60% of farm supply organizations have never used advance trading at wholesale markets, study finds

A study has found that wholesale markets need to expand advance trading to curb sharp price swings in agricultural products — yet six in 10 production and retail organizations at the source level reported no experience with such transactions in the past year. Price fluctuation risk and difficulty securing contracted volumes were identified as the main barriers to wider adoption.

According to a report released Tuesday by the Korea Rural Economic Institute titled "Introduction and Activation of Advance Trading at Agricultural Wholesale Markets," a survey of 50 integrated production and retail organizations found that 60 percent had no experience with advance trading in the past year. Another 22 percent said they had engaged in it occasionally, while 18 percent said they did so regularly.

Advance trading is a method in which the timing, volume and price of agricultural products are negotiated before they are shipped to a wholesale market. Unlike the conventional auction system — where prices are set after goods arrive at the market — advance trading allows producers to plan their shipments and buyers to secure the volumes they need ahead of time.

The researchers said the limitations of the auction-centered trading system are growing as climate change drives output fluctuations and logistics and labor costs rise. When shipments concentrate in a particular period or weather conditions shift abruptly, wholesale prices can swing sharply.

Assessments of advance trading's effectiveness were broadly positive. Half of respondents said it was helpful for price stability and securing supply volumes, and 4 percent said it was very helpful. Only 14 percent said it was not particularly useful.

The reason widespread recognition of its value has not translated into broader use comes down to price risk and the burden of fulfilling contracts.

Market price fluctuation risk was cited as the biggest deterrent, at 27.4 percent. Difficulty adjusting contracted volumes followed at 16.7 percent, quality and specification mismatches at 13.1 percent, and lack of trust in trading partners and complex administrative and system procedures each at 13.1 percent.

If actual market prices rise or fall sharply from the level agreed at the time of booking, one party to the transaction can incur a loss. Failure to meet contracted volumes or quality standards also risks triggering trade disputes.

Upgrading price information and supply-demand forecasting systems was cited as the top priority for promoting advance trading, at 42.2 percent. Contract performance guarantees followed at 21.9 percent, counterparty reliability management at 14.1 percent, and contract standardization and the introduction of electronic contracts at 10.9 percent.

Reasons for avoiding advance trading in agricultural products Source: Korea Rural Economic Institute

Category | Response share Market price fluctuation risk | 27.4% Difficulty adjusting contracted volumes | 16.7% Quality and specification mismatches | 13.1% Lack of trust in trading partners | 13.1% Complex administrative and system procedures | 13.1%

When asked about their willingness to participate in advance trading going forward, 45.5 percent of respondents said they were neutral. Some 36.4 percent expressed a willingness to participate, while 18.1 percent said they had no intention of doing so. The results suggest that while advance trading has potential to expand, institutional improvements are needed to drive more active participation.

The study also found overseas examples of advance trading being used to stabilize prices and manage supply. An analysis of wholesale market trading systems in Japan and Taiwan found that various forms of advance trading have contributed to strengthening price stability and supply management.

The researchers proposed launching pilot advance trading projects for major agricultural products domestically and developing trading models suited to the characteristics of individual commodities. They also said standard contracts to reduce disputes between trading parties, along with insurance and guarantee systems to share the risk of price and volume fluctuations, need to be introduced.

They said in particular that contract farming at the production stage should be linked with advance trading at the wholesale market level, and that logistics infrastructure — including joint sorting, pre-cooling and storage facilities — needs to be expanded.

"Advance trading at agricultural wholesale markets is a way to complement the existing auction system and improve transaction stability for both producers and retailers," said Choi Byeong-ok, a research fellow at the Korea Rural Economic Institute. "It is important to gradually expand pilot projects by commodity and to establish an institutional foundation that links contract farming at the production stage with advance trading at wholesale markets."