chapter one: basic principles of gribusiness marketing

7/27/2019 CHAPTER ONE: Basic principles of gribusiness marketing

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CHAPTER ONE

Basic principles of agribusiness marketing

Introduction

The word agriculture indicates ploughing, a field, and planting seeds, harvesting a crop,

milking cows, or feeding livestock. Until recently, this was a fairly accurate picture. But

today, agriculture is radically different. Agriculture has evolved into agribusiness and has

become a vast and a complex system that reaches far beyond the farm to include all those

who are involved in bringing food and fibre to consumers. Agribusiness system has

undergone a rapid transformation as new industries evolved and traditional farming

operations grew larger and more specialised.

Agribusiness includes not only those that farm the land, but also the people and firms that

provide the inputs (e.g. seeds, chemicals, and credit); process the output (e.g. milk, grain, and

meat); manufacture the food products (e.g. ice cream, bread, and breakfast cereals); and

transport and sell the food products (e.g. restaurants and supermarkets) to consumers.

Agribusiness system has undergone a rapid transformation as new industries evolved and

traditional farming operations grew larger and more specialised. The transformation did not

happen overnight, but came slowly as a response to a variety of forces. Knowing something

about how agribusiness came about makes it easier to understand how this system operates

today and how it is likely to change in the future.

Evolution of Agribusiness

In the late 1800s, agriculture being the major venture, it was easy to become a farmer, but

productivity was low. As a consequence most farmers were nearly totally self sufficient.They produced most of the inputs they needed for production, such as seed, draft animals,

feed and simple farm equipment. Farm families processed the commodities they grew to

make their own food and clothing. They consumed or used just about everything they

produced. A few agricultural products made their way into the export market and were sold to

buyers in other countries.

Overtime, farmers found it increasingly profitable to concentrate on production and began to

purchase inputs they formerly made themselves. This trend enabled others to build business

that focused on meeting the need for inputs used in production agriculture such as seeds,

fencing, machinery, and chemicals and so on. These farms evolved into the industries that


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make up the agricultural input sector. Input farms are a major part of agribusiness and

produce variety of technologically based products that account for approximately 75% of all

the inputs used in agricultural production.

At the same time the agricultural input sector was evolving, a similar evolution was taking

place as commodity processing and food manufacturing moved off the farm. The form of

most commodities were changed to make them more useful and convenient for consumers

who are willing to pay extra for the convenience of buying the processed commodity instead

of the raw agricultural commodity.

During the same period technological advance were being made in food preservation

methods. The perishable nature of most agricultural commodities meant that they were

available only at harvest. Advance in food processing have made it possible to get those

commodities all throughout the year. These farms that meet the consumers demand for

greater processing and convenience also constitute a major part of agribusiness and are

referred to as the processing manufacturing sector.

The term agribusiness was first introduced by Davis and Goldberg in 1957. It represents the

three part system made up of

The agricultural input sector The production sector The processing-manufacturing sector

To capture the full meaning of the term agribusiness it is important to visualise these three

sectors as interrelated. The success of each part depends heavily on the proper functioning of

the other two.

Agriculturalinput sector

Productionsector

Processing-manufacturing

sector


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Input sector

This sector is a large part of agribusiness. It provides farmers and ranchers with the feed,

seed, credit, machinery, fuel, chemicals, and so forth they need to operate. Improvements in

the quality of purchased inputs have been a large source of efficiency gains for the entire

system. This sector provides 75% of the input used in production agriculture. The trend

towards the use of more purchased input will probably continue and should be an ongoing

source of productivity gains for production agriculture.

Production sector

The middle part of agribusiness is the production sector. In the recent years, producers have

specialised into one or a few crops or types of livestock in order to be able to increase the

efficiency of their operations and become production experts. The agricultural production

sector has been the cause of much of the change in agribusiness. They, in turn, have been

changed by development in other areas of agribusiness, particularly in technology.

Processing-manufacturing sector

The sector includes all the individuals and firms that process agricultural commodities (e.g.

turn wheat into flour), manufacture food products (e.g. turn eggs, and other inputs into bread)and distribute and retail food products to the consumer. This sector employs millions of

people in a variety of businesses ranging from grain elevators to fruit and vegetable-

processing plants to supermarkets to fast food restaurants. Some of the nations largest

businesses are included in this section of agribusiness. The businesses in this sector acquire

raw agricultural commodities from farmers and ranchers, and then process them into food

products that are sold at times, at places, and in forms that are desired by consumers. The cost

of these activities is called the marketing bill. The firms in this sector have grown to capture

the economic advantages available from large-scale operations. Although the sector has a few

largefirms, they compete fiercely among themselves and are very responsive to the needs of

the markets.

Definitions of agribusiness

There are many different definitions of agribusiness. According to Merriam- Websters

collegiate dictionary, agribusiness agribusiness is an industry engaged in the production

operations of a farm, the manufacture and distribution of farm commodities


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John Davis and Ray Goldberg (1957), in their early research on agribusiness, defined it as all

operations involved in the manufacture and distribution of farm suppliers; processing, and

distribution of the resulting commodities and items.

A similar definition of agribusiness describes it as any profit-motivated enterprise that

involves providing agricultural supplies and/or the processing, marketing, transporting and

distributing of agricultural materials and consumer products.

Ewell Roy (1980) defined agribusiness as the coordinating science of supplying agricultural

production inputs and subsequently producing, processing and distributing food and fibre.

An inclusive definition of agribusiness was provided by the Australian Department of

Agriculture, Fisheries and forestry. The DAFF called the agribusiness sector a chain of

industries directly or indirectly involved in the production, transformation, or provision of

food, fibre, chemical and pharmaceutical substrates.

All these definitions agree that agribusiness includes all the activities that take place in the

production, manufacturing, distribution, and wholesale and retail sales of agricultural

commodities. Modern agribusiness is a dynamic and growing industrial complex that

provides the nations with the highest-quality, lowest-cost food supply in the world.

Agribusiness can therefore be said to be a generic term for the various businesses involved in

food production, including farming and contract farming, seed supply, agrichemicals, farm

machinery, wholesale and distribution, processing, marketing, and retail sales.

Agribusiness is the coordination of all activities that contribute to the production, processing,

marketing, distribution, financing and development of agricultural commodities and

resources. This includes food, fibre, wood products, natural resources, horticulture, and other

plant and animal products and services. It is a high-tech industry that uses satellite systems,

computer databases and spreadsheets, biotechnology and many other innovations to increase

efficiency and profitability.

Several things characterise agribusiness, differentiating it very distinctly from family

farming: the first is the scale, which is typically quite large; the second is considerable

vertical and horizontal integration. Agribusiness is also distinguished by being run like a true

business, with administrators rather than farmers at the helm of companies in the agriculture

business.


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Scope of agribusiness

Agribusiness companies provide input supplies to the producers as shown in fig 1.1. the

farmers (producers) produces food and fibre (cotton, wool, etc) and the output is taken by

agribusiness companies that process, market and distribute the agricultural products.

Many services are needed in agriculture, such as transportation, storage, refrigeration, credit,

finance, and insurance. Government agencies inspect and grade agricultural products for

quality and safety. Hundreds of agribusiness trade organisations, committees and conferences

educate, promote, advertise, coordinate and lobby for their agricultural products.

Science, research, engineering, and education help improve agribusiness. Millions of people

are employed in agribusiness throughout the world, and people throughout the world also

depend on agribusiness for their food, clothing and shelter.


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Energiser: Agribusiness affects us daily. Consider one of the best-sell ing fast- food

items, the cheeseburger. To get an idea of how agribusiness aff ects our daily li ves, imagine

what is involved in assembl ing a cheeseburger with al l the trimmings. L ist at least 10

businesses or services that are needed to get a cheesebur ger ready for consumption.

Many others

Dairy

Livestock

Poultry

Alternative animal

Crops

Forestry

Nursery

Fruit and vegetable

Alternative crops

Small animal care

Ex orts

Processing

PRODUCTION

AGRICULTURIST (FARMERS)

AGRICULTURAL INDUSTRY

AGRIBUSINESS INPUT

Agricultural by-

products, oil,

bran, dried

grain

ImportsFeed

Seed

Machinery andequipment

Financial/credit

Transportation

Fertilizers

Animal health

Pesticides

Wholesalers

Energy

Containers

Chemicals

Insurance

Research

Science

Engineering

Education

Many others

Marketing

Transportation

Processed foods

Non processed foods

Beverages

Textiles

Wood and paper

Wholesalers and

retailers

Food brokers

Groceries

Fast and other

restaurant

AGRIBUSINESS OUTPUT

COMPANIES


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Agribusiness marketing

Agribusiness marketing can best be defined as series of services involved in moving a

product from the point of production to the point of consumption. It is a series of inter-

connected activities involving: planning production, growing and harvesting, grading,

packing, transport, storage, agro-and food processing, distribution and sale. Such activities

cannot take place without the exchange of information and are often heavily dependent on the

availability of suitable finance. Marketing systems are dynamic. They are competitive and

involve continuous change and improvement. Marketing has to be customer oriented and has

to provide the farmer, transporter, trader, processor, e.t.c with a profit.

Conflicting Needs of Producers and Consumers

Regardless of how an economic system is organized it must have a marketing system to

bridge the gap between the needs of producers and consumers. On the one hand, there are

producers who seek to maximise their long-run profits by selling large quantities of a few

products at the highest possible prices. Conversely, there are consumers who seek to

maximise their total satisfaction by consuming small quantities of many products by

purchasing these items at the lowest possible prices. This makes a conflict.

This conflict of interests requires a marketing system that can solve the differences between

the needs of buyers and sellers. The marketing system helps producers determine what

products consumers most desire and which products can provide the greatest profits. The

marketing system also makes it possible for consumers to find the variety of products they

want at the lowest prices. By solving the conflict of producers and consumers, the marketing

system can lead not only to an efficient meeting of producers and consumers needs, but also

to an efficient use of societys limited resources.


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The Role of Marketing in the Agribusiness System

Marketing plays an important role in giving consumers a large variety of food and fibre

products at the lowest prices found anywhere. Marketing plays a key role in the success of

any economy by bridging the gap between the differing needs of producers and consumers. It

does this by helping producers better understand consumer needs. Marketing helps producers

to decide what products to produce and when to produce them. Marketing also helps

consumers by letting them know what products are available at what price. When done well,

it leads to greater satisfaction for consumers and higher profits for producers.

Agribusiness is the largest industry in most developed nations, and marketing is its largest

segment. More than 80 % of those involved in agribusiness are employed in marketing. For

example, agribusiness marketing activities generate more than 16% of the Americas annual

GNP. Agribusiness marketing is also clearly a major part of Zimbabwes economy.

Nine Functions of Marketing in the agribusiness system

In any economic system there are always barriers between producers and consumers that

prevent producers from efficiently meeting consumer needs. These include separations of

space, time, information and ownership. The role of marketing system is to overcome these

separations by building a bridge between producers and consumers.

Regardless of the type of economic system in a society, the marketing system must perform

nine separate functions to raise the level of economic efficiency in the society. To do this the

Conflicting needs of producers and consumers that

agrimarketing seeks to reconcile.

Producers try to consumers try to

Maximize profit Maximize theover the long term satisfaction they

receive from the

products they buy

With their limited

incomes

Sell large quantities Buy small quantitiesof fewer products of many products

Obtain the highest Obtain the lowestprices prices


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marketing system must overcome separations of space, time, information, value, and

ownership. The nine functions of marketing and the barriers they pass over are listed

subsequently.

Exchange functions

Buying ownership separation

Selling ownership separation

Physical functions

Storage time separation

Transportation space separation

Processing value separation

Facilitating functions

Grades/standards information separation

Financing value separation

Risk taking time separation

Market information information separation

Exchange functions: buying and selling are the most familiar marketing function to most of

us. They must occur in the marketing system if any product exchanges are going to occur.

These functions involve overcoming separations of ownership by exchanging legal title of the

product for money between the buyer and seller.

Figure 1.2: The exchange function

Physical functions

1. Storage: An inherent characteristic of agricultural production is that it is seasonalwhilst demand is generally continuous throughout the year. This gives rise to the need


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for storage to allow a smooth, and as far as possible, uninterrupted flow of product

into the market. The storage function overcomes the separation of time by keeping the

product in good condition between production and the final sale. For example, an

apple picked in September must be kept in controlled atmosphere storage so a buyer

can have a fresh apple in January. In agriculture, and especially in LDCs, supply often

exceeds demand in the immediate post-harvest period. The glut reduces producer

prices and wastage rates can be extremely high. For much of the reminder of the

period before the next harvest, the product can be in short supply with traders and

consumers having to pay premium prices to secure whatever scarce supplies are to be

had. The storage function is one of balancing supply and demand. Both growers and

consumers gain from a marketing system that can make produce available when it is

needed. A farmer, merchant, co-operative, marketing board or retailer who stores a

product provides a service. That service costs money and there are risks in the form of

wastage and slumps in market demand, prices, so the provider of storage is entitled to

a reward in the form of profit.

2. Transportation: the transportation function overcomes the separation of space bymoving the product from where it is produced to where the consumer is willing to

purchase it. For example, the frozen hamburger patty is produced at a central location,

but cooked and served in your neighbourhood. The transport function is chiefly one of

making the product available where it is needed, without adding unreasonably to the

overall cost of the produce. Adequate performance of this function requires

consideration of alternative routes and types of transportation, with a view to

achieving timeliness, maintaining produce quality and minimising shipping costs.

3. Processing: the processing function means changing the form of a commodity to aform that has greater value to the consumer. The form changing activity is one that

adds value to the product. Changing green coffee beans into roasted beans, cassava

into garri or livestock feed, full fruit bunches into palm oil or sugarcane into gur

increases the value of the product because the converted product has greater utility to

the buyer.

Facilitating functions

Facilitating functions are not a direct part of either the exchange of title or the physical

movement of produce.

Figure 1.3 The facilitating functions


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1. Standardisation: Standardisation is concerned with the establishment and

maintenance of uniform measurements of produce quality and/or quantity. This

function simplifies buying and selling as well as reducing marketing costs by enabling

buyers to specify precisely what they want and suppliers to communicate what they

are able and willing to supply with respect to both quantity and quality of product. In

the absence of standard weights and measures trade either becomes more expensive to

conduct or impossible altogether.

2. Financing: In almost any production system there are inevitable lags betweeninvesting in the necessary raw materials (e.g. machinery, seeds, fertilizers, packaging,

flavourings, stocks etc.) and receiving the payment for the sale of produce. During

these lag periods some individual or institution must finance the investment. The

question of where the funding of the investment is to come from, at all points between

production and consumption, is one that marketing must address. Consider the

problem of a food manufacturer who wishes to launch a range of chilled products in a

developing country where few retail outlets have the necessary refrigeration

equipment. This is a marketing problem. It might be solved by the food manufacturer

buying refrigerators and leading these to retailers (or arriving at a hire-purchase

arrangement with retailers).

3. Risk bearing: the risk function involves assuming the risk of loss between the time ofpurchase and sale. In both the production and marketing of produce the possibility of

incurring losses is always present. Physical risks include the destruction or

deterioration of the produce through fire, excessive heat or cold, pests, floods,

earthquakes etc. Market risks are those of adverse changes in the value of the produce

between the processes of production and consumption. A change in consumer tastes

can reduce the attractiveness of the produce and is, therefore, also a risk.4. Market intelligence: As far as is possible marketing decisions should be based on

sound information. The process of collecting, interpreting, and disseminating


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information relevant to marketing decisions is known as market intelligence. The role

of market intelligence is to reduce the level of risk in decision making. Through

market intelligence the seller finds out what the customer needs and wants. The

alternative is to find out through sales, or the lack of them. Marketing research helps

establish what products are right for the market, which channels of distribution are

most appropriate, how best to promote products and what prices are acceptable to the

market. As with other marketing functions, intelligence gathering can be carried out

by the seller or another party such as a government agency, the ministry of agriculture

and food, or some other specialist organisation. What is important is that it is carried

out.

Four Utilities of Marketing

1. Form utility: this means to process the product into a form desired or needed by theconsumer. For example, French fries at a fast food restaurant, the farmer may begin

the process by providing form utility by converting seed, water, fertilizer, and other

inputs into a full-grown potato that is ready for harvest. Those that process the raw

potato into frozen French fries are also involved in the process of providing form

utility; as are people who cook it at the fast-food restaurant. Merely handing

consumers a raw potato would probably do very little to provide them with any

personal happiness when what they really want is hot, sizzling French fries.

Marketing people recognise the profit potential in this desire of consumers for cooked

French fries and transform the raw potato to cooked French fries through processing.

2. Place utility: this means transporting the product to a location desired by theconsumer. Continuing with the French fries example, turning the potato into cooked

French fries is only part of the job. If the potato or frozen French fries is in Harare

while the consumer is in Victoria Falls, how can the consumer gain happiness.

Products need to be transported to consumers, because eating the French fries at their

favourite restaurant in Victoria Falls will give them more utility than if they have to

drive all the way to Harare to get them.

3. Time utility: this means storing the product until the time it is needed by theconsumer. This utility is very important in agribusiness because many commodities

are harvested just once during the year, but consumers want to eat them year-round.

Again, back to the French fries, without storage we could only enjoy French fries for

a few weeks each year after the potato harvest. The marketing people recognise the


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profit potential in year-round consumer access to French fries, and develop ways to

store potatoes and French fries to meet this demand.

4. Possession uti l i ty: this allows consumers to gain ownership of the product so they canlegally use it. This is why the marketing system must provide a simple way for

changing title of the potatoes or the French fries that does not put the buyer in trouble.

Possession utility normally completes the utility process as ownership and physical

control pass to the consumer of the product.

A useful way to think about the utility process is to think of them as adding value to the

product. Consumers must feel the process has increased the value of a product because they

must be willing to pay the market price for the addition of time, place, form and possession

utilities to products they buy.

The purpose of marketing in any economic system is to make sure that consumers get the

products they desire. This means making sure that the right product (form utility) is available

at the right place (place utility), at the right price (possession utility), and at the right time

(time utility) to satisfy the consumer fully.

Each of these utilities is added to the product by performing one or more of the nine

marketing functions. Form utility is created by processing. Place utility is created through the

transportation function. Time utility comes from the storage function. Possession utility is

created by the buying and selling functions. In this way the barriers of space, time,

information, value and ownership are overcome for the producer and consumers.

chapter one: basic principles of gribusiness marketing

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