Analysis Presentation: Marketing Margins And Costs

Marketing Margins and Costs Presentation Teaching Material 01 Definition of Marketing Margin 02 Marketing Margin Concept 03 Farmer's Share 04 Added Value of Agricultural Products Margin as the difference between primary and derived demand, margin calculation, marketing margin components, examples Definition, calculation, case example Definition, calculation, example 1. Definition of Marketing Margin Mathematically: Marketing Margin Total Marketing Margin: It is the difference between the amount paid by consumers and the amount received by producers for an agricultural product traded at the same time, volume and quality. MP = Pr - Pf Description: Pr: Price at retailer/consumer level Pf: Price at farm level Marketing Margin Calculation 1. Definition of Marketing Margin (Cont...) Marketing margin is also defined as the price of a bundle of marketing services as a result of the demand and supply of marketing services. The price of a bundle of services is a function of the demand and supply of all the marketing services. These marketing services include: assembly, processing, transportation, storage, and retailing. 1. Definition of Marketing Margin (Cont...) At each marketing level, the margin is also defined as the difference between the selling price and the buying price of the marketing institution. • Thus, the total marketing margin is the sum of all margins at each marketing institution in a marketing channel. 𝑛 𝑀𝑃 = $ 𝑀𝑖 = 𝑀1 + 𝑀2 + ⋯ + 𝑀𝑛 𝑖=1 2. Marketing Margin Concept (Cont...) Marketing Margin can also be expressed as the difference between the primary demand curve and the derived demand curve of a particular product. Demand Concept 01 Primary Demand (Dr) is the demand determined by the response of the final consumer. The primary demand function/curve is based on data on retail price (Pr) and quantity (Qr). Demand (Df) 02 Derived is the demand for inputs that used to produce up to the final product. The derived demand function/curve is based on data on the relationship between price and quantity, whether at the point of product at the farm level or at the point of product at the processing level as intermediate inputs. 2. Marketing Margin Concept (Cont...) For example: Demand for wheat at the farm level is derived from demand at the retail level by end consumers or called primary demand for bread or other bakery products. Demand for tobacco derived from primary demand for cigarettes at the retail or consumer level Demand for rice is derived from the primary demand for rice at the retail or consumer level. 2. Marketing Margin Concept (Cont...) Concept of Supply Primary Supply (Sf) is the relationship between price and quantity offered at the producer level. The primary supply function/curve is based on farm gate price (Pf) and quantity (Qf) data. 02 Derived Supply (Sr) is the relationship and betweenprice quantityoffered at the retail level. The derived supply function/curve is based on retailer price (Pr) and quantity (Qr) data. So, derived supply is the supply at the retailer level that is derived from primary supply by adding a marketing margin. 2. Marketing Margin Concept (Cont...) P (Price) Sr = derived supply Sf = primary supply Pr M Dr = primary demand Pf Df = derived demand 0 Qr,f Qr = Qf M = Pr - Pf VM = (Pr - Pf)*Qr,f Q (Quantity) 2. Marketing Margin Concept (Cont...) ❑ Marketing margins will change if there are changes in demand and supply from the farm level to the retailer level. ❑ Marketing Margin (M) consists of the costs and profits of the firms involved in the marketing system. M=C+π Marketing Margin Component A. Cost of Marketing Inputs (C) : represents the remuneration for inputs used in the marketing process. Example: • Transportation costs: Vehicle rental, fuel, driver service, tolls, parking • Loading and unloading costs • Packaging costs: sacks, rope, plastic, labor • Selling costs: shop/stall rent, electricity, water, retribution • Communication costs B. Marketing Institution Profit (π) : represents the return to marketing institutions for performing marketing functions. 2. Marketing Margin Concept (Cont...) Value Marketing Margin (VM) VM= (Pr - Pf)*Qr,f VM can be viewed in aggregate into 2 different aspects: a) VM: revenue from inputs used in marketing services from producer/farmer to consumer level (marketing costs or return to factors). Included in this component are: wages, interest, rents, and profits. b) VM: as marketing charges or returns to institutions: assemblers, wholesalers, processors, and retailers. 2. Marketing Margin Concept Cont... Types of Marketing Margins (George & King, 1971) Percentage Margin Margin is a percentage of the price level at the retailer. M = k Pr M = Pr - Pf ; Pr = Pf + M ; Pr = Pf + k Pr ; Pf = (1-k) Pr Description: k : proportion (constant) Absolute Margin Margin in the form of a fixed value Pr = Pf + M Margin is a Linear Function 3 M = a + b Pr Pr = Pf + M ; Pr = Pf + a + b Pr so that Pf = -a + (1-b) Pr The marketing margin is determined by (Tomek & Robinson (1990): a) Changes in prices of b) Quantity and quality of marketing services Changes in market structure and technology 3. Farmer's Share Farmer's share is the share of the price that farmers receive, 1 calculated as the ratio between the price received by farmers with the price paid by consumers (in percentage form). Farmer's share (FS) received is inversely proportional to the 2 marketing margin, the greater the marketing margin, the smaller the FS value. FS is often used to measure the performance of a system 3 marketing, but it is not always a reliable measure. Marketing efficiency, due to the complexity of product handling that must be done to increase customer satisfaction. 𝑃𝑓 & 𝐹𝑎𝑟𝑚𝑒𝑟 𝑠𝑆ℎ𝑎𝑟𝑒 = 𝑥 100% 𝑃𝑟 4. Added Value of Agricultural Products a) Agricultural commodities are generally produced as raw materials and are perishable, so they need to be consumed directly or processed first. b) Value Added: The increase in value of a commodity as it undergoes processing, transportation or storage. Value added is calculated as the difference between the value of the product and the cost of raw materials and other inputs. c) Value-added of agricultural products is an important strategy for agricultural businesses and rural development. Increasing value-added can be done at any stage of the marketing chain (physical utility). Agro-industry d) According to Zimmer (1996), added value can be created by: Development of new technologies; Discovery of new knowledge; Improvement of existing products and Discovery how to processing that more efficient. 4. Value Added of Agricultural Products (Cont...) 1. Food Crops Food crop processing industry: wheat flour industry, industry soy sauce, bread industry, industry rice milling 2. Plantation Crops Plantation crop processing industry: palm oil industry, sugar industry, inner and outer tire industry, cigarette industry, cocoa powder industry 5. Fisheries 6. Horticulture Example of Value Added of Agricultural Products 3. Forest Products Forest products processing industry: 4. Livestock processed wood industry, rattan industry, honey industry