The purpose of this study is to identify the problems of pricing methods and to find a reasonable transaction system appropriate for the characteristics of each item while “fixed price and private sale and some sale by auction” is applied for the pricing of dry hot peppers and skinless garlic, the typical spice vegetables, in the Garakdong Wholesale Market. The objectives of this study are 1) to identify the current distribution structure and the transaction system of dry hot peppers and skinless garlic and to derive problems thereof, and 2) to establish a pricing method and propose a development direction of the wholesale market appropriate for the characteristics of dry hot peppers and skinless garlic.
The distribution structure of dry hot peppers is currently reorganized under local joint markets centered around Seoandong Nonghyup, and the share of local joint markets in the distribution system is gradually increasing. Since the local joint market of Seoandong Nonghyup sells garlic daily through auctions for fair and transparent pricing, sellers rely on the joint market, and the share of Nonghyup and local distributors in the selling of garlic is increasing.
Some wholesalers under the Seoandong Nonghyup Joint Market formed organizations to directly supply products to food processing companies and large distributors and competitively buy local products. Since the joint market operated by Seoandong Nonghyup employs the sale-by-auction system for the transaction of large amounts of pepper, it actually presents reference prices for other distribution routes. The Seoandong Nonghyup Joint Market is the only local joint market where year-round auctions for dry hot peppers occurs in Korea, and it is predicted that the transaction amount will continue to grow. The price of dry hot peppers is determined through auctions at the Seoandong Nonghyup and auctions in Jecheon, Jeongeup, and others. It is predicted that the amount of dry hot peppers traded at local wholesale markets such as the Garakdong Wholesale Market will continue to drop, whereas the transaction will grow at local joint markets.
However, the wholesalers who trade dry hot peppers in small amounts still want to sell them in wholesale markets. The reason that they want to sell them in wholesale markets is that they want higher prices than those in local joint markets or want to build up a base for continuous transaction with the distributors in areas where consumers live. However, since the wholesalers who deal with dry hot peppers in the Garakdong Wholesale Market are small in business size and they mainly deal with imported peppers, it is not possible to fully meet the needs of local suppliers. In the past, there was a Nonghyup that attempted to sell dry hot peppers at auctions in the Garakdong Wholesale Market, but the auctions weren't successful because dry hot peppers couldn't be continuously supplied from local suppliers and the wholesalers who traded dry hot peppers did not want to sell the expensive dry hot peppers produced in Korea.
Since there are not many wholesalers of dry hot peppers in the Garakdong Wholesale Market and their main consumers are small pepper powder shops in traditional street markets and restaurants, the market is therefore inevitably limited. Also, since the wholesalers who deal with dry hot peppers in the Garakdong Wholesale Market prefer imported pepper and do not have a large number of consumers, dry hot peppers produced in Korea are limited in terms of transaction amount.
Therefore, it is seen that introduction and operation of a sale-by-auction system is not feasible unless the wholesalers who trade dry hot peppers in the Garakdong Wholesale Market have the competitive power. Since continuous supply of agricultural products to wholesale markets depends on wholesalers’ ability to handle the transaction amount and attract new consumers, it will be difficult to sell dry hot peppers at auctions in the Garakdong Wholesale Market if the wholesalers do not have the competitive power. Therefore, the fixed price and private sale system and the partial auction sale currently adopted for the pricing of dry hot peppers in the Garakdong Wholesale Market is a reasonable transaction method.
However, the auction sale system should be gradually expanded for fair distribution and pricing of dry hot peppers and for local sellers to secure more consumers. For the auction sale of dry hot peppers in the Garakdong Wholesale Market, it is necessary to improve the market environment and increase the scale of transaction, and construct more processing facilities so that the wholesalers can meet the needs of retailers.
As for garlic, the traditional local collectors were in charge of distributing the product. But recently, Nonghyup, storage firms, and processing companies have emerged as new local distributors as local joint markets, storage firms and processing companies grew in major garlic production regions. Garlic is distributed in the form of bulb or peeled-off clove. Garlic with stalks are not traded in the Garakdong Wholesale Market because of the problem of treating the waste. As a result, the common types of garlic traded are peeled-off garlic and packaged garlic bulbs.
There is a suspicion that an implicit agreement exists among large storage firms, processing companies and wholesalers in the wholesale market. Since garlic is sold skinless in the Garakdong Wholesale Market, local storage and processing firms store them in cold storage facilities to control the amount and the time of selling depending on the market price. However, there is an unceasing suspicion that the market price is distorted due to an implicit agreement among local processing companies. Therefore, there is a call for a transparent pricing system (that is, conversion of the pricing method from fixed-price and private sale to sale by auction in the Garakdong Wholesale Market).
The producer groups who want peeled-off garlic to be auctioned are local Nonghyups and joint market wholesalers in chief garlic production districts. However, since the Garakdong Wholesale Market prevented the sale of garlic with stalks because of the waste problem, the wholesalers who traded garlic in large volumes left the Garakdong market. The scale of garlic transactions in the Garakdong market accounts for approximately 7% of the entire garlic produced in Korea. After the Garakdong Wholesale Market prevented the sale of garlic with stalks, the amount of skinless garlic sold in the market rose to account for more than 80% of the garlic sold in the market.
Most of the skinless garlic suppliers in the Garakdong Wholesale Market are local storage and processing companies, and it is thought that it would be difficult to convert the pricing method into an auction system since delivery time and price are currently determined through fixed price and private sale. It is thought that if the auction sale is adopted in the Garakdong Wholesale Market, it can not be operated for a long term since there is no supplier who can steadily supply a fixed amount of garlic continuously. Furthermore, if the auction sale is introduced without any improvement of storage facilities, the early introduction of the pricing system could have negative impact on the commodity value of peeled-off garlic.
The sale of skinless garlic by auction must be adopted in the Garakdong Wholesale Market on a mid- and long-term basis after considering various aspects (e.g., fair pricing, fair distribution practices and development of the garlic industry). In order to introduce auction sale of garlic at the Garakdong Wholesale Market, it is necessary to foster suppliers who can steadily supply skinless garlic and fully equip the auction site with low-temperature storage facilities.


Researchers: Choi Byoung-Ok and Kim Yean-Jung
Research period: 2011. 3. - 2011. 5.
E-mail address: bochoi@krei.re.kr