Analysis Presentation Agricultural Product Marketing Channels

Agricultural Product Marketing Channels Presentation Teaching Materials 01 Concept of Marketing Channels for Agricultural Products 02 Economic Actors in Agricultural Product Marketing Channels 03 Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives 1. Concept of Marketing Channels for Agricultural Products Agricultural Marketing ▪ The performance of all business activities in moving goods/services from the producer (farm level) to the final consumer. Agricultural marketing bridges the gap between producers and consumers. ▪ One of the most important decisions in farming is marketing because: The channel chosen greatly influences every other decision in the marketing field ▪ The length of the marketing channel depends on the number of intermediaries used. ▪ Each institution (including producers) that conducts buying and selling activities is a level in the distribution chain. 1. The Concept of Agricultural Product Marketing Channels cont... Agricultural Product Marketing Channels ▪ Describes all activities that contribute to production of Agricultural Products. From fertilizer manufacturers, to farmers, to food processors, and to grocery store managers, they are all important elements. ▪ The word "channel" indicates the need for every party involved in the production of food/agricultural products and to reflect the interdependence of these parties ▪ Marketing channels in agriculture from various commodities or group commodity different. The difference is caused by : 1. Regional differences 2. Level of available technology 3. Post-harvest handling 4. Available marketing facilities 5. Consumer behavior 6. Government role and intervention 7. The nature of the commodity 2. Economic Actors in Agricultural Product Marketing Channels Economic Actors in Agricultural Product Marketing Channels are various business organizations or business groups that carry out business activities (marketing functions) of agricultural products. Khols & Uhl classify marketing intermediaries: ▪ Trade intermediary institutions, i.e. retailers & wholesalers ▪ Intermediary agents, i.e. brokers & intermediary institutions seeking commissions ▪ Speculator middleman ▪ Processors & manufacturing (agro-industry) ▪ Facilitator organization 2. Economic Actors in Agricultural Product Marketing Channels cont... Economic Actors in the Marketing Channel Intermediary Trader (Merchant Middlemen who own and control products, namely wholesalers and retailers. Intermediary Agent (Agent Middlemen), only mastering the product, namely brokers and commissioners. Speculators (Speculative Middlemen are intermediary traders who buy and sell products for profit by taking advantage of price movements. Usually speculators work on a short-term basis, taking advantage of price fluctuations. Processing and Manufacturing (Processors and Manufacturers), are business groups whose activities handle products and change the form, namely raw materials into semifinished materials or final products. Supporting Organization (Facilitative organizations that help facilitate marketing activities, such as auctions and associations of importers and exporters. 2. Economic Actors in Agricultural Product Marketing Channels cont... Farm Inputs and Farm Production Form Utility Added Food Processing Form Utility Added Food Wholesalers Place and Time Utility Added Food Retailers Time, Place, and Possession Utility Added Consumers Food/Agricultural Product Marketing Channels (1) Agricultural Inputs For example: ▪ John Deere manufactures tractors, ▪ Monsanto produces pesticides, ▪ Mosaic produces fertilizer All are essential ingredients for agricultural production. Livestock producers have to buy feed (corn, soybean meal, hay), medicine, and buildings. 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Efficient Marketing Channels ▪ Marketing agriculture is something complex and costly. that ▪ Marketing channels will be efficient if: 1. Able to deliver products from producers consumers at the cheapest possible cost. 2. (farmers) to Being able to make a fair share of the overall price paid by the end consumer to all those who participate in production and marketing activities. 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... ▪ ▪ ▪ ▪ Marketing is efficient if the ratio of output value to input value in the marketing system is maximum Any change that reduces marketing costs per unit of output is desirable, but if it also reduces consumer satisfaction then it may not improve efficiency. marketing Conversely, if the marketing cost per unit of outputincreases, butdoes not cause a decrease in efficiency if the value of output (consumer benefit) increases equal to or greater than cost Customer satisfaction cannot be measured directly, so changes will be analyzed in terms of: a) Technical Efficiency and b) Pricing Efficiency. Marketing Efficiency = Output Value/ Input Value, Technical Efficiency, Price Efficiency 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Technical Efficiency • • • Emphasizes the way marketing functions are physically performed to achieve the maximum output per unit input ratio. Technological changes can be evaluated to determine whether they reduce marketing costs per unit of output. For example: The use of advanced apple fruit packing machines can increase the number of apples packed per day but also reduce labor costs. Technical Efficiency & Price Efficiency Pricing Efficiency • Emphasizes accuracy, precision, and speed in which prices reflect consumer demand channeled through market channels to producers. • Therefore, price efficiency is affected by marketing costs and the level of competition in the industry. • Activities that can improve price efficiency are market information and the level of market competition. For example: Improved price information and market competition 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Vertical Coordination in Agriculture Vertical Coordination: The act of coordinating activities between sectors along agricultural/food marketing channels. ▪ One of the problems that arise in marketing is that it is difficult to provide consistent products to its customers. For example, sizes that vary. marketing channels encourage less consistent agricultural products that reach consumers ▪ If consistency in agricultural products produced by farmers leads to higher agricultural product prices, then farmers are willing to maintain product consistency 🡺 Price incentives. ▪ Vertical coordination along the agricultural marketing channel shows that the longer the agricultural and food marketing channel, the more difficult it is to deliver the goods. information from consumers to farmers. 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Vertical Coordination Through Average Price ▪ There are many ways for companies to coordinate their activities vertically along the food marketing channel. One of these is through markets and the reliance on price as an information signal. ▪ Prices are efficient information signals. Example: high beef prices signal that consumers want more beef than is currently being produced, and producers respond to high beef prices by producing more beef. ▪ The price is determined by: a) Product quality 🡺 for each agricultural/food commodity is based on average quality, this is referred to as the average price. The price will most likely be determined in It's a kind of auction where buyers and sellers don't interact directly. b) Supply and Demand 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Vertical Coordination Through Grid Pricing ▪ To improve the quality of agricultural/food products through the use of grid pricing, where each agricultural/food product is assigned a unique price based on its quality characteristics. ▪ The term grid pricing is used because the premiums and discounts given for each carcass are based on a table or grid, which reflects the processor's place value on different carcass traits. Base price Quality grade adjustment Prime Choice Select Standard $108.59 $5.17 -$12.33 -$21.00 Yield grade adjustment 1.0-2.0 2.0-3.0 3.0-3.5 3.5-4.0 4.0-5.0 7 5.0 $1.67 $0.75 -$0.17 -$0.33 -$16.83 -$21.83 Carcass weight adjustment 400-500 Ibs. $20.67 500-550 Ibs. 950-1,000 Ibs. 7 1,000 Ibs. -$17.33 -$18.67 -$24.50 Example of Cattle Pricing Grid (Prices Are in $/cwt of Carcass). Source: Lusk et al. (2003). Reprint permission made available by Blackwell Publishing. 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Cost Transmission Along the Food Marketing Channel ▪ Who will bear the transmission costs along the marketing channel? ▪ Between consumers the end consumer and the farmer, who who most affected? Depends on supply elasticity (Producer) and demand elasticity (Consumer) Consequences on market equilibrium 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Cost Transmission Along Agricultural and Food Marketing Channels Demand is more elastic than supply ▪ ▪ Left Curve: Demand is more elastic than supply, When marketing costs rise, consumer prices rise only slightly but farm prices fall by a much larger proportion. In this arrangement farmers feel the greater impact of food processing costs. P Supply more elastic than demand P small retail price rise S Farm large retail price rise S Farm D Retail ▪ ▪ Curve Right: Quote more elastic than demand. If agricultural supply becomes more elastic than consumer demand, the fall in agricultural prices is not very large but the rise in consumer prices is very steep. Consumers are harmed more than farmers. small farm price fall large farm price fall Q D Retail Q (oval = old equilibrium; triangle = new equilibrium) Source: Bailey Norwood, Jayson Lusk (2007) 3. Marketing Channel Efficiency: Producer, Marketing Institution, and Consumer Perspectives Cont... Cost Transmission Along Agricultural and Food Marketing Channels Those with inelastic supply or demand will pay most of the increase in marketing costs. When the cost of food production rises, regardless of the specific sector that directly pays for the cost, all sectors (including consumers) of the food marketing channel will be affected, and the sectors with the least elasticity will be most affected Elasticity is determined by the number of substitutes available. If consumers have many close substitutes for the good in demand, consumer demand will be elastic. If producers have alternative ways to earn money, supply will be elastic. ThankYou!