This paper uses the relative price spread model to analyze the farm-retail spread for pineapple, pawpaw and watermelon in Jamaica. Our findings suggest that price increase in the retail market is not being passed down to pineapple and pawpaw farmers and only marginally to watermelon farmers.Demand and Price Analysis,

Abdulkadri, Abdullahi O.

Ajibefun, Igbekele A.

English

Research Papers in Economics

An Analysis of Farm-Retail Price Spread for Jamaican Fresh Fruits 
 
 
 
 
Abdullahi O. Abdulkadri 
 
Department of Economics, The University of the West Indies 
Mona Campus, Kingston 7, Jamaica 
abdullahi.abdulkadri@uwimona.edu.jm 
 
and 
Igbekele A. Ajibefun 
 
Department of Agricultural Economics and Extension 
The Federal University of Technology 
PMB 704, Akure, Nigeria 
iajibefun@yahoo.com 
 
 
 
 
Selected Paper prepared for presentation at the Southern Agricultural Economics Association 
Annual Meeting, Tulsa, Oklahoma, February 14-18, 2004 
 
 
 
 
Copyright 2004 [Abdulkadri and Ajibefun].  All rights reserved.  Readers may make verbatim 
copies of this document for non-commercial purposes by any means, provided that this copyright 
notice appears on all such copies. Abstract 
This paper uses the relative price spread model to analyze the farm-retail spread for pineapple, 
pawpaw and watermelon in Jamaica.  Our findings suggest that price increase in the retail market 
is not being passed down to pineapple and pawpaw farmers and only marginally to watermelon 
farmers. 
 
Introduction 
Jamaica is popular for its exotic fruits and juices.  Apart from the production of bananas for the 
export market, fresh fruits are also supplied to the domestic market in large quantities.  Over the 
last decade, however, the fruit industry, like most other agricultural sub-sectors in the island, 
have recorded drastic fall in output.  Not only did the production of bananas for the export 
market halved between 1995 and 2000, the production of pawpaw declined from 21,063 tons in 
1993 to 9333 tons in 2002 while the production of watermelon fell from 9584 to 8068 tons 
within the same time period, representing a decline of about 56% and 16%, respectively.  On a 
positive note, the all-island production of pineapple increased from 14,532 tons in 1993 to 
20,571 tons in 2002, representing an increase of about 42% in output.  The mixed trends in 
domestic production of these fruits are depicted in Figure 1.  Regardless of these trends, prices 
have generally been on the increase.  For instance, while there has been an upward trend in 
pineapple production, a downward trend in pawpaw production and a somewhat stable trend in 
watermelon production between 1993 and 2002, price data have shown steady increases in retail 
prices for these fruits.  During this period, the real retail price (in 1988 dollars) of pineapple 
increased from J$3.77 per kilogram (kg) in the first quarter of 1993 to J$5.13 per kg in the fourth 
quarter of 2002.  Similarly, the real retail price for pawpaw and watermelon rose from J$2.86 per 
  1kg and J$3.73 per kg, respectively, in the first quarter of 1993 to J$5.51 per kg and J$4.31 per 
kg, respectively, in the fourth quarter of 2002.   
  Ordinarily, an increase in retail price, ceteris paribus, should induce increased production 
of a commodity.  Despite the general increase in real retail prices, domestic production of fresh 
fruits in Jamaica has indeed declined considerably in some cases.  This situation suggests that 
either price is not enough an incentive for production or that the middle-men do not pass on 
increased retail prices to the farmers.  A closer look at real farm gate prices and the marketing 
margins for these fruits should provide a rough indication of market mechanism for these farm 
products.  Figures 2 to 4 show trends in real market price, real farm gate price and real marketing 
margin for pawpaw, pineapple, and watermelon, respectively.  As seen in Figures 2 and 3, the 
real market margins for pineapple and pawpaw have increased steadily over the years while their 
real farm gate prices have been fairly stable.  In contrast, Figure 4 indicates that the real 
marketing margin for watermelon has been fairly stable while the real farm gate price has been 
increasing modestly. 
In order to solve the puzzle on whether or not real increases in retail price are reaching 
the farmers, a determination of the effect of retail price on marketing margin is crucial.  Our 
objectives in this paper are therefore to identify factors that influence marketing margins for 
pineapple, pawpaw and watermelon in Jamaica and to determine the impact of each factor on the 
marketing margins for these fruits.  It is hypothesized that middle-men absorb significant portion 
of increases in market prices and hence leave the farmers with no price incentives to increase or 
even maintain production.  By determining the factors that significantly influence marketing 
margin, policy instruments could be put in place to facilitate a more efficient marketing of farm 
produce. 
  2 
Marketing Margin Analysis 
Marketing margin analysis is an important aspect of agricultural marketing because of the policy 
implications of such studies.  Concerns about market concentration, monopoly pricing, etc., have 
warranted marketing margin analyses for various industries (Brester and Musick; Capps, Jr., 
Byrne, and Williams; Holloway; Schroeter and Azzam).  In subsistent farming, marketing 
margin analysis is useful in determining unfair pricing practices or receipt of economic profits by 
dominant merchants who normally have the bargaining power against the peasants.  Middle-men 
or commodity merchants offer an important marketing service of getting farm produce from the 
farm gate to the retail market and are entitled to charge a premium over the farm gate price paid 
to farmers to cover the costs of rendering this service.  When costs of marketing services 
increase, the middle-man has three options: he could pass on this cost to end consumers in terms 
of higher retail prices, to the farmers in terms of lower prices paid at the farm gate, or absorb the 
cost in terms of reduced profits to himself.  The corollary of this also holds in theory when the 
cost of marketing services decline.  An interesting issue arises when, in the case of an increase in 
the cost of marketing services, the middle-man charges a premium over and above the increase in 
costs, resulting in the consumers paying significantly more while the farmers get no increase in 
the farm gate price received for their products, or even at times get paid less.  Such scenario is 
common practice and happens more often in subsistent agriculture. 
  A widening of the marketing margin for a crop could potentially discourage farmers from 
producing and causes genuine concern for policy makers.  Any program aimed at inducing 
increased farm output must pay due attention to the market for the farm products as well.  An 
  3analysis of the marketing margin for fresh fruits in Jamaica is, hence, seen as a necessary step 
toward addressing the fall in domestic output for these crops. 
 
Analytical Model 
The Relative Price Spread (RPS) Model of Wohlgenant and Mullen has been widely applied in 
marketing margin analyses.  Brester and Musick applied the RPS model to study the effect of 
market concentration on lamb marketing margins.  Capps, Jr. et al. also used the RPS model in 
their analysis of marketing margins in the U.S. lamb industry.  The RPS model assumes profit 
maximization, implying that firms will offer marketing services to the point at which the 
marginal value of the services (equivalent to the marketing margin) is equal to the marginal cost.  
Formally stated, the model is represented by: 
 
  ,            ( 1 )   ) , ( C Q K M =
 
where M is the marketing margin or price spread, K is the marginal cost of marketing services, Q 
is quantity of output, and C is the vector of prices of marketing inputs.  As indicated in equation 
(1), the marginal cost of marketing services depends on the output quantity and the prices of 
marketing inputs.  Wohlgenant and Mullen showed that equation (1) is equivalent to (2) below: 
 
 ) ,           ( 2 )   / , ( m m P C Q K P M =
 
where Pm is the market price. 
 
  4Using the RPS model as a basis, the empirical model for analyzing the marketing margin for 
fresh fruits in Jamaica is stated as: 
 
  kt kt kt kt m kt m kt MC Q P P MM ε β β β + + + = 3 , 2 , 1 ,        ( 3 )  
 
where MM is the real marketing margin for fresh fruits defined as the difference between the real 
market price and the real farm gate price, Pm is real market price, Q is the output quantity, MC is 
an index of the cost of marketing services, and ε  is an independently and identically distributed 
error term.  The β’s are model parameters, and the indices k and t represent particular fruit type 
and time period, respectively. 
  Estimation of the empirical model (3) will provide us with values for the model 
parameters.  These parameter estimates are in turn used to compute the marketing margin 
elasticities for the explanatory variables.  These elasticity estimates denote, respectively, the 
effect on the marketing margin of a percentage change in the real market price and the cost of 
marketing services. 
 
Data and Estimation 
Quarterly production and price data for pineapple, pawpaw and watermelon from 1993 to 2002 
were collected from the Data Bank and Evaluation Division of the Ministry of Agriculture in 
Kingston, Jamaica.  Data on consumer price indices was collected from several issues of 
Statistical Digest, a monthly publication of the Bank of Jamaica.  All nominal variables were 
converted to real variables (in 1988 dollars) using the implicit price deflators.  The real variables 
were in turn used for estimation purposes.  Due to lack of data on the actual costs of marketing 
  5services, the consumer price index for transportation was used as a proxy for MC in the empirical 
estimation.  Quarterly marketing margins were calculated as the difference between the market 
price and the farm gate price at the end of the quarter.  The descriptive statistics of the variables 
used in the model are given in Table 1. 
Both linear and log-linear forms of the empirical model were estimated using ordinary 
least squares (OLS) method for each of pineapple, pawpaw and watermelon.  The three equations 
were also estimated as a system using the seemingly unrelated regression (SUR) procedure to 
take advantage of the gain in efficiency from possible contemporaneous correlation of the error 
terms of the individual equations.  The SUR estimates were observed to be generally better and 
hence the SUR model was selected as the preferred one.  In order to capture the possible effects 
of seasonal changes, dummy variables were created for quarters and included in the SUR 
regression equations. 
 
Results 
The results of the SUR estimation are presented in Table 2.  They indicate that real market price 
has a positive and statistically significant effect on marketing margin for pineapple, pawpaw and 
watermelon.  The coefficient of the real market price and quantity interaction term has a negative 
sign for pineapple and pawpaw but a positive sign for watermelon.  It is also only statistically 
significant for pineapple.  The coefficient of the cost of marketing services is negative and 
statistically insignificant for pawpaw and watermelon but positive and statistically significant for 
pineapple.  Seasonal differences in marketing margin are only statistically significant for 
pineapple, with the marketing margin falling in the fourth quarter below the levels for the other 
three quarters.   
  6The elasticity estimates, calculated at the means, indicate that marketing margins for 
pawpaw and pineapple are elastic with respect to retail price and inelastic with respect to cost of 
marketing services.  As for watermelon, the estimate for the marketing margin suggests unitary 
elasticity with respect to the retail price but inelastic response with respect to the cost of 
marketing services. 
Our findings show that retail price is an important factor in determining the level of 
marketing margin for pawpaw, pineapple, and watermelon in Jamaica.  The findings further 
suggest that the cost of marketing services, e.g. transportation cost, only impacts significantly on 
the marketing margin for pineapple and not for pawpaw or watermelon.  The deductions from the 
elasticity estimates are that the middle-men pass on a disproportionately less amount of increases 
in market price for pawpaw and pineapple to the farmers but pass on a proportionate increase in 
the retail price for watermelon to farmers.  Interestingly for pineapple, our model suggests that 
the middle-men would not only pass on all increases in the cost of marketing services to the 
farmers, they actually would charge an additional premium.   
In summary, the findings of this paper indicate that market price is an important factor in 
determining marketing margin for fresh fruits in Jamaica and that due to the elastic nature of 
marketing margins, middle-men gain disproportionately when compared to farmers as a result of 
increases in the market price for fresh fruits.   
 
Conclusions 
This study has established an empirical relationship between marketing margin for fresh fruits in 
Jamaica and their market prices and cost of marketing services.  Results of the marketing margin 
analysis indicate that marketing margin is positively related to market price.  Marketing margin 
  7in also observed to be elastic to changes in market price for pawpaw and pineapple, but neither 
elastic nor inelastic to changes in market price for watermelon.  Since price is a good indication 
of future profits and an incentive for production, this paper has established that a high market 
price for fresh fruits does not translate to a high farm gate price.  This finding may partly offer a 
solution to the puzzle raised earlier in this paper.  Since farmers do not received appreciable 
share of increases in retail prices for their products, other incentives apart from price must induce 
them to increase output.  This offers a possible explanation for why production of pawpaw may 
be falling in the face of real increases in retail prices. 
As an important step in reversing the declining trend of fresh fruit production in Jamaica, 
this paper has identified market price as a policy instrument.  If institutions are put in place to 
ensure that farmers gets a more proportionate share of increases in market price, it is expected 
that farmers, being economic agents, will respond by increasing production so as to earn more 
profits from increased output.  Institutions that take farmers closer to the market or that bring the 
market closer to the farmers will serve important functions in this regard.  Such provision will 
induce efficiency in the marketing of farm produce by improving price information and 
eliminating economic profits for middle-men. 
  In as much as this study has identified important factors that determine price spread for 
fresh fruits in Jamaica, the study has some limitations.  The lack of actual data for the costs of 
marketing services necessitated the use of a proxy for this variable.  While the use of this proxy 
is justified, it may not reflect an accurate cost structure for fresh fruits marketing services and 
hence may have biased the result one way or the other. 
 
 
  8References 
Bank of Jamaica.  Statistical Digest. Several volumes. 
Brester, G.W. and D.C. Musick, 1995. “The Effect of Market Concentration on Lamb Marketing 
Margins.” Journal of Agricultural and Applied Economics, 27(1): 172-183. 
Capps, O., P. Byrne, and G. Williams, 1995. “Analysis of Marketing Margins in the U.S. Lamb 
Industry.” Agricultural and Resource Economics Review, 24(2): 232-240. 
Holloway, G. The Farm-Retail Price Spread in the Imperfectly Competitive Food Industry. Amer 
J. Agr. Econ. 73(4), Nov, 1991: 980-989. 
Schroeter, J. and A. Azzam. Marketing Margins, Market Power and Price Uncertainty. Amer J. 
Agr. Econ. 73(4), Nov, 1991: 990-999. 
Wohlgenant, M.K. and J.D. Mullen, 1987. “Modeling the Farm Retail Spread for Beef.” Western 
Journal of Agricultural Economics, 12(2): 119-125. 
  9Table 1: Descriptive Statistics of Variables in the Empirical Model of Marketing Margin 
for Fresh Fruits in Jamaica 
Variable Mean  Std.  Deviation  Minimum  Maximum 
Pawpaw        
Real marketing margin ($/kg)  1.84  0.638  0.44  3.47 
Real farm gate price ($/kg)  2.04  0.303  1.15  2.79 
Real market price ($/kg)  3.88  0.779  2.73  5.84 
Output (‘000 tonne)  3.37  1.328  1.721  7.355 
        
Pineapple        
Real marketing margin ($/kg)  1.89  0.564  0.63  2.82 
Real farm gate price ($/kg)  2.58  0.432  1.89  3.60 
Real market price ($/kg)  4.48  0.480  3.60  5.33 
Output (‘000 tonne)  4.60  3.237  0.61  9.69 
        
Watermelon        
Real marketing margin ($/kg)  1.96  0.421  1.08  3.08 
Real farm gate price ($/kg)  2.12  0.465  1.23  3.25 
Real market price ($/kg)  4.08  0.434  3.10  4.70 
Output (‘000 tonne)  3.30  1.402  1.13  7.11 
        
Transportation CPI  944.76  367.04  330  1556.1 
 
  10Table 2: Parameter Estimates of the Empirical Model of Marketing Margin for Fresh 
fruits in Jamaica 
Variable  Estimated Coefficient  Standard Error  Elasticity Estimate 
Pawpaw      
Pm  0.830*** 0.129 1.645 
PmQ  -0.015 0.014   
MC  -0.0003 0.0003  -0.138 
Quarter 1  0.059     
Quarter2 -0.173     
Quarter 3  0.445     
Constant -2.920***     
R
2 = 0.8679 
Log-Likelihood Function = -11.7846 
Pineapple      
Pm  0.945 0.176  1.820 
PmQ  -0.039 0.018   
MC  0.0006 0.0002  0.311 
Quarter 1  0.492  3.419   
Quarter2 1.966  0.607   
Quarter 3  1.324  0.414   
Constant -3.094  0.720   
R
2 = 0.7371 
Log-Likelihood Function = -11.7846 
  11Table 2 (Continued): Parameter Estimates of the Empirical Model of Marketing 
Margin for Fresh fruits in Jamaica 
Variable  Estimated Coefficient  Standard Error  Elasticity Estimate 
Watermelon      
Pm  0.457 0.161  1.04 
PmQ  0.012 0.010   
MC  -0.0003 0.0002  -0.129 
Quarter 1  -0.315  0.161   
Quarter2 0.167  0.161   
Quarter 3  0.125  0.161   
Constant 0.252  0.595   
R
2 = 0.4066 
Log-Likelihood Function = -11.7846 
Note: *** denotes statistical significance at the 1% level. 
 
  120
5000
10000
15000
20000
25000
1992 1994 1996 1998 2000 2002 2004
Year
T
o
n
n
e
s
Pawpaw
Pineapple
Watermelon
 
Figure1: Trend in Production of Major Fruits in Jamaica 
 
0
1
2
3
4
5
6
7
1992 1994 1996 1998 2000 2002 2004
Quarter
J$/kg
RMM
RFP
RMP
 
Figure 2: Trend in Prices and Marketing Margin for Pawpaw in Jamaica 
  130
1
2
3
4
5
6
1992 1994 1996 1998 2000 2002 2004
Quarter
J$/kg
RMM
RFP
RMP
 
Figure 3: Trend in Prices and Marketing Margin for Pineapple in Jamaica 
 
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1992 1994 1996 1998 2000 2002 2004
Quarter
J$/kg
RMM
RFP
RMP
 
Figure 4: Trend in Prices and Marketing Margin for Watermelon in Jamaica 
 
Legend: RMM is real marketing margin, RFM is real farm price and RMP is real market price. 
  14

AN ANALYSIS OF FARM-RETAIL PRICE SPREAD FOR JAMAICAN FRESH FRUITS

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