Five Tonnes of Tomatoes and Three Buyers
Mrs Banda will harvest 5,000 kg of tomato over 10 days. The local market pays $0.30/kg but absorbs only about 1,500 kg per day, and the price collapses to $0.15/kg after day four. A trader offers $0.30/kg for 3,000 kg delivered on day one, take it or leave it. A processor offers a contract at $0.18/kg for any quantity, collected at the farm gate, with payment 30 days later. Harvest and packing cost $0.05/kg. Transport to the trader or local market costs $0.04/kg marketed. A used evaporative cooler is available for $600, expected to last five seasons, with running costs of about $30 per season; it holds 2,000 kg and would cut losses from about 30% to 10%, allowing sale at an expected $0.55/kg later, though that price is not guaranteed. Mrs Banda has no savings and would need a loan for the cooler.
1. Calculate the net return for three options: all to the processor; 3,000 kg to the trader plus the rest to the processor; and 3,000 kg to the trader plus 2,000 kg through the cooler. Show your working.
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Common cost: harvest and packing 5,000 × $0.05 = $250.
Option 1 - all to the processor: 5,000 × $0.18 = $900. No transport, farm-gate collection. Net = 900 − 250 = $650.
Option 2 - trader plus processor: Trader: 3,000 × $0.30 = $900; transport 3,000 × $0.04 = $120. Processor: 2,000 × $0.18 = $360. Net = 900 + 360 − 250 − 120 = $890.
Option 3 - trader plus cooler: Trader as above: $900 − $120 transport. Cooler: 2,000 kg with 10% loss = 1,800 kg × $0.55 = $990. Cooler costs: running $30, depreciation $600 ÷ 5 = $120, transport 1,800 × $0.04 = $72. Net = 900 + 990 − 250 − 120 − 30 − 120 − 72 = $1,298.
Option 3 looks best by $408 over Option 2, but that depends entirely on achieving $0.55/kg.
2. Assess the risk in Option 3 and identify the price at which it stops being better than Option 2.
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Break-even price: Option 3's fixed and variable costs apart from the cooler price total 900 − 250 − 120 − 30 − 120 − 72 = $308. To match Option 2's $890, the 1,800 kg must earn 890 − 308 = $582, so the required price is 582 ÷ 1,800 = $0.323/kg. Above about $0.32/kg the cooler wins; below it, the cooler loses money.
Risks:
- The $0.55 price is an expectation, not a contract. If many farmers store at once, the later market may be flooded.
- 1,800 kg is a large volume for a small local market to absorb quickly; the crop still has a shelf life after storage.
- The cooler must be run correctly; power cuts or poor management would raise losses above 10%.
- A loan must be serviced before any income arrives, and payment from the trader is immediate while cooler sales are later.
Judgement: the cooler is attractive but speculative. A safer version is to sell 3,000 kg to the trader for guaranteed cash, put only part of the remainder through the cooler, and send the rest to the processor. That protects cash flow while testing the later market.
3. What records should Mrs Banda keep this season, and what should she negotiate before signing the processor contract?
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Records:
- Harvest date, quantity harvested and quantity by grade.
- Quantity and price for every sale, by channel, and the transport cost per sale.
- Spoilage and unsold quantities, so losses are measured rather than guessed.
- Cooler running hours, power cost and any breakdowns.
- Labour and packing costs per kilogram.
- Loan repayments and the timing of cash inflows versus outflows.
Contract points to negotiate:
- Payment terms. Thirty days is long for a farmer with no savings; ask for part payment on delivery or a shorter period.
- Price and quality standards. Clarify the price per kilogram, whether it is fixed or linked to grade, and who bears rejected fruit.
- Volume commitment. A minimum quantity removes some price risk; a maximum protects against having nowhere to send surplus.
- Collection timing. Late collection in hot weather causes loss; specify a collection window and who is responsible after collection.
- Penalties and dispute process. Know the deductions before delivery.
With these records she can compare channels next season using her own figures rather than the adviser's estimates.