[Weather Is Not to Blame]② 'Three-Second' Agricultural Auctions... The Wholesale Price Game for the Few

Report from the Vegetable and Fruit Auctions at the Agricultural and Marine Products Wholesale Market
Sequential Auctions of Daily Collected Produce Over Two Hours
Client Demand of Intermediate Wholesalers Takes Priority Over Quality
Distribution

Editor's NoteWe now live in an era where "agflation," driven by climate change, is a constant force pushing up agricultural product prices. Every time abnormal weather such as droughts, monsoons, or heat waves occurs, the cost of food fluctuates dramatically. Unpredictable weather, which leads to poor harvests, is often cited as the cause of soaring agricultural prices. This is only half true. An opaque distribution structure for agricultural products manipulates prices, using weather as a convenient shield. Farmers are frustrated as their carefully cultivated produce fails to fetch a fair price in the market, while consumers are caught in a vicious cycle of paying far more than the shipping price from the production site. The Asia Business Daily investigates the cartel hidden within the agricultural distribution structure behind the external factor of weather, and explores alternatives to the auction system for agricultural products that has remained unchanged for 40 years.

"Wo~eorieorieori, Lee ○○, Cho ○○..."

As dusk settled over the Garak-dong Agricultural and Marine Products Wholesale Market in Songpa-gu, Seoul, the vegetable building was bustling with vegetable auctions from across the country after 7 p.m. The auctioneer, riding a mobile electric cart, repeated unintelligible chants in a set rhythm over the microphone. The names he called out were those of producers who had shipped their agricultural products from all over the country to the auction house that day.

As the humid air filled the building, about 70 to 80 people gathered around the cart as the auction began. The majority were men of various ages, with a few middle-aged women also noticeable.

Those holding bidding devices that resembled small remote controls were intermediate wholesalers, brokers who determine the auction price of the day's collected agricultural products and supply the winning goods to small business owners or food material distributors. Kwak Jonghun, Executive Director of Sales at Donghwa Cheongwa and a veteran auctioneer with 30 years of experience, explained, "Intermediate wholesalers prefer to conduct the auction process with a certain rhythm, making clear breaks and pauses. They insert these chants in between to draw attention and increase focus."

In the vegetable building of the Garak-dong Agricultural and Marine Products Wholesale Market in Songpa-gu, Seoul, auctioning is taking place while agricultural product brokers, known as intermediate wholesalers, are inspecting the products. Photo by Kim Heungsun

Auction Prices Finalized in the Blink of an Eye

The vegetable auction continued nonstop for about two hours. Boxes of napa cabbage, chicory, radish, lettuce, and more were auctioned off in turn, with intermediate wholesalers opening a few boxes to check the condition of the produce as each item came up. It took less than five seconds to set a price for the goods from a single producer. The electronic display showed the winning bidder, quantity, and price for each lot. On this day, napa cabbage packed in 8 kg boxes was settled at 10,000 won per box, chicory (2 kg) at 5,000 to 7,000 won, radish (4 kg) at 6,000 to 9,000 won, and lettuce (4 kg) at around 40,000 won per box.

The auction process, which moved at lightning speed, made it impossible for the quality of each product to be properly reflected. The situation was similar at the Guri Agricultural and Marine Products Wholesale Market in Gyeonggi Province, where fruit auctions were underway. It took less than five seconds for each item, such as apples and pears, to be auctioned off. With mountains of agricultural products stacked high, all items in each category were sold within 10 to 30 minutes. One intermediate wholesaler with 10 years of experience claimed, "We have our own standards for checking for pests or appropriate size." However, he did not disclose the criteria for winning bids. He explained, "Everyone marks the products they want in advance, and when it's time for the auction, they use their intuition to secure them."

In the vegetable section of the Agricultural and Marine Products Wholesale Market in Garak-dong, Songpa-gu, Seoul, intermediate wholesalers, who act as brokers for agricultural products, are holding auction bidding devices while inspecting the quality of lettuce. Photo by Kim Heungsun

Previously, an analysis by the Seoul Agro-Fisheries & Food Corporation in September 2019 of auction data for 25 major fruit and vegetable items showed that, out of a total of 6,475,290 transactions, 42.7% were completed in more than one second but less than or equal to three seconds. Another 16.5% were completed in less than one second. In other words, six out of ten auction lots were settled within three seconds. Producers were excluded from this price-setting process. They could only accept the settlement amount or, if dissatisfied, refuse the winning bid and either discard or retrieve their products.

Intermediate Wholesalers: The Key Players in Price Determination

Intermediate wholesalers are identified as the key players in determining auction prices. This is because the daily prices of agricultural products collected nationwide are set by them. Intermediate wholesalers are business operators who, after receiving authorization or designation from the operators of agricultural and marine products wholesale markets or auction houses, purchase, wholesale, or broker the sale of listed agricultural and marine products. They supply the agricultural products they secure through auctions to a range of clients, including traditional markets, food service providers, food material distributors, supermarkets, and restaurants, as well as small and medium-sized business owners and self-employed individuals.

According to the annual statistical report on agricultural and marine products wholesale markets published by the Korea Agro-Fisheries & Food Trade Corporation (aT), there were 7,678 registered intermediate wholesalers, both individuals and corporations, at 32 public wholesale markets nationwide as of last year. To maintain their qualifications, they must meet the minimum transaction amount set by the market operator through participation in auctions. At Garak Market, for example, individual intermediate wholesalers must transact at least 150 million won over three months, while corporate wholesalers must transact at least 300 million won-equivalent to 50 million won and 100 million won per month, respectively.

In other regions, the minimum transaction amount varies according to market size, but for fruits and vegetables, individuals are typically required to transact 20 to 30 million won per month, and corporations around 100 million won. If the average monthly transaction volume over three months falls short of the minimum requirement, penalties such as warnings, cautions, or suspension of business for a certain period are imposed. No transactions for one month result in a "caution," two months in a "warning," and three months in a "license cancellation."

Observation of their price-setting structure at public wholesale markets revealed that the key factor determining auction prices was not the quality of the agricultural products delivered that day, but rather the order volume from the clients secured by intermediate wholesalers. One intermediate wholesaler, who supplies vegetables to 20 to 30 small and medium-sized business clients, said, "Because business is slow, restaurants, which are our clients, are reducing their order volumes compared to before. As intermediate wholesalers also want to avoid the burden of unsold inventory, the quantity secured through auctions decreases, and as a result, market prices inevitably fall."

Wholesale Auction Prices Determined by Client Demand, Not Production Volume

He continued, "Especially for vegetables, since their storage and distribution periods are short, price volatility is greater than for other items. If the quantity on the market that day is small but the amount we need to purchase is large, we will bid up the auction price to secure the products we want. Conversely, if supply exceeds demand, the opposite happens."

In the end, this means agricultural product prices are determined not by production volume, but by the quantities needed by intermediate wholesalers. This is why farmers point to the irrational distribution structure, rather than climate change, as the cause of agricultural price fluctuations.

Intermediate wholesalers argue that they are being unfairly blamed. It is known that the margin they add when supplying auctioned agricultural products to clients is around 15%. They claim that this also includes risk management costs. One intermediate wholesaler with 10 years of experience said, "Large supermarkets or distributors never accept losses in transactions, but we have to bear all returns requested by our clients. Because of this, I have personally lost more than 100 million won."

In fact, as of last year, the most common annual transaction volume for intermediate wholesalers was between 1 billion and 2 billion won, with 1,740 individuals in this category. Another 1,658 intermediaries transacted between 500 million and 1 billion won, and 1,329 handled more than 3 billion won. Due to these large transaction volumes, transportation and labor costs are significant, and intermediate wholesalers argue that these costs are fully reflected in the distribution process and thus passed on to consumer prices.

Unclear Pricing Structure from Intermediate to Retail

The compensation received by intermediate wholesalers varies greatly depending on experience and client performance. One corporate representative said, "We participate in auctions daily and need workers to handle sales, sorting, and transportation for delivering products to clients nationwide. With night shifts and a six-day workweek, it is difficult to find people willing to work under these conditions. We pay our roughly 10 employees more than 4 million won each per month, so labor costs are considerable."

The problem is that the process of setting consumer prices as products pass through intermediate wholesalers is opaque. For example, there are no upper or lower limits set for the prices intermediate wholesalers bid, so "the number you enter becomes the market price." Even wholesale corporations only collect the commission set after the winning bid and do not control price fluctuations. Moreover, there is no way to know how much profit intermediate wholesalers add when selling to clients, or how much of the distribution cost and margin is reflected in consumer prices.

As a result, when consumer prices for agricultural products skyrocket, abnormal weather or poor harvests are cited as the main causes, but there is no way to verify or monitor whether the price-setting structure in the middle distribution stage is reasonable.

One producer said, "Every day, countless agricultural products from across the country gather at the auction house, and prices are set in such a short time that, from a farmer's perspective, we suspect that wholesale corporations or intermediate wholesalers may have already picked out and bought the products of producers they are close to or have traded with for a long time at good prices. Small-scale farmers or new suppliers are inevitably at a disadvantage in the auction market."

<To be continued in Part 3: Weather Is Not to Blame>