Monday, September 3, 2012

"Service charges" to Pass on Food Safety Costs

A fish company in Shanghai has introduced a "service charge" on fish feed in the name of food safety that has outraged local farmers and feed dealers. The fee is another example of the complexities of introducing costly food safety controls in a highly competitive market. It also reflects a subtle trend toward monopolization of agricultural markets in the name of strengthening food safety.

Beginning July 20, the Shanghai Ruihua Company began requiring fish feed dealers on Chongming Island to pay a fee of 2-yuan per bag. If a dealer doesn't pay, he is not allowed to sell feed on the Island. The company pitches this fee as a "service charge" to compensate them for the services they provide to farmers and feed dealers. One farmer angrily denounced it as a "protection fee" (presumably to protect the Ruihua Company). Most dealers and farmers refused to pay the fee.

With so many food safety incidents in recent years, companies and governments are trying out a lot of  measures to improve food safety. These generally entail companies working closely with farmers so they can control the inputs, management and marketing to reduce the risk of toxic additives or other hazards and facilitate traceability of food products.

Ruihua is a state-owned company that markets fruit, crabs, shrimp and fish raised on Chongming, an island in the mouth of the Yangtze River that is part of Shanghai. Ruihua rents out fish ponds to farmers who raise fish and sell them to the company. The farmers buy feed from local dealers.

There have been a lot of efforts to improve fish-farming on Chongming Island in the last 3 years. The local government upgraded large areas of fish ponds and has tightened control over feed and pharmaceuticals used in fish farming. Only fish feed from six or seven companies that have manufacturing licenses and provide testing reports can be sold in Chongming. The local government chose the feed suppliers that are eligible. Dealers have to be licensed. Two years ago Ruihua wanted to implement a tightly-controlled production model in which it would have dealt directly with only three feed suppliers, but Ruihua gave up on the plan due to resistance from local farmers and feed dealers.

The Ruihua Company's vice chairman claims the fee is justified to compensate them for the quality services they provide to dealers and farmers. He claims the company provides free warehouse space to feed dealers in production areas and the fee covers the free rent. However, a feed dealer says this is false; he says feed dealers pay their own rent.

The Ruihua vice chairman claims that his company helps the feed dealers collect payments. Fish farmers often buy feed on credit and the vice chairman claims some farmers fail to pay. (Presumably, Ruihua would deduct the feed payment when farmers are paid for their fish.) The feed dealer questions this assertion as well, asserting that the dealers and farmers do business transactions without the involvement of Ruihua. The dealer says the farmers just pay rent to Ruihua (for their fish ponds).

A Beijing lawyer agrees that the fees are not legally justified. If the company and feed dealers had a direct relationship in which the company provided a service to the dealers, they would be justified in charging a fee. They can't charge a fee if there is no legal relationship between the company and the dealers.

Dealers say the fee will wipe out their profit margin of about 2 yuan per bag unless they raise feed prices to pass it on to the farmers. They say farmers wouldn't be able to bear higher feed prices. The price of fish in Chongming Island is already about 0.5 yuan/500g higher than in neighboring provinces of the Yangtze delta region. The article warns that assessing an unpopular fee like this could provoke social unrest.

This incident is an example of a subtle reversal from the free-for-all competition that prevailed in rural China during the last few decades. Food safety is prompting a revival of practices that resemble those of the planned economy era--unified supply of inputs, unified sale of products, herding farmers into cooperatives and administered prices. In order to pass on the higher costs of "safe" food production practices, companies need to have their monopoly enforced by shutting down competitors who don't meet "standards" or enforcing trade barriers.

In the case of Ruihua there is a direct link to the planned economy era. Chongming Island was historically divided up into state-owned farms and the island's map still shows districts named after production teams like the "Friendship team," "Red banner team," and "Advanced village." One of Ruihua's farms is the "Red Star farm." Ruihua is a state-owned company. Since it rents out land (and thus owns it), Ruihua presumably is descended from a state farm (its parent company, Guangming, was formerly the local bureaucracy that operated Shanghai's government dairy farms). This arm of the state is subtly trying to restore its monopoly over fish-farming and the associated supply chain in this small corner of the Chinese economy.

In this instance the Ruihua company is acting like a government authority by charging what is, in effect, a tax on feed dealers. The article points out that "Ruihua is a company, not the government." Or is it?

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