledge of trade credits can inform farmers and policy-makers about the pros and cons of the system with trade credits as well as provide information with respect to policies that may improve the system.

Methodology:

The cost of trade credits was identified by considering the price of the fish feed for a cash purchase, the price for a trade credit purchase, the discount period and the duration of the trade credit contract. The cost was calculated using the method presented by Ng, Smith, and Smith. The theoretical foundation for studying power was supply and value chain analysis. Power relationships among transaction parties are an important aspect in analyzing global value chains (Gereffi, Humphrey, &Sturgeon,2005; Gibbon, Bair, & Ponte, 2008; Kaplinsky & Morris, 2000; Sturgeon, 2001). Gereffi and Fernandez (2011) studied value chain activities from inter-firm networks to those on a global scale, while Schmitz (1999) showed how global value chains were coordinated and controlled by economic governance dictated by the powerful party. Cuevas, Julkunen, and Gabrielson (2015) further found that the powerful party develops a framework for ruling a value chain that included culture, value, act, process,inter-organizational relationship and governance. The scope of this paper, however, was limited to measuring the power relationships between two nodes of the value chain: fish farmers and feed sellers. Power in the buyer-seller relationship can be a measure of how much one party can influence the other. The resource dependence theory of Emerson (1962) claimed that every organization depends on others for obtaining the required resources. The more independent a party is, the more powerful it is. Resource dependency is the key to power according to this theory, and it does not consider other sources or origins of power. Based on resource dependence theory, the power regimes methodology describes the skewed nature of power relations between the buyer and seller in a power matrix (Cox,1999,2004; Cox, Watson, Lonsdale, & Sanderson, 2004). The power matrix identified four basic power positions: dominant buyers, dominant suppliers, interdependent actors, and independent actors. This method is broadly applied in supply chain analysis. The power matrix included the power relationship that originates in resource dependency. The theory did not, however, explore reasons for resource dependency, nor did it consider other sources of power. Meehan and Wright (2012), in their analysis, introduce three sources of power in the buyer-seller context: individual, organizational and relational. This conceptual framework was used in this paper to measure the power relationship between farmers and feed sellers.

Source of Information: AQUACULTURE ECONOMICS & MANAGEMENT

Article Link (Online Journal): https://doi.org/10.1080/13657305.2020.1729896

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Achievement/Findings:

The trade-credit contracts allow feed sellers to maintain an authoritative position and develop an asymmetric governance structure in two nodes of the value chain. The powerful feed sellers influence small and medium-sized farmers' management decisions, restricting their buying options from alternative sources and leading to higher costs. Moreover, feed sellers can potentially interfere in decisions, for example, on harvesting time or even fish price, and governs the relationship by making and implementing rules. The analysis further showed that the extra costs increased the overall production costs, and reduced the competitiveness of farmers.

The results of the study should encourage policymakers to investigate the possibility to design better financing options for small and medium-sized farmers to relieve them of the extra costs of using trade credits. However, until a better financing solution is introduced, policymakers must balance the rules to avoid exploitation while maintaining trade credits as an option for farmers without financial capability to be able to continue production. Farmers may be advised to develop teams or cooperatives that share risk and acquire more bargaining power when using trade credits.

Knowledge Management: Journal