MARKETINGAg Management

Chapter 7

The Farm Gate Approach to Marketing Lumping and labeling everything that is

done to a product after it leaves the farm as marketing

ShortcomingImplies that production on the farm and

marketing are separate and independent

Stages of a Complete Marketing System

Consuming

Retailing

Wholesaling

Processing

Producing

The True Definition of Marketing All the economic activities involved

in preparing and positioning the product for the final consumer.

The Concept of Utility Satisfaction Products with utility meet a need and in

the process provide satisfaction to the consumer

3 Basic TypesFormPlaceTime

Form Utility Creation starts at the farm level Satisfaction with product grows as

processing changes the product form and prepares it for the final consumer

Place Utility Consumers also demand convenience The modern supermarket now provides

almost any food product the consumer wants under 1 roof

Home delivery

Time Utility Consumers want products to be

available in a timely fashion Products that do not meet consumer

demand in a timely fashion will be deemed to failure.

Dividing the Consumer Dollar Controversial Producers feel cheated because they

only receive a small percentage of the consumer food dollar

Total Utility -the various contributors to the total consumer satisfaction and total product get paid based on what portion of the total utility they provide.

How Much Does the Producer Get? Assuming that a dairy producer gets

$0.34/dollar spent on milk they would receive $1.19 of every $3.50/gal sold.

The other marketing bill (processing, packaging, distributing) gets $0.65/dollar or a total of $2.31/gal

Price Directs the System Contributors get paid for what they do

Consuming

Retailing

Wholesale

Processing

ProducingPriceSignal

ProductionResponse

Price Signals Increasing production in response to

consumer wants and needs. As consumer demand for a product

increases, then so do the prices paid by retailers for products and the prices paid to producers.

Price Efficiency How effective the system is in communicating

needed changes and prompting the proper response.

If clear signals are not sent, then the entire system persist in a state of imbalance

Consumer desires are not met as well and producers receive smaller returns

How well the system communicates via the price mechanism is important to the individual consumer, the individual producer and to society in general

Law of Demand At any point in time the rational

consumer will take more only at a lower price.

Demand Curve Negative Slope It is interpreted this way: Quantity taken

will increase only if the price comes down

Supply Curve Slopes up and to the right Reflects that producers will only offer

more at higher prices

Price Found where supply and demand

intersect That price is the equilibrium price

Equilibrium Quantity The quantity at which supply and

demand match

Price Discovery The process of searching the equilibrium

or market clearing price

Market Clearing Price Also called an equilibrium price It is the only price at which the quantity

demanded by the buyers is exactly equal to the quantity offered by the producers.

Micro-Macro Paradox Individual producers (the micro level) cannot

control price but they are very vulnerable to the actions of producers in the aggregate (the macro level)

Never make a long term commitment to an increase in market price that is likely to be temporary.

No marketing strategy is sufficient to overcome the problems that come with making long term response to a short-run surge in price.

Example In 1972-73 the (now former) Soviet Union was facing a poor grain

crop. Reversing pas behavior, they came into the market and bought grain and oilseeds heavily. US prices were driven up to record prices or near the all time record highs. Corn prices moved above $4.00/bu., wheat $6.00/bu., and soybeans $11.00/bu. US producers responded to the higher prices in dramatic fashion, by the late 1970’s some 50 million acres had been brought into the production of corn, wheat, and soybeans. When the Soviet Union crops improved and it reduced buying in subsequent years, grain prices plunged. Producers were caught in the “micro-macro trap” with no where to turn. It was primarily the surge in acreage that brought on excessive expansion and prompted the “farm crisis” of the 1980’s when many grain farmers were forced out of business. Many of those added acres were grasslands, erodible fields and drained wetlands that were still being targeted by governmental conservation programs in the 1990’s.

Economies of Size Producers and processors tend to try to

reduce cost by increasing in size. Getting too large may cause cost to

increase again Cost decrease on a large farm because

cost are spread over more bushels of production.

Farm Support Programs Most common element is price support

programs 1950’s and 60’s price support was based

upon a base period and the concept of parityThis demonstrated a willingness of society to

keep the incomes of farmers on par with the income of non-farmers

Base price used for decades was 1910-1914 Biggest shortcoming: ignored technological

advances.

Farm Support Programs 1960- surpluses were generated due to

price supportsSurpluses were sold below market price and

given away in domestic and international food programs

This allowed farm prices to be very stable with huge surpluses that made buffers against drought and crop shortage

Farm Support Programs 1972-73- price ceilings on food and other

producers were imposed for the first time in non-war years

Imposing price ceilings below the equilibrium price creates shortages

Price ceilings have not been used since the 1970’s

Farm support programs are still in use and recent Farm Bill legislation works to provide support with pegging a specific price.

Farm Support Programs Target Price

Estimates the cost of production and is considered a “fair” price to farmers

Loan Rate The price the government will pay for the product going into

a 9 month loan program The third component of the Farm Bill Support program

is the deficiency payment The deficiency payment is the difference between the target

price and cash price The net result

Subsidize farmers when prices are low but not in such a way that US prices are pushed above the world-level price.

Marketing Strategies It is important to recognize that farmers

are vulnerable to price vulnerability brought on by weather and crop uncertainty and the impact of government price support and occasional price ceiling programs

Elasticity Percent Change in Quantity

Percent Change in Price

Two Primary Types of Supply-Side Price Variability Price Cycle

Can last for a number of years Seasonal Price

Movement across months within the year

Three Ways Prices Move Forward Cash Contracts Futures Market Options on Futures

Futures Contract A contract calling for delivery of a

carefully described commodity for delivery at some later time period.

Basis Difference between cash and futures

market Usually negative

Forward Price Futures+Basis

Put Option The right to sell underlying futures at a

specific price

Price Floor Strike Price+Basis-Premium The price can not go below this.

Net Price Cash+Option Value-Premium

There are ways producers can improve on the price taker status the markets impose on them.