Market and Physical Risks of Agricultural Products

Market and Physical Risks of Agricultural Products Presentation Teaching Materials 01 02 Market and Physical Risk Price risk and crop failure Risk Management in Agricultural Product Marketing 1. Institutionalization of Market Information 2. Marketing Cooperation 3. Hedging 4. Warehouse Receipt 5. Product Standardization and Grading 6. Agricultural Insurance 1. Market and Physical Risk ❑ Agricultural products have unique characteristics such as: Bulky, requires large space, high storage and transportation costs Perishable, easily damaged and cannot be stored for too long in a container fresh state, must sell immediately even if the price is cheap Seasonal in nature, depending on climate and weather conditions, as a result when supplies are low prices are high, and vice versa Depending on the conditions of Mother Nature, production faces uncertainties due to the threat of pests and diseases, natural disasters, etc. ❑ The above conditions have risks in marketing agricultural products, namely market risk in the form of price risk and physical production risk in the form of risk of crop failure. 1. Market and Physical Risk Cont... Price characteristics of agricultural products High Volatility Volatility of agricultural prices is much higher than that of most non-agricultural goods and services Biological and Cyclical Production Process Agricultural prices tend to be volatile mainly due to the biological and cyclical nature of the production process of agricultural commodities Time Lag There is a considerable time lag between the time of production and the price that occurs, which causes price fluctuations. Inelastic Demand Food is a basic necessity so consumer demand is relatively insensitive (inelastic) to price changes. Due to the inelastic demand of agricultural commodities, shortages in the supply of foodstuffs lead to sharp increases. International Influences Domestic prices are also affected by changes in agricultural commodity prices at the international level. An increase in wheat prices at the international level can increase domestic prices through the price transmission mechanism. 1. Market and Physical Risk Cont... Main Commodity Price Indexes, 1992-2022 ❑ Price volatility of agricultural products in international markets 1. Market and Physical Risk Cont... ❑ Harvest failure due to flooding, drought, and pest infestation 2. Risk Management in Agricultural Product Marketing Cont... Market information Marketing of agricultural products deserves special attention because effective marketing of agricultural products depends largely on the prevalence of an environment conducive to smooth bargaining among market participants. ❑ Agricultural Marketing Information System refers to a set of people, equipment, and procedures for the collection, sorting, analysis, interpretation, and dissemination of timely and necessary information for decision-making to stakeholders in the agricultural marketing system ❑ Timely, reliable and relevant information is very helpful in making decisions. Decision. ❑ Information on current and expected agricultural prices in various markets, quantities available, forecasts of future supply and demand of various products and services. The characteristics of agricultural commodities are crucial in determining what, when and where to sell and in planning f u t u r e marketing activities. ❑ A market system can operate efficiently and effectively only if relevant, accurate, and upto-date information is available for producers, market intermediaries, and consumers to utilize. help them make decisions. Market information 2. Risk Management in Agricultural Product Marketing Cont... The types of market information required to serve the needs of various individuals throughout the marketing system fall into three general categories Production Statistics Basic production and consumption statistics for domestically traded commodities 1 Price Daily national and international prices and supply of commodities at various points throughout the marketing system as a guide t o current transactions 2 Variables that Affect Price 3 Data related to commodity movements this, long-term trends and factors that affecting future prices such as the area under cultivation of certain crops and expected yields 2. Risk Management in Agricultural Product Marketing Cont... ❑ The importance of market information, especially the price of leading commodities, requires the central and regional governments to work hard to build a market information network. ❑ Examples of market information institutions for agricultural commodities in Indonesia include PIP (Market Information Service) for plantation commodities, cooperatives, associations ❑ Entering the 4.0 era, there are now several supporting applications to carry out marketing activities, one of which is the Fintek (Finance Technology) application which includes There are digital marketing and digital counseling features. ❑ This can help agricultural problems in marketing their products as well. There is a need for the right regulatory format, a system that must be built well, profits margins that must be mutually agreed upon, and increased efficiency. ❑ The existence of market information institutions 🡪 plays a role in providing information in policy making for agricultural commodities also plays an important role in improving bargaining position, price transparency, decision-making materials. 2. Risk Management in Agricultural Product Marketing Cont... Problems in Institutionalizing Market Information in Developing Countries Greater emphasis is placed on gathering lots of information but little attention is paid to making this information available to farmers. The quality of information collected is generally poor and does not accurately reflect the market situation. The collection and dissemination of information is not done regularly, which is not very helpful for farmers to negotiate with traders or to decide whether or not to send products to the market. Information is published in a form that is not suitable for most illiterate farmers who cannot read and understand the information Inappropriate timing in broadcasting information through radio and media Price information is reported from large (wholesale) markets in urban areas, which are sometimes not available. understood by farmers Informati ona lInformations 2. Risk Management in Agricultural Product Marketing Cont... Small-scale farms are faced with a weak bargaining position, resulting in smaller negotiated prices. Marketing cooperation improves bargaining position and the margin received is higher. 1. Group Marketing Group Marketing makes it easy for farmers to plan together, determine pricing, sharing risks and costs and selling their products 2. Cooperative Marketing The cooperative marketing system rests on the principle of self-help (i.e. one for all and all for one) or "from and for us". 3. Direct Marketing Direct Marketing is effective in reducing the length of marketing channels and marketing costs. 4. Contract Farming Through the contract mechanism, farmers and traders agree to sell and buy their products at a pre-negotiated price. 2. Risk Management in Agricultural Product Marketing Cont... 1. Group Marketing ❑ Individual marketing system with small scale 🡪 will not generate sufficient profit (margin) for smallholders. ❑ Group Marketing 🡪 makes it easy for individual farmers to plan together, set prices, share risks and costs and sell products. they are. This increases the collective bargaining power of farmers, resulting in profits and savings in marketing costs. ❑ Group Marketing helps build entrepreneurial skills among farmers which in turn reduces market risks and costs. 2. Risk Management in Agricultural Product Marketing Cont... 2. Cooperative Marketing ❑ The foundation of the cooperative marketing system rests on the principle of self-help (i.e. one for all and all for one) and is owned and managed by the farmers themselves. to improve marketing efficiency. ❑ Via system this, farmers can access inputs quality, credit, and collective marketing infrastructure such as grading facilities, storage, and processing. This helps farmers to develop an upstream to downstream marketing network. ❑ Cooperative marketing, if implemented correctly, can improve conditions for farmers' economy by lowering marketing costs, increasing resilience business and ensure equitable distribution of proceeds. ❑ Cooperative marketing also can contribute in improve efficiency of the marketing system. Market competition demands that cooperatives tend to become more competitive ❑ An example of cooperative marketing in Indonesia is "KPBS Pangalengan is a a cooperative consisting of dairy farmers located in Pangalengan District, South Bandung. Dairy farmers market their milk together through a cooperative. 2. Risk Management in Agricultural Product Marketing Cont... 3. Direct Marketing ❑ Direct Marketing is a way to reduce the length of marketing channels and marketing costs. Through this process, direct communication between buyers and sellers is established which leads t o mutual benefits, especially for farmers. ❑ Limited infrastructure, assurance of quality supply, location of consumers still within reach is a prerequisite for direct marketing. 2. Risk Management in Agricultural Product Marketing Cont... 4. Contract Farming ❑ Contract farming is an institutional mechanism (contract) that strengthens the bargaining position of farmers, ranchers and fishermen. with business entities (companies) to obtain guaranteed market access, prices, and others in accordance with mutual agreements in the context of marketing effectiveness. ❑ In Contract Farming, the company that makes the contract with the farmer has agreed to buy products the farmer with price that already negotiated in advance. ❑ In some cases, buyers (such as company) also agree to ensure timely supply of necessary agricultural inputs to farmers. This contractual agreement is beneficial for both parties as farmers are guaranteed market access and a minimum price for their products, while buyers are assured of a consistent supply of products of a certain quality at a lower price. Thank You!