IntroductionAgribusiness industry is one of the main contributors to the nation’s gross national product of
any country and that too especially in less developed countries. In Ethiopia agriculture represents 45 % of the GDP and sustains the livelihood of 85 % of the population. Whereas agricultural commodities (both primary products and value-added products) are the main components of the trade balance in Ethiopia. Agricultural marketing is a key component of rural growth, poverty reduction, enhanced food security and addressing the needs of a growing population in both rural and urban areas.
The course on ‘Agribusiness Management’ is very much significant because it helps in providing future managers the knowledge to understand how to provide food and fiber to the nation in a better way. This course also enables the managers to have a better understanding of the agribusiness system and its various components. And how these different components interact with each other so that the inputs required by the farmers reach to them and the products produced by them reach the consumers through the distributors.
This course enables the future managers to think differently and to transform farmers from subsistence farming to enterprise farming so as to provide them higher income and a better standard of living.
This course material on ‘Agribusiness Management’ is oriented towards imparting knowledge of the activities and management concepts and tools relating to non-farm agricultural business firms engaged in input supply, advisory services, processing, marketing and distribution of food and agricultural commodities.
The contents of this course material are grouped into two modules covering the important topics of agribusiness operations specifically emphasizing on the marketing operations of agribusiness. The course material has been prepared in an easy and simple language so as to make it easy and interesting to read.
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TABLE OF CONTENT
Title Page
1. Agribusiness Management: An Overview ..................................1.1. Definition, Significance, And Scope Of Agribusiness1.2. The Agribusiness System
Self-testing questions 2. The Management And Organization Of Agribusiness
2.1. Distinctive Features Of Agribusiness Management 2.2. Functions Of Management 2.3. The Organization Of Agribusiness
Self-testing questions 3. Systems Approach To Agroindustrial Analysis
3.1. Production Chain Linkages3.2. Macro-Micro Policy Linkages3.3. Institutional Linkages3.4. International Linkages
Self-testing questions4. Agroindustrial Analysis – Procurement And Processing Factors
4.1. Procurement Factors4.2. Processing Factors
Self-testing questions5: The Agribusiness Marketing Management
5.1. Agricultural Marketing and The Agribusiness Firm ……………...5.2. Commodity Marketing ………………………………………………5. 3. Marketing Program of Agribusiness ………………………………5.4. The Marketing Environment of the Agribusiness Firm …………5.5 The Marketing Plan ……………………………………………….5.6 Developing a Marketing Strategy …………………………………
6. The Agribusiness Marketing Mix ……………………………………….6.1. Agribusiness products: Definition, Features, Product mix decisions, and the
Agribusiness Product Lifecycle ………………………….6.2 Promotion of Agribusiness Products ……………………………..6.3. Distribution of Agribusiness products …………………………….6.4. Pricing of Agribusiness Products ………………………………….
7. Government Marketing Services ……………………………..7.1. Market Information Services ………………………………………7.2. Assistance to Market Operations ………………………………...7.3. Market Surveillance ………………………………………………...
8. Managing the Market Risk …………………………………….8.1. Types of Risk ………………………………………………………8.2. Common Types of Business Risk …………………………………..8.3. Ways to Reduce Business Risk ……………………………………8.4. Ways to Manage the Market Risk ………………………………….
9. Operating the Agribusiness …………………………………..9.1. Production Planning in the Agribusiness ………………………….9.2. Production Processes ……………………………………………….9.3. Types of Production ………………………………………………….
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9.4. Special Problems in Agricultural Production ………………………9.5. Planning Production …………………………………………………9.6. Controlling Production Processes in the Agribusiness …………..
10. Evaluating the Marketing Program ………………………….10.1. Revenue ……………………………………………………………10.2. Costs ……………………………………………………………10.3. Financial Planning: Records and Analysis ………………………
Bibliography ………………………………………………..
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I. Agribusiness Management: An Overview
This unit could be considered as an introductory unit as it provides the definition, significance, and scope of agribusiness. In addition, this unit also explains the agribusiness system and its components.
Unit Objectives
Define what an agribusiness is Explain the scope of agribusiness Understand the agribusiness system and its parts Explain the agricultural input sector Explain the farm/production sector Explain the processing/manufacturing sector Explain the service sector
1.1. Definition, Significance, and Scope of Agribusiness
Definitions of AgribusinessAgribusiness means the very large or conglomerate businesses within the agricultural industry. But this is a very narrow definition. We need to have a broader definition on agribusiness to have a true picture on agribusiness. The following are some of the broader definitions on agribusiness.
According to Davis and Goldberg, ‘ agribusiness includes the sum total of all operations involved in the manufacture and distribution of farm supplies; production operations on the farm; and the storage, processing, and distribution of farm commodities and items made from them.’
According to Downey and Trocke, ‘ agribusiness includes the total input-farm-product sectors that supply farm inputs; are involved in production ; and finally handle the processing, distributing, wholesaling, and retailing of the product to the final consumer.’
According to Long, Oliver, Coale, and Lee, ‘agribusiness management involves the habits and practices of management as they apply to the businesses that are connected with agriculture.’
A simple modern day definition of agribusiness is ‘agribusiness encompasses the total food production and distribution system.’
Activity 1.1Agribusiness includes only very large or conglomerate businesses within the agricultural industry? Discuss upon it.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Importance/Significance of AgribusinessAgribusiness is an important subject area because it is concerned with society and basic needs. Getting food and fiber to all people in the world in the right form at the right time is an extremely complex process.
About 50% of the world’s population is involved in the basic industry of providing food. Many think of USA as a highly industrialized country with agriculture being a relatively small part, but approximately 50% of the total assets of all US corporations and Farms combined is in agribusiness.
Also around 17% of US labor force is employed in agribusiness operations and roughly 22% of USA consumer expenditures are for food and clothing made from US Farm products, and it contributes 16% to the nation’s Gross National Product. Around 85% of Ethiopian population depends on agriculture, and its concerned activities.
Agriculture is an integral part of the world food system. Crop and animal production are the foundation of the system. Management is critical to success in agribusiness.
The agribusiness sector becomes increasingly important because it is faced with the responsibility of providing not only the right type and amount of purchased inputs to the farm sector but the correct mix of service to products as they move through the food system to the final consumer.
Providing quality food and fiber at reasonable prices to all consumers, agribusiness is vital to any nation’s economy.
The Scope of Agribusiness
Agriculture or agribusiness is an integral part of the general economic system. The agribusiness sector in today’s economic environment combines diverse commercial firms, using a heterogeneous combination of Labor, Materials, Capital, and Technology.
The agribusiness sector begins with many varied activities from the farm supply sector, which provides a myriad of production inputs and services to the farm, and then continues through the marketing, processing, and distribution activities necessary to satisfy consumer wants.
Agribusiness- related occupations include:1) Agricultural products and propagation of animals, animal products, plants, plant products, forests, and forest products.2) The provision of services associated with agricultural production and the manufacture and distribution of supplies used in agricultural production.3) Design, installation, repair, operation, servicing of machinery, equipment, and power sources, and construction of structures used in agricultural production.4) Any activities related to inspection, processing, and marketing of agricultural products and primary by-products.5) Any aspects of greenhouse, nursery, landscaping, and other ornamental horticultural operations.6) Conservation, propagation, improvement, and utilization of renewable natural resources.7) The multiple uses of forest lands and resources.
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Agribusiness is by no means homogeneous industry. Agribusiness is made up of small family firms; large corporate organizations; credit and other input supply firms; marketing and processing firms; transportation networks; wholesalers; restaurants; and food and fiber retailers.
Agribusiness industry is composed of a complex series of firms. Agribusiness firms supply inputs to farms, produce farm products, process agricultural products, and market these commodities to the final consumers. No longer do we think of agribusiness/ agriculture as solely the physical and biological production of agricultural commodities. If the United States has a relative advantage in the production of any product at this time, it is in agricultural commodities.
Activity 1.2Is agribusiness is a homogeneous or heterogeneous industry? Explain.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
1. 2. The Agribusiness System
The agribusiness system consists of all the firms that are involved in supplying inputs or services to production agriculture or that handle, process, or manufacture farm outputs and that distribute, wholesale, or retail these products to the final consumer.
The agribusiness system consists of the following four parts:1. the agricultural input sector2. the production sector3. the processing-manufacturing sector, and4. the service (distribution) sector
Each part of the agribusiness system is linked to the other parts of the system for better performance.
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Figure 1.1. : The Agribusiness System
The Agricultural Input Sector
All over the world, farm sector productivity has increased by a significant percentage over the last few decades. A large proportion of this increased efficiency is directly attributed or attributable to the input supply sector. Improved varieties of seed and feed, chemicals, farm machinery and equipment and the facilitating services offered to farmers helped in improving the output-input ratio. Farmers purchase 70-80% of the inputs they use in developed countries.
Today, farmers in the developed countries purchase more than two-thirds of all the inputs they use for production. Thus an efficient input sector that is capable of supplying the right products at the right time in the proper amounts to the farm sector is crucial to continuing the increases in production efficiency that has been witnessed in the past and the present.
Some of the major input supply industries are discussed specifically below. The brief look of some of the major input supply sectors should give the student an idea of the relative importance of each in terms of total farm outlays.
1) Feeds
The largest single out-of-pocket expense item for farmers in recent years in developed countries has been for purchased feed. Feeds are the major farm input in terms of cost in developed countries. In developing countries the farmers meet their feed requirements mostly by growing the feed themselves. Feed includes Grain – corn, wheat, barley, etc. Recently, larger feed industry firms that handle the manufacturing, processing, and distribution from start to finish have become predominant in developed countries and particularly in USA. Though these firms are becoming larger, their numbers have not declined significantly.
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The majority of feed inputs, including grain and supplement, come from local elevators. These firms supply many other product inputs, from nutrients to chemicals and pesticides as well as fuel and motor supplies.
Coming to Ethiopia, the farmers themselves arrange the feed by themselves to meet their requirements.
2) Fertilizers and Pesticides
Agriculture uses many chemicals in the form of fertilizers and pesticides. Between fertilizers and pesticides, fertilizers are used the most. The fertilizer market has expanded rapidly over the decades. About one-third of all crop production can be attributed to the proper use of fertilizer like Urea, DAP, etc. the market for fertilizer products are both national and international. The three key ingredients of fertilizer are nitrogen, potash, and phosphate. The fertilizer industry is linked with that of the petroleum industry because natural gas is a major input in the manufacturing of nitrogen.
Farm use of pesticides has increased by a lot over decades. Pesticides improve crop yields and therefore the overall efficiency of the country’s agriculture. As weed and crop disease control becomes more critical in the future, the continued use of farm pesticides will guarantee a plentiful supply of food for world markets. Pesticides consist of three major categories: Herbicides, Insecticides, and Fungicides.
Coming to Ethiopia, the usage of fertilizers and pesticides by farmers is very less. Actually in the whole of Africa itself the usage of fertilizers and pesticides is itself very less. Recently there was much promotion of usage of fertilizers and pesticides in Ethiopia so as to increase the farm productivity. Even though the usage of fertilizers and pesticides increases the production of output but they have negative fallout. Its usage will lead to contamination of soil and health problems.
3) Petroleum
Farmers spent billions of dollars all over the world for fuels and energy. Fuels used by farm machinery – gasoline, diesel fuel, and compressed gas – are fuels common to other motors. Therefore, no distinct fuel industry exists for agriculture. Input supply firms in this area are typically the larger oil companies that have integrated themselves into the farm supply area, and agricultural cooperatives. Petroleum will continue to be a vital resource for agricultural production and for the input supply industries serving agriculture. Fertilizer industry is especially vulnerable to price and availability changes in the petroleum market.
Coming to Ethiopia, the use of petroleum for farm sector is less because it is not mechanized. The farmers do not use tractors, tillers, water pumps, etc., for agricultural purposes.
4) Farm Machinery and Equipment
Expenditures for farm vehicles, machinery, and tractors amounted to several billion dollars all over the world. An extremely efficient implement supply sector is needed to meet the current demands of farmers. The structure of this industry approaches that of Oligopoly in USA and Europe, where a few large firms dominate the market. The purchase decision rests not only on the price of the particular piece of machinery but on the service that the farmer expects from the dealer.
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Coming to Ethiopia, the farm machinery and equipment industry is non-existing or minimal. The country has a tractor assembling plant at Nazareth, which was set up with collaboration of the erstwhile Soviet Russia.
5) Feeder Stock: Live Stock
Expenditures for live stock and poultry also totaled several billion dollars. Majority of animals move directly from producer to feeder. However, auction markets and country dealers play a major role in feeder stock movement. Terminal markets play a very minor role in providing livestock for breeding and feeding.
6) Financing
Farm debt all over the world totals to hundreds of billion dollars. Debt is categorized as real estate and non-real estate debt. Sources of loans are commercial banks, cooperative banks, etc. Lending institutions in agriculture appear to be changing; they are becoming more competitive and they are starting to adopt constructive innovations in lending policies that will benefit farmer consumers.
7) Cooperatives
Farmer cooperatives are an important element in agribusiness today. Cooperatives tend to be pace setters and power balancers within the industry. Farmer cooperatives today handle a significant percent of all products from the farm gate to the consumer, and provide also a significant percent of all production inputs to the agriculture sector.
Cooperatives contribute much to innovating services to farmers and increasing competition within the farm supply sector. Cooperatives consist of marketing cooperatives and farm supply cooperatives. Marketing cooperatives are more in number than that of the farm supply cooperatives. Cooperatives have progressed significantly in building and in acquiring manufacturing, storage, and distribution facilities. The cooperatives have also made competitive inroads into the fertilizer industry.
2.2. The Production / Farm Sector
The farm sector has been able to meet the challenge of meeting the growing food needs of people in the world. The growing food needs of people arose because of two factors. First, is the increase in population and second, because of the affluence of the people. The farm sector was able to meet these growing food needs importantly because of the following reasons. The first reason is the technology and the second reason is the specialization.
The production sector is the biggest employer in the developing countries and also a major contributor to the nation’s gross domestic product in developing countries. Coming to Ethiopia, majority of the people depend on this sector for their livelihood. Majority of the farmers in Ethiopia are subsistence or marginal farmers. They grow crops basically to meet their food and fodder needs and if any surplus is there they would sell it in the market. As the farmers in Ethiopia are marginal or small and so they do not involve in any kind of specialization activities. Farm productivity is very poor in Ethiopia because of fragmentation and lack of specialization. Farm sector is one of the major contributors to exports in Ethiopia. The export commodities or products from Ethiopia’s farm sector include coffee, pulses, sesame, etc.
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Coming to USA, there are around two million farmers and ranchers. There is a trend toward larger more specialized farms. An average farm equals more than 400 acres and over 450,000 dollars in assets. But still individuals and partnerships still control US farmland and many farm corporations are still owned by families.
Farm productivity has increased to a larger extent due to greater specialization and larger sizes in farms. The gross farm income is growing but there is volatility in net farm income because of rising cost of inputs. And there is also instability in net farm income due to the variation in the selling prices of agricultural output. Also input prices vary from year to year.
2.3. The Processing–Manufacturing Sector or the Product Sector
Product sector is the largest of all the sectors in the agribusiness system. The product sector is responsible for the transformation of the raw farm output into a final consumer product at the retail level.
The processing–manufacturing sector includes all the individuals and firms that process agricultural products (for example, turn wheat into flour) and manufacture food products that is, turn, flour, eggs, and other inputs into bread.
So processing-manufacturing sector acquires raw agricultural products and then process them into food products. The firms in the processing-manufacturing sector are very responsive to the needs of the market. Many of the better known agribusiness firms are found in processing–manufacturing sector.
Features of Processing – Manufacturing sector
1) Largest part of Agribusiness systemIt is the largest part of agribusiness system in developed countries with millions of workers employed in outlets from grain elevators, fruit and vegetable processing plants, super markets to fast-food restaurants.
2) Marketing bill major part of each food dollar The Processing- manufacturing sector acquires raw agricultural products and then processes them into food products sold to consumers. The cost of performing these activities is called marketing bill – and is about 75% of consumer dollar spend on food in USA.
3) Small number of Large FirmsThe firms in the processing- manufacturing sector tend to compete fiercely among themselves. Firms in this sector operate large-volume facilities that permit lower cost per unit of product produced.
Major players in the food processing sector internationally are Heinz, Kraft, Proctor & Gamble, General Mills, Kellogg’s, Campbell soup, Hershey Foods, Pillsbury, etc
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Structure of Processing – Manufacturing / Product Sector:
Large corporate organizations are common place in the product sector. Many of these firms have successfully integrated by combining marketing functions at different levels in the farm-food chain, especially merging under one management for processing and marketing activities.
A few firms have even integrated back to the farm level to guarantee a supply of raw materials with uniform quality. This type of vertical coordination is most prevalent in the areas of broiler chicken, fruit and vegetable production.
2.4. The Service Sector – Distribution
The service sector importantly consists of wholesaling and retailing businesses.
1) Wholesaling
Wholesaling operations involves sales to retailers, other wholesalers, industrial users, and to a lesser extent, the ultimate consumer. A wholesaler may buy directly from the farmer and sell to another wholesaler, or food processor or the wholesaler may buy from the processors and sell to retailers.
The makeup of the whole wholesale trade involves a large group of varied organizations. Wholesalers take title to the products they handle. Wholesalers are responsible for geographic distribution of the product.
2) Retailing
Retail food stores represent one of the largest industries in the U.S., and are also becoming popular in Ethiopia. Trends in the retail food industry are towards larger stores offering more square feet of display area and proportionately more products. The following are the different type of retail stores available for a agribusiness firm to distribute its products.
Superstore concept has been successful in some regions of USA, and under one roof the consumer can purchase now food, drugs, clothing, hardware, and miscellaneous items. Some examples of superstores are Safeway, Giant, Ware mart, etc.
Convenience store concept involves use of very limited store space to move the higher-volume items found in the retail super market. Some examples of convenience stores are 7-11, Circle K, etc. Convenience stores stock a limited assortment of high-volume, high-margin items. Success of convenience stores rests in their location relative to traffic patterns in the area. Convenience stores will continue to be successful as long as the consumer is willing to pay a premium for this type of limited-item, quick service store facility. Convenience stores are the most popular type of retail stores in Ethiopia.
Chain stores account for a major share of all grocery sales. A store is defined as a chain store when it is one of the stores in eleven or more stores under one central management. Current efforts of chain stores involve reducing costs and increasing awareness of consumer needs. For reducing costs, chain stores are adopting mass merchandising techniques, and have installed electronic scanners at the checkout.Scanners offer two benefits;
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i) Relatively error-free, speedy checkout; andii) Better inventory control techniques for the individual store.Regarding increasing awareness of consumer needs, chain stores have adopted unit pricing and are conducting efforts to put more information on labels. Some chain stores are offering generic brand products for the price conscious consumer. Some examples of chain stores are Wal-Mart, Kmart, Home Depot, etc.Checklist
If you understand the following phrases put a tick ( ) mark in the box, otherwise read the unit again.
Yes NoDefinition of agribusinessWhat is an agribusiness system?What are agribusiness-related occupations?What is a chain store?
Self-testing QuestionsAnswers are provided at the end of the Module.
Multiple-choice Questions1. Which among the following is not an agribusiness related profession?a. propagation of animalsb. propagation of animal productsc. propagation of plantsd. propagation of forestse. none of the above
2. Which among the following is not an agribusiness related profession?a. greenhouseb. nurseryc. landscapingd. none of the above
3. The major farm input in terms of costs isa. feedsb. farm machineryc. chemicalsd. petroleume. none of the above
4. The largest sector of all the sectors of the agribusiness system in developed countries isa. agricultural input sectorb. farm/production sectorc. processing-manufacturing sectord. service sector5. The industry structure of farm machinery and equipment is that ofa. pure competitionb. monopolyc. oligopolyd. none of the above
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6. What type of stores has installed electronic scanners for reducing costs?a. Superstoresb. Convenience storesc. Chain storesd. None of the above
True/False Statements
___________1. Fungicide is a type of fertilizer.___________2. Pesticides improve the overall efficiency of the country’s
agriculture.___________3. The selling prices of agricultural output are the same always
and do not vary from year to year.___________4. Marketing cooperatives are more in number than that of the
farm supply cooperatives.___________5. Agribusiness is a homogeneous industry.
Assignment (10%)1. Assess the overall performance of the agricultural sector in Ethiopia during the
last three years.2. Describe the linkage between agricultural sector and the Micro and small
enterprises in the urban sector.
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UNIT 2 - The Management and Organization of Agribusiness
This unit deals with the management and organization of an agribusiness firm. It discusses the distinctive features of agribusiness management and the various form of organization available to an agribusiness firm for organizing its business activities.
Unit Objectives
Explain the distinctive features of agribusiness management Define management and its functions Explain how an agribusiness can be organised Explain the nature, advantages and disadvantages of sole proprietorship Explain the nature, advantages and disadvantages of partnership Explain the nature, advantages and disadvantages of corporation Explain the nature, advantages and disadvantages of cooperatives Discuss the principles of cooperatives Discuss the challenges faced by cooperatives
Managing the Agribusiness
The success or failure of any agribusiness rests primarily on its managers’ effective or ineffective utilization of the organization’s resources. Management is the process of working with people and resources to accomplish organizational goals. Agribusiness management refers to the application of basic managerial principles to a specific sector of the agricultural economy.
Section 1. Distinctive features of Agribusiness Management
Basically, the principles and knowledge of management are the same for any kind of business. The smallest one-person agribusiness and the largest businesses in the world are guided by the same general principles of management. The difference between agribusinesses and other kind of businesses lay in the art of application of basic principles of management to the running of the business.
The agribusinesses and agribusiness management has some unique qualities. Some of the reasons why agribusiness management differs from other kinds of management are the following:
1) The tremendous variety in the kinds of businesses in the agribusiness sector; that is, from basic producers to shippers, brokers, wholesalers, processors, packagers, manufacturers, transporters, financial institutions, retailers, food chains, etc.2) The vast number of agribusinesses. Literally millions of different businesses have evolved to handle the route from the producer through the retailer to the consumer.3) The way in which basic agribusiness is built around several million farm producers. These farmers produce hundreds of different food and fiber products. Most agribusinesses deal with farmers directly or indirectly. No other industry is built principally around the basic producer of its raw product.4) The infinite variety in size of agribusinesses, from giants like Dow Chemical to the one-person or one family organization. Most agribusinesses tend to be small when compared to other businesses and industrial segments.
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5) Agribusinesses are small and compete in a relatively free market where there are many sellers and fewer buyers and where the numbers and sizes of agribusinesses do not allow monopoly like firms. Product differentiation is also difficult in most agribusinesses – a ton of fertilizer or a quintal of wheat will vary little from producer to producer.6) The traditional philosophy of life exhibited by many agribusiness workers, which tends to make agribusiness more conservative than some other businesses.7) The fact that agribusiness firms tend to be mostly family-oriented. Many agribusinesses are run by families or deal with businesses that are run by families.8) The fact that agribusiness tend to be community–oriented. Many of them or located in small towns and rural areas where interpersonal relationships are important and associations are long term.9) The fact those agribusinesses, even those that are industrial giants, are likely to be highly seasonal in nature in operations. Because of the intimate relationship and interdependence of agribusiness and farm producers, and because of the nature of planting and harvesting seasons, special problems often arise.10) Agribusiness deal with vagaries of nature. Droughts, floods, insects, pests, and diseases are a constant threat for many agribusinesses. Everyone from the processor to the fertilizer manufacturer is concerned with the weather.11) The direct impact governmental programs and policies have on agribusinesses. The price of food grains may be heavily influenced by government regulation. Many agricultural products are directly influenced by government programs.
Each of these special features of the agribusiness world requires the agribusiness manager to use the principles of management in a very special way. Agribusiness is unique, and requires unique abilities and skills of its managers.
Activity 2.1: Managing an agribusiness firm is the same as that of managing other types of business firms. If not, list the reasons for not being so. _____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Section 2. Functions of Management
Managers perform many tasks and to accomplish all, it is important to separate them into larger functions. There are five main management functions and these are planning, organizing, directing, coordinating, and controlling. Even in organizations that give employees a large role in planning, organizing, and controlling, the manager must understand these functions well enough to recognize when employees are carrying them out effectively and to guide them when improvement is necessary. Furthermore, the manager’s leadership is important in any organisation.
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1) Planning
Like people, organizations cannot do everything, so they need to determine what is most important and where they should focus their time and energy. The process of setting goals and determine how to achieve is called planning. Planning involves deciding in advance what to do, when to do it, where to do it, how to do it, and who is to do it. Planning is performed at all levels of management. The form that planning takes varies from one manager to the next. At the top levels of the organization, managers must develop a vision of the organization’s overall direction and priorities, a process that requires a large share of the manager’s time. Lower-level managers tend to handle routine planning tasks, such as scheduling, or they may coach employees in carrying out these tasks.
A plan is a future course of action and, therefore, planning is based on forecasts. Forecasting is done using past and current situation to predict future market conditions.
The process of planning consists of:i) Establishing objectives,ii) Making forecasts,iii) Formulating policies, procedures, and rules, andiv) Drawing programs, schedules, budgets, etc.
Planning starts with a firm’s purpose and objectives.Purpose of the firm: the purpose of the firm gives an identity to the firm, that is, the purpose tells the management, employees, and public in clear terms what the firm intends to do. For example, the purpose of the firm could to be to sell cattle feeding equipment to all farmers in Tigrai region.
Objectives of the firm: the objectives of the firm tell how the firm will accomplish its purpose. For example, a firm’s objective could be to have the largest selection, lowest price, or best service of cattle feeding equipment in Tigrai region.
2) Organizing
As individuals, we do our best work when we get organized first. But for managers, organizing is much more than an exercise in time management. Organizing involves developing ways or schemes to transform plans into reality. Formally defined, organizing is arranging tasks into departments, delegating responsibility, and allocating resources. Or organizing function may be defined as identifying and grouping the activities to be performed, assigning them among the individuals and creating authority – responsibility relationship among them. In other words, because managers accomplish their goals through the work of other people, they must set up a way for people to work together effectively.
The organizational structure of firms affects how employees perform their work and make decisions in various situations. Agribusiness firms usually organize according to:
i) Business function- when agribusiness firms organize according to business functions then they then do have large, separate departments. For example, the organization will be organized into sales, production, and purchasing departments.
ii) Product lines – when agribusiness firms organize along product lines then they have departments like feed, seed, fertilizer and chemicals, etc.
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iii) Geographic location – when agribusiness firms organize along territorial lines then they have departments for all major locations in which it is operating and all the functions will be under one manager.
Organizing is hardly just a formality; it is the foundation that shapes all work activities. Whether a sales manager assigns sales representatives to cover geographic territories or to specialize in selling particular products can significantly affect sales revenues. Blunders in organizing can be extremely costly.
The agribusiness manager must see to it that each employee has a role that is clearly defined as part of the organizing function.
3) Directing
Directing is known as ‘management in action’ and is concerned with execution of plans. Directing initiates organized action and breathes life into the organization. Directing is the interpersonal aspect of management because it involves influencing, guiding, and motivating the subordinates for the achievement of the organizational objectives.
Directing is: Assigning duties and responsibilities Establishing the results to be achieved Delegating necessary authority Creating the desire for success Seeing the job is done and done properly
Directing, then, involves leading, supervising, motivating, delegating, and evaluating the employees by the manager. Managers are directing when they see to it that the efforts of each individual are focused on accomplishing the common objectives of the organization.
Directing involves close day-to-day contact with people, helping to guide and inspire them toward achieving team and organizational goals. For achieving maximum results, agribusiness managers must have knowledge on the trends that have affect on the people whom they manage and, hence, there is a need for continual reevaluation of direction.
Successful agribusiness managers know that the measure of their output is but the sum total of the outputs of all those who work for them. The good agribusiness manager will develop those qualities of direction and leadership that will help subordinates to succeed and to derive satisfaction from their work.
4) Coordinating
Coordination is the orderly arrangement of group efforts to provide unity of action in the pursuit of a common goal. Or coordination deals with synchronizing and unifying the actions of a group of people. Coordination involves unifying, integrating, and harmonizing the activities of different departments, and individuals for the achievement of common objectives. The need for coordination arises because of the large size of the organization, specialization, and human nature.
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Coordination is the brain in the body of management skills. When a manager discovers continued difficulty in coordinating, he or she should suspect a poor program of planning, organizing, and directing.
Coordination is, in short, that area of management skills where an ounce of prevention is worth a pound of cure. The less coordinating a manager has to do the better. Good, sound command of the other management skills areas will keep the need for coordination at a minimum.
Coordinating is working together by: Interpreting programs, plans, policies, procedures, and practices Providing for growth and development of employees Keeping in touch with employees and keeping a sense of perspective Providing the climate for success Providing for the free flow of information
5) Controlling
Planning, organizing, directing, and coordinating do not guarantee success. The final function, controlling, monitors progress and implements necessary changes. Controlling is the process of measuring and comparing operative results with the plans and take corrective action when results deviate from plans. Progress levels are measured against standards set in planning. The standards should not be set too high or too low.
The purpose of control is to ensure that everything in the organization occurs in accordance with the pre-determined plans. An efficient system of control helps to predict deviations well in time and to initiate corrective action before much loss occurs.
The control required in all areas of business must be based on predetermined, written goals or objectives. Then only the agribusiness manager can find out whether the results fit with the preconceived plans through which success is sought.
Agribusiness managers must continually check to ensure their organization is meeting its objectives. The organization’s performance has to be compared with that of organization’s objectives. If actual performance falls short of objectives, the manager may identify a need to change the way employees are carrying out their work or to modify the objectives themselves. A manager who controls effectively is able to spot problems and make changes before poor performance does great damage. By involving employees in the control process, the manager may create a system in which errors are corrected faster or prevented altogether.
Activity 2.2: list and explain the various functions of management and how these functions are going to affect the performance of the agribusiness firm.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Section 3. The Organization of Agribusiness
Introduction
Agribusiness firms can be either a small shop selling agricultural products worth hardly hundreds of birr per year to a multinational corporation having sales billions of dollars. So agribusiness firms are found from the smallest to the largest of business enterprises, that is, a one-man enterprise to a corporation employing thousands of employees all over the world.
Agribusinesses may engage in any kind of activity that is related to the production, processing, and marketing of food and fiber products. Agribusinesses are found nearly in every form of business organization existing. Agribusiness firms can organize themselves as a sole-proprietorship, partnership, corporation, or as a cooperative. The form of organisation is not necessarily dictated by the size or kind of agribusiness; nearly every conceivable size and kind of agribusiness may occupy any of the four legal forms of organization.
Each form of business organization has its own advantages and disadvantages. The form of business organization selected for the agribusiness depends on several factors which make it suitable for that particular agribusiness.
3.1. The Sole proprietorship
Sole proprietorship is the oldest and simplest form of business organization. Sole proprietorship is an organization owned and controlled by one person, although it may have many employees. Among all forms of business organizations, sole proprietorship is the most popular form.Sole proprietorship is the easiest form of business to start with limited funds. The term sole proprietor is interchangeable with that of sole trader, sole owner, or proprietor.
Sole proprietorship is the most common form of business organization and can be cited as the first stage in the evolution of forms of business organization. In the sole proprietorship form of business organization, the owner provides capital, management, and perhaps part of labor. The owner is entitled to all profits arising from the agribusiness but also the owner has to assume fully all the losses or risks in the agribusiness.
Generally, sole proprietorship agribusiness firms tend to be small businesses but there are notable exceptions. But as the small businesses become bigger and reach a certain size, then other forms of business organization importantly partnership or corporation normally becomes more attractive.
Activity 2.3: sole proprietorship form of business organization is the least popular and the most difficult to start with. Do you agree with it, if not, why?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Advantages of sole proprietorship
i) Ease and low cost of formationThe formalities required for setting up an agribusiness as a sole proprietorship is minimal. Based on which country the particular agribusiness is being started depends the formalities. In some countries there is a need of license to start agribusiness as a sole proprietorship. In some countries there is no need of a license at all. What is importantly required is the individual’s desire to establish a business. ii) Control Sole proprietorship gives the individual owner complete control over the business, subject only to government regulations. The sole proprietor has complete control over plans, programs, capital, policies, and other management decisions. iii) Freedom and promptness of actionThe sole proprietor need not seek permission from anyone to make management decisions. The sole proprietor can take prompt decisions especially when an emergency arises.iv) Business secrecySecrecy is vital to any business. The business affairs of sole proprietorship are completely secret from all outsiders as they don’t, have to reveal information to anybody except for selected government departments.v) Single TaxThe sole proprietor pays no income tax on business as his business Income is treated as personal income.
Activity 2.4: list the advantages of sole proprietorship form of business organization?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Disadvantages of sole proprietorship
i) Unlimited Liability The sole proprietor will be legally liable for all debts of the business. The sole proprietor’s personal assets can be attached and claimed by creditors if business assets are not sufficient to repay the business debts.ii) Limited Financial Resources The amount of capital funds that one person can contribute to the agribusiness is limited. Because of this, the business expansion cannot take place easily.iii) Lacks Stability and ContinuityAs it depends heavily on one person and if something happens to that one person, that is, the sole proprietor by way of death or disability, then the business may destabilize and even collapse.iv) Heavy RiskThe owner takes all the decisions by himself and so there is a possibility that wrong decisions may be taken.v) Long HoursThe owner has to work for long hours so as to make the ends meet, or to expand the business.
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Activity 2.5: list the disadvantages of sole proprietorship form of business organization?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
3.2. The Partnership
A partnership is the association of two or more people as owners of an agribusiness. There is no limit to number of people who may join a partnership. Except for the fact that a partnership involves more than one person, it is similar to the sole proprietorship form of business organization. Like the sole proprietorship, this form of business organization does not have its own distinct legal identity and so the partners have unlimited personal liability both personally and severally. This means that in case the partnership becomes insolvent or owes debts to creditors, each partner is liable in full for his share and also for the whole debt when the other partners do not have enough personal assets.
Partnership can be based upon written or oral agreement, or on contracts between parties involved. It is always better to have the partnership agreements in writing so as to avoid disagreement and misunderstanding at a later date. Most partnerships tend to be formally enacted in a Deed of partnership or Articles since this makes it much easier to reduce uncertainty and to ascertain intentions when there is a written document to consult.
Partnership can be formed by law whenever two or more people act in such a way that reasonable people would be led to believe they are associated for business purposes. In essence, a partnership comes into being when two or more people establish a business which they own, finance and run jointly for personal gain, irrespective of the degree of formality involved in the relationship.
There are basically two kinds of partnerships and these are general partnership and limited partnership. General partnership is the most popular kind of partnership and majority of partnerships are general partnerships.
1) General Partnership
General partnership is the most common form of partnership. The partners in a general partnership are called as general partners. In a general partnership each individual partner, regardless of the percentage of capital contributed, has equal rights and liabilities. A general partner has the authority to act as agent for the partnership, and normally participates in the management and operation of the business.
Each general partner is liable for all partnership debts. Each general partner may share in profits, in equal proportion with all other partners. Liabilities are shared equally as long as sufficient personal resources exist. But, when one general partner’s resources are exhausted, the remaining general partners are held liable for the remaining debt.
General partners may contract among themselves to delegate certain responsibilities to each other, or to divide business revenues or costs in some special manner. Each general partner may
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bind the partnership to fulfill any business deal made. General partnership is usually treated as a separate business for the purposes of accounting; it is legally not regarded as an entity in itself, but as a group of individuals or entities.2) Limited Partnership
This type of partnership has two cases of partners and they are general partner and limited partner. All partnerships are required by law to have at least one general partner. This general partner is responsible for the operation and activities of the partnership. The limited partners have limited liability and their liability is equal to the money they have contributed to the partnership. The limited partner’s personal assets cannot be claimed by creditors when the partnership assets do not cover the full amount owed to the creditors.
The limited partner’s rights in management affairs are limited as their liability is limited. Limited partners are needed basically to increase the capital of the agribusiness firm. Limited partnerships are relatively few in number.
Activity 2.6: limited partners manage the activities of the partnership. Do you agree by it? Discuss.____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Advantages of partnerships
i) Ease of startingPartnership is just about as easy to start as sole proprietorship. They require very little expense, except for lawyer expenses to draw up the partnership agreement. ii) Increased sources of capital and creditPartnership offers numerous sources of capital. First, there is direct contribution by the partners. Second, the partnership can get loans from friends, investors, and banks. Finally, the partnership can get credit from the suppliers.iii) Reduced riskAs there are many partners in the partnership. There is no need for one person like in sole proprietorship to take all the risks or losses and the losses or risk will be shared among all the partners according to the partnership agreement.iv) Motivation As partners share in responsibility and profits, they are more likely to be motivated than employees of sole proprietorship or corporation.
Activity 2.7: list the advantages of partnership form of business organization.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Disadvantages of partnerships
i) Unlimited liability The partners’ liability in the partner ship is unlimited. If at all the partnership incurs losses and the assets of the partnership are not sufficient to cover the losses of the partnership. Than the personal assets of the partners have to be sacrificed to write of the losses of the partnership.ii) Lack of ContinuityPartnership is dissolved on the death, retirement, or insolvency of any partner. This situation leads to the disruption of the activities of the partnership.iii) lack of smooth relationshipAs many people are involved in the running of business and this leads to lack of understanding and unity among partners. So when this occurs it would lead to differences and conflicts among the partners.iv) Investment withdrawal difficulty/restriction on share transferA partner can sell or transfer his share in the partnership to outsiders only when he gets the consent of the remaining partners. So this is a impediment in the withdrawal of investment from the partnership.
Activity 2.8: Discuss the disadvantages of partnership form of business organization over the sole proprietor ship form of business organization._________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
3.3. The Corporation
A corporation is an artificial being, endowed by law with the powers, rights, liabilities, and duties of a natural person.
By law a corporation is a corporate association having a legal identity of its own. This means that the corporation is distinct from the people who own it, unlike in the case of a sole proprietorship or partnership. So the property and other assets owned by the corporation belong to the corporation and not to its members (share holders or stock holders). And hence the personal assets of its members (share holders) do not generally belong to the corporation. When the corporation becomes bankrupt or insolvent the member liability is limited to his or her contribution to the corporation.
Corporations are essentially business organizations consisting of two or more individuals who have agreed to embark on a business venture and who have decided to seek corporate status than to form a partnership. The creation of today’s big business companies, which have assets in billions or millions of dollars and thousands of employees has been made possible with the corporate form of business organization. Even though majority of the biggest businesses all over the world are corporations, still many corporations are relatively small businesses.
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The Nature of the Corporation
The corporation when compared with that of the earlier forms of business organization like sole proprietorships and partnerships is a rather recent phenomenon. Corporations even though it is an artificial being can own property, take loans, and can sue or be sued for damages, among other things in its name.
The important distinction between corporation and sole proprietorships or partnerships is that the owners (shareholders) and the managers do not own anything directly. The assets of the corporation are in the name of the corporation itself.
Individuals seeking to form a corporation are required to file numerous documents, including a Memorandum of Association and Articles of Association, with the Registrar of Companies. If satisfied, the Registrar will issue a Certificate of Incorporation, bringing the corporation into existence as a legal entity. The applicants can now onwards do business in the name of corporation.
The Stock of the Corporation
The owners of the corporation are stockholders and they are also known as shareholders. Ownership of a corporation is divided into equal parts called shares. Stockholders get ownership in the corporation when they hold stock or shares in that corporation. The stockholder receives a share certificate from the corporation showing his or her number of shares owned in the corporation. So a share certificate is a paper, in prescribed legal form, which shows each person’s amount of ownership in the corporation.
There are two types of stock in a corporation and these are preferred stock and common stock. Preferred stock holders do not normally vote in the affairs of the corporation but have preference in dividends and sharing of assets in case the corporation is liquidated. Common stock holders have a say in the affairs of the corporation and have preference in dividends only when the preference share holders get their due dividends.
There are many ways of financing a corporation like bonds, debentures but equity financing or sale of stock is most commonly used for raising the required finance.Functioning of the Corporation
The corporations act through their directors. Directors are individuals elected by the corporation’s common stockholders to manage the affairs and to make important decisions concerning the direction the corporation should take. Directors take important decisions in the areas of mergers, acquisitions, investments, etc.
The number of directors that a corporation can have depends on the bylaws of the corporation. The appointment and powers of the directors are given in the Articles of Association. The group of directors is known as board of directors. The board of directors’ responsibility is to manage the activities of the corporation. The board of directors represents the interests of the stockholders as they are elected by the stockholders to look after their interests. The major function of the board of directors is to select and hire top executives, and to evaluate the progress of the corporation.
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Activity 2.9: Shareholders are involved in the day-to-day activities of the firm. Discuss.______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Advantages of corporation
i) Limited LiabilityThe stock holders are not responsible for the debts of the corporation beyond their original investment. The personal assets of the stockholders cannot be claimed to cover the debts of the corporation.ii) Better ManagementThe corporate structure allows the organization to recruit excellent and highly motivated people and also it allows the delegation of authority, responsibility, and establishment of accountability.iii) Ease in transfer of ownershipGenerally, there are no restrictions on the transfer of stock from one stock holder to another stock holder. Normally the stock holder can sell it to any outsider without the permission of the board. Or otherwise they can gift it to anybody whom they wish to without the permission of the management or the consent of the board of directors of the corporation.iv) StabilityThe corporation is perpetual in nature. It means that the corporation is not affected by the death or withdrawal of its stockholders and can continue its operation without any hindrance.v) Large Finances A corporation can mobilize large amounts of funds through sale of stock and/or through issue of bonds. And as the stock is freely tradable, it can help in mobilizing more funds.
Activity 2.10: list the advantages of corporation form of business organization?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Disadvantages of Corporations
i) Double TaxationThe corporation is first taxed on its income and then when it passes the profits to the stockholders as dividends. The dividend income of the stockholders is again taxed as his personal income. So thus you see double taxation.ii) Highly RegulatedA corporation has to abide by many laws and regulations when compared to the earlier forms of business organization like sole proprietorships or partnerships. iii) Lack of SecrecyThe corporation has to provide information about its activities regularly to its stockholders and many government departments. As much information must be made available to the public and to government agencies there is a lack of secrecy in the affairs of the corporation.
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iv) Separation of Ownership and ControlGenerally in most corporations the owners and the managers are different. So the owners, that is, the stock holders do not have any say in the affairs of the corporation. And if they are dissatisfied with the affairs of the corporation either they have to change the board of directors or simply sell their ownership in the corporation.v) Expensive to OperateWhen compared to the other forms of business organization like sole proprietorships and partnerships the corporate form of business is highly expensive. This is so because it has to pay more taxes, maintain records, and spend more on operative expenses.
3.4. The Cooperatives in Agribusiness
Cooperatives play a major role in agribusiness. Farmers own and operate a distinctive form of agribusiness called as agricultural cooperatives. The cooperative method of business has been an important way for an individual farmer to join with other farmers to improve their economic well- being.
Cooperatives enable farmers to obtain products and services that are properly adapted to their special needs at fair prices throughout the year. The purpose of a cooperative is to help farmers reduce the prices paid for their inputs and to enhance their output prices.
The encouragement and the special policies and regulations of the government have helped the farm cooperatives to become a significant factor in many supply, marketing, finance, and service industries of the agricultural sector. Cooperatives are found almost in every phase of the agriculture process either directly or indirectly.
Through farm supply cooperatives the cooperatives play a major role in agribusiness by providing the farmer with the means to integrate vertically backward into the agricultural input sector. And through farm marketing cooperatives to integrate vertically forward into the processing-manufacturing sector. Many cooperatives provide both types of activities like providing inputs to the farms and buying farm products. The farm supply cooperatives help its farmer members with the purchase of inputs to the farm, such as seed, feed, chemicals, fertilizers, fuel, etc. The farm supply cooperatives play a crucial role in the supply of fertilizers, petroleum products, and farm chemicals to its members. Farm marketing cooperatives assist farmer members with the marketing of their produce. The farm marketing cooperatives play a major role in the marketing of many farm products, and they are particularly strong in the marketing of dairy products and food grains.For the benefit of agribusiness community, there is an addition of another form of agricultural cooperative to the existing two forms of agricultural cooperatives. This third form of agricultural cooperative is called the service cooperative. Some examples of service cooperatives are the Federal land banks, rural credit unions, production credit associations, etc.
In improving their standard of living and getting more profits from farm operations the service cooperatives also play a major role by helping farmers.
All over the world, cooperative forms of business have been a major player to the success of agribusiness. Agricultural cooperatives have become big businesses and are numbered among the largest businesses organizations with regard to sales in USA. Some examples of large cooperatives in sales are Land O’Lakes, Sunkist Growers (oranges), and Sun-Diamond Growers.
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The objectives of Agricultural Cooperatives
The objectives of agricultural cooperatives have changed little over the several decades and remain mostly the same as they were earlier. The agricultural cooperatives try their best to improve the lot or economic welfare of its farmer members.
The agricultural cooperatives have two fundamental objectives and these are:
i) Honest MarketProvide a dependable, honest, and accurate market to the farmers for their inputs which they purchase and the outputs which they sell. Farmers prefer a business that could provide them with the needed inputs and services for their specific needs and at the same time offer a fair and reasonable price for their outputs.
ii) Increase in IncomeTo increase the income of farmers by increasing their returns for agricultural outputs and at the same time reduce the cost of agricultural inputs and services.
The agricultural cooperatives function to help its farmer members increase their profits from their own agricultural activities. So as to help the farmers to make profits in their activities the agricultural cooperatives provide them with the needed products and services which help them to lower their production costs and to operate more efficiently. The agricultural cooperatives achieve these objectives by combining together in order to obtain sufficient volume to purchase and sell more efficiently, and by passing back all profits earned to its farmer members.
Activity 2.11: The objective of a cooperative is primarily to make as much as profits as possible so that the farmers could become rich. Discuss.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Principles of Cooperatives
The principles surrounding the functioning of cooperatives have not undergone major change throughout their existence. Many modern cooperatives are formed around the principles espoused by Rochdale Society of Equitable Pioneers in United Kingdom in 1844.
The major principles of cooperatives are:
1) Member Controlled, Member OwnedThis principle makes sure that only the farmer gets advantage from these cooperatives. It is normal and essential that cooperatives maintain their orientation toward servicing their patron members. And this is the best way to ensure that the cooperative is controlled by its patron members who are also the owners of it.
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2) One person, One voteThrough the enforcement of this principle the cooperatives provide the same kind of treatment to all members what ever be their holding of membership. This principle also ensures that members having big holding do not dominate the organization.
3) Limited Return on CapitalThis principle makes sure that the emphasis is not on capital appreciation or return on investment but to improve the efficiency in marketing activities.
4) Operate at CostThis principle makes sure that this organization functions for the mutual benefit of its farmer members as most of the profits are passed on to its members. The profits are passed on to individual members according to the volume of business that they had conducted with the cooperative.These principles of control and operation are unique to cooperatives and distinguish them from other forms of business organizations.
Classification of Agricultural Cooperatives
Agricultural cooperatives can be classified in several ways. The agricultural cooperatives can be classified according to1) the type of commodity traded2) the organizational structure utilized3) the Territorial or Geographical area covered4) the type of Marketing function performed
1) The type of Commodity tradedThis classification of agricultural cooperatives is according to the type of commodity or product handled. The examples of this type of cooperatives are those cooperatives which specialize in marketing teff, corn, cotton, milk, etc. most of these types of cooperatives start their operations in one commodity or product and then move on to several commodities or products.
2) The Organizational Structure utilizedThe agricultural cooperatives can be organized as federated structure or centralized association. The majority of agricultural cooperatives are owned directly by their farmer members. This type of structure is called the centralized association. This type of cooperatives serves local customers by operating local facilities near them. Federated structure is a type of organizational structure in which the membership is taken by other cooperatives and mostly by local cooperatives.
3) The Territory or Geographical area coveredCooperatives not only serve a local community, district, but also a region. So as to serve efficiently in all areas it divides the organization into different parts. To accomplish this, the cooperatives use either a centralized or federated organizational structure where each part serves a particular geographical area.
4) The Type of Marketing Function performedMajority of cooperatives either perform any one of the marketing functions. They either perform supply of inputs to farmers or provide agricultural products to the consumers. But there are many other marketing functions like storage, transportation, etc that have to be provided and these are usually handled by the parts of the federated structure. The forward vertical integration of
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marketing functions toward the consumer, and the backward vertical integration of supply functions to the actual production of farm inputs, can each be handled by a different unit of the cooperative.
Challenges of agricultural cooperatives
The tremendous growth in size and operations and complexity of agricultural cooperatives provides a big challenge to both its members and management. So far agricultural cooperatives have had success by meeting efficiently the needs of their farmer members. As the cooperatives become larger the meeting of the needs of farmer members becomes more difficult. Thus, the major challenge facing the agricultural cooperatives is how to operate and meet the needs of the members efficiently keeping in mind the basic principles of cooperatives. To achieve the task of operating and meeting the needs of members efficiently without sacrificing the principles of cooperatives requires persons with capability as managers and directors.
Another challenge being faced by cooperatives is how to retain their members. The farmer members are no more loyal to their cooperatives. The farmer member looks for sure and tangible benefits. So if he doesn’t get any definite benefits from the existing cooperative he doesn’t keep his membership with that cooperative. So the agricultural cooperatives have to always seek improved, better, and more efficient ways to serve the needs of its farmer members and satisfy them.
An agricultural cooperative to be well functioning and operating requires a capable, well-trained, and involved board of directors. This board of directors should set the right direction and establish general policies for the cooperatives. The boards of directors have been found to be on the negative side regarding hiring of efficient management professionals in managing the cooperatives by providing them higher salaries and decentralizing power. But as the situation is changing and becoming more complex, the board has to move in the positive direction and hire more efficient management professionals and provide them with the required decision making powers and adequate salaries.
There is should be equity in the treatment of the farmer members. The needs of the younger farmer members should be taken into consideration because they are having more constraints or problems of capital when compared with the existing older farmer members who may not that many constraints or problems.
Another important challenge facing agricultural cooperatives is the need to generate a more stable and equitable capital base than that of concentrating on revolving fund or debt capital. Through revolving fund, the cooperatives pass on the patronage refunds in the form of stock rather than in the form of cash to its members. Activity 2.12: Discuss the challenges and prospects of cooperatives in Ethiopia.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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ChecklistIf you understand the following phrases put a tick ( ) mark in the box, otherwise read the unit again.
Yes NoWhat is planning?What is organising?What is directing?What is coordination?What is controlling?What is a cooperative?What is a farm supply cooperative?What is farm marketing cooperative?
Self-testing QuestionsAnswers are provided at the end of the Module.Multiple-choice Questions1. The most common and least complex form of business organization is the
a) non-profit organization.b) sole proprietorship.c) partnershipd) corporation
2. A characteristic of an agribusiness corporation is that it: a) is always highly profitable. b) does not pay taxes, the different partners in the corporation pay taxes. c) is not allowed to lend money to farmers. d) is owned by the shareholders
3. A payment to the stockholder of a corporation from after-tax earnings is.a) interest income.b) a dividend.
c) a covenant.d) none of the above
4. A not for profit business organization that is owned and controlled by the people it serves is a:a) partnership.b) limited partnership.
c) corporation.d) cooperative
5. __________ is an artificial person endowed by law with the powers, rights, liabilities, and duties of a natural person.
a) Sole-proprietorshipb) General Partnershipc) Limited partnership
d) Corporatione) None of the above
True/False Statements
_________1. Agribusiness is more conservative than some other businesses.___________2. Agribusinesses are not affected by vagaries of nature.___________3. Organizing starts with a firm’s purpose and objectives.___________4. Directing breathes life into the organization.___________5. The votes held by a member in a cooperative depend on the
number of shares they hold in the cooperative.
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Questions for Discussion1. What is sole proprietorship and what are its disadvantages?2. What is partnership and what are its advantages over sole proprietorship
form of business organization?3. What is a corporation and what are its advantages over the sole proprietorship and
partnership form of business organization?4. What are the objectives of cooperatives?5. What are the principles of cooperatives?6. What are the different types of agricultural cooperatives?7. What are the different ways available to classify agricultural cooperatives?8. What challenges are faced by agricultural cooperatives in their activities?
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UNIT 3 - Systems Approach To Agro Industrial Analysis
This unit enables the readers to view agro industry as a system and how the different linkages are going to affect the performance of the agroindustry.
Unit Objectives
To explain the Role of agribusiness in development To explain the linkage between agribusiness and the small scale farmer Explain production chain linkages Explain macro-micro policy linkages Explain institutional linkages Explain international linkages
The agro industrial project analysis framework views agro industries as systems because agro industries distinctive characteristics create a set of critical interdependencies. Examining these systematic linkages is essential to designing and operating successful agro industries.
The four types of systematic linkages are:
1) Production Chain LinkagesThese systematic linkages consist of the operational stages that agro industry materials flow through as they move from the farm through processing and then to the consumer.2) Macro – Micro Policy LinkagesThese systematic linkages concerns the multitudes of effects of government’s monopolies have on an agro industry’s operations.3) Institutional LinkagesThese systematic linkages involve the relationships among the different types of organizations that operate and interact with the agro industry production chain.
4) International LinkagesThese systematic linkages deal with the interdependencies of national and international markets in which the agro industry functions.
Each of these linkages deals with different dimensions of the agro industry system, but all are interrelated. The task of the project analyst is to understand how the production chain linkages, macro-micro policy linkages, institutional linkages, and international linkages interact and affect the agro industry viability.
The four systematic linkages affect each of the three core operating areas of an agro industry: Procurement, Processing, and Marketing.
Section 1. Production Chain Linkages
Agro industrial projects have often suffered from an ‘analytical Schizophrenia’. Analysts are ambivalent about whether to examine agro industries as agricultural projects or manufacturing projects. This ambivalence reflects the dichotomy in the analyzers: ministries are split into agricultural or industrial; analysts are categorized as agricultural economists or industrial engineers; and development banks are specialized as agricultural or industrial. For agro industrial
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project analysis the dichotomy is false and counter productive. Agro industries are inherently intersectoral; it is essential to view the operation as links in a production system.
Even though recognizing the importance of the entire system, some analysts focus mainly on agricultural production and lump everything post-harvest into ‘marketing’, thereby glossing over the analysis of the special demands and characteristics of agro industries.
One must recognize agro industry’s uniqueness but also understand that it constitutes only part of the seed-to-consumer agribusiness system; one’s analytical lens must scan the entirety of the chain because of the interdependencies of the links.
Figure 3-1. Flow Chart for Agroindustry
Breedstocks
Seeds Equipment
Agro-chemicals
Othersupplies
Extensionand research
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Note: Labor and financing inputs occur for each task. Agroindustry products may includeby-products or be inputs to other agroindustries including additional processing operationsThe production chain system begins with product inputs to the farm, which converts these into agricultural raw materials, a portion of which may be retained for on-farm consumption and the remainder transported to agro industry directly or through produce markets.
At the processing stage the agricultural raw materials are stored and then transformed by industrial inputs and processed into consumer or industrial products, which are stored and then distributed through the wholesale and retail channels of the domestic and foreign markets. Labor and financial inputs occur at each stage in the chain. Thus, the production chain encompasses both production and service businesses. The precise structure of the production chain varies for each agro industrial system and setting. For example, for agricultural products like fresh fruits and vegetables require low level of transformation, and so, the processing stage would be dominated by cleaning, sorting, packaging, and storage. Other agricultural products might pass through multiple processing stages.
A companion affliction to ‘analytical schizophrenia’ is ‘analytical myopia’, in which project design focuses only on parts of the production chain without taking into account all of the links and interdependencies. An agro industrial system is filled with interdependencies, so an analyst must carefully examine all of the backward and forward linkages. By focusing myopically only on one operation, for example, oil extraction, rather than on the larger set of linked subsystems (fiber, food processing, and livestock), the businesses and government planners fail to see and plan for problems and opportunities arising from the system’s interdependencies. The resultant adhoc planning was unnecessarily costly to the businesses and the country.
Often the analytical myopia is with the agriculturalists rather than the industrialists. Rare is the developing country that has not watched an agricultural production project succeed in raising output only to falter and perhaps even fail because of bottle necks or inadequate planning in the down stream agro industry stages of the production chain. Such problems abound when new production technologies are instituted, as during the ‘green revolution ‘years in Asia and Latin America.
It is equally important to understand the dynamic nature of the production chain. The flow of raw material supplies is vital; it dictates capacity requirements in transport, storage, and processing. Raw materials flow may fluctuate because of seasonality and vagaries of nature. The timing and magnitude of seasonal flows can be affected by production technology. For example: new seed varieties of different growth cycles, or second or third crop through irrigation. Vagaries of nature are less predictable, but they too can be incorporated into planning. For example, vagaries of nature can be overcome by importing from other areas when there is deficit in the raw materials in the main procurement area.
The interdependent nature of the production chain means that changes at one point often trigger changes elsewhere, significantly affecting the entire system functioning. For example, the banana business in Central America; box usage for banana exporting and not by stems. Sometimes change occurs at the retail and consumer end of the production chain. For example, the emergence of super markets increases the bargaining power of the retailer and often forces agro industries to adjust packaging, delivery, and even product design.
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A final perspective on the production chain can be gained by examining its value-added components. Each of the direct and indirect production functions that occur throughout the length of the production chain adds value in the cumulative process of creating the final product.
The amount of value created will depend on how each function is carried out and how it is linked with the others in the chain. For the designer of an agro industry this perspective is particularly important in considering which of the functions in the production chain it should perform itself, (that is, the degree of integration) and how it should relate to its suppliers and buyers to maximize their collective value creation effort.
An example is in the sugar production chain, where any number of occurrences might change the value during the critical function of harvesting. When and how the cane is cut and how quickly it reaches the sugar mill and is processed all significantly affect the quantity and quality of sugar that can be extracted from the cane.
Activity 3.1: Production chain includes both production and service businesses. Discuss. _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Section 2. Macro–Micro Policy Linkages
The business environment of an agro industry is significantly shaped by the government’s policies and actions. Given the economic, political, and social importance of food and agriculture; most governments are particularly heavily involved in their nation’s agro system. Government constitutes a ‘mega-force’ in the nation’s food and fiber production chain, and so the systems approach must encompass an examination of the government’s role.
One way to envision the linkages between the government’s policies at the macro level and the operations of the agro industry at the micro level is the ‘public policy impact chain’. National development goals and strategies are expressed through national policies that are implemented by various policy instruments (taxes, credits, subsidies, etc) that affect in a variety of ways in the production chain and the specific agro industry.
Alternative types of development strategies – for example, import substitution or export promotion – can give rise to distinct policy configurations and have quite different effects on agro industries.
Macro policies can be grouped into the following categories: Fiscal (Revenue and Expenditures), Monetary (Credit and Interest rates), Trade (Foreign exchange and EXIM Controls), and Incomes (Prices and Wages). In addition to these policies, governments also formulate macro policies for specific sectors such as agriculture, industry, transportation, health, education, etc.
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The task of the analyst is to identify how specifically the macro policies will affect the agro industry being examined. Macro policies can alter access to inputs and markets, costs and types of inputs, competition and prices. For example, a regional/state government in India has imposed a ban on the production, sale and consumption of liquor in that state. This ban on production, sale and consumption of liquor has hurt the sugar industry very much because the price of molasses, a by product of sugar, has fallen down drastically. Molasses is used for making liquor and once there was ban on producing liquor/alcohol the demand for molasses has fallen down and hence it led to reduction of molasses price.
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The effects are pervasive, permeating the procurement, processing, and marketing operations of an agro industry. For example, under fiscal policy for agriculture the government might provide subsidy or remove subsidy. Each has its own implications. The policy analysis of the agricultural production stage in the chain is relevant because of the implications for the agro industry’s procurement operations.
Regarding monetary policy, an overvalued exchange rate will decrease the costs of imported inputs for farmers and processors but increase the competition from imported finished goods with the agro industries outputs. Of course, duties or quotas could affect the access, costs, and competition of imports. In the area of incomes policy, agricultural price supports can directly affect the cost of the raw materials to the agro industry. At the consumer end, price controls on the processed goods can limit the revenues of agro industries.
In the absence of subsidies the agro industry may find its margins severely squeezed by government’s policies to raise farmers’ incomes and lower consumer’s food costs. Agro industries are caught right in the middle of this basic food policy dilemma.
It is evident that the private analyst must carefully analyze the significance of the government’s policies and actions because they can directly and indirectly have dramatic affects on agro industry’s strategy, operations, and viability.For the public sector analyst also it is equally important to scrutinize these policy effects in order to avoid unintended consequences in any part of the production chain.
Activity 3.2: Discuss the effect of macro policies on agroindustry._________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Section 3. Institutional Linkages
Institutional linkages deal with institutions operating the system. The structuring and managing of institutional relationships are critical to effective design and operation of agro industries. The Project analysis must encompass institutional analysis.
For any agro industry the primary operating and bargaining relationship within the production chain are with its suppliers, mainly the farmers, and its buyers. From a competitive perspective the agro industry interacts with its rival processing companies and faces the threat of potential new competitors and even substitute products.
The government’s control and regulation of resources can affect all of the other relationships and hence competitive structure and dynamics.
There are five main types of economic institutions which are operating in the production chain and they are i) farmers and producer cooperatives;ii) state-owned enterprises;iii) multi-national companies;
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iv) local enterprises; andv) marketing intermediaries
i) Farmer and Producer Cooperatives
Agriculture is characterized by a large number of producers, although farm size varies widely. This farm structure often means that an agro industry has to deal with many suppliers or their middlemen.
Most farmers operate as independent businesses. But to gain economic or political power, farmers sometimes organize into cooperatives or other forms of producer associations. And also governments actively encourage or promote the organization of farmer cooperatives.
Farmer cooperatives supply twenty percent (20%) of farm inputs worldwide. These cooperatives also market worldwide thirty percent (30%) of farm production. Sometimes cooperatives also integrate vertically into the agro industry stage of the production chain.
Cooperatives are having significant political power because of their numerical strength. The cooperatives are also having bargaining power as suppliers due to their economic size, and control over supply. Because of their organizational form the cooperatives are slow in decision making and the operating responsiveness. Cooperatives face serious operating problems as they are lacking adequate professional management, and have limited capital.
ii) State- Owned Enterprises
Most governments often choose to intervene in the food and fiber production chain through the use of state-owned enterprises, or parastatals. State-owned enterprises are organizations operating directly in the production chain and carrying out various productive functions.
Governments have turned to state-owned enterprises for many reasons. Food shortages and price instability of agricultural products can lead to political turmoil and this affects the survival of the governments. State-owned enterprises enable the government to have more direct control over the food system.
For gaining political support among selected groups also state-owned enterprises are used. Through state-owned enterprises, governments provide economic benefits to favored groups through prices, purchases, protection, payoffs, and positions. For example, in the regional state of Maharashtra, India the ruling government provides benefits to sugar cane farmers by providing a minimum support price for sugar cane, asking the sugar mills to purchase sugar cane from farmers, restricting the number of farmers to grow sugarcane, etc.
State-owned enterprises also act as competitors in increasing the prices and help in purchasing agricultural products when the market structure is noncompetitive and concentrated by a few players.
Also the state-owned enterprises provide the needed inputs to farmer/producer which the private sector neglects or does not provide adequately because of their non profitability or for other reasons. For example, state-owned enterprises have been established to provide inputs in the areas of research and development, technical assistance, storage, or capital.
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State-owned enterprises are also used on social grounds. State-owned enterprises are used to stabilize food prices to consumers, support farm incomes, create employment, and to promote regional development. State-owned enterprises were actively supported by international development aid agencies in the 1960’s and 1970’s. But now they are asking for their dissolution.
In all the stages of production chain the state-owned enterprises operate and these state-owned enterprises are very much used throughout the developing world. Less-developed countries use state-owned enterprises more heavily than that of the developed countries.
The performance of state-owned enterprises has been generally disappointing in terms of economic efficiency and effectiveness. And on the government budgets, the operations of state-owned enterprises have caused a serious financial burden.
Even though in recent years there has been a trend toward privatization of state-owned enterprises and market liberalization. The state-owned enterprises still play a major role in the production chain.
The state-owned enterprises may provide the needed inputs to farmers for producing the raw materials needed by a new agro industry. Also the state-owned enterprises may even purchase, transport, and store the raw materials needed by that new agro industry and could be even a potential supplier of those raw materials. Or sometimes the state-owned enterprise could be also a competitor in processing those raw materials. Regarding marketing side, the state-owned enterprises might be even engaged in wholesaling and retailing foodstuffs. The state-owned enterprises are also involved in exporting of some agricultural products and have also sometimes monopoly over the export of agricultural products.
So for sure, the state-owned enterprises should be under consideration in the analyst’s institutional matrix with the clear assumption that the economic actions will be much more influenced by political forces and consideration than private sector enterprises.
iii) Multinational Corporations
The largest multinational food corporations combined together have hundreds of affiliates in developing countries and territories and produce around thirteen percent (13%) of the processed food output in those countries.
Multinational companies have usually played a major role in the export of many basic agricultural commodities. Regarding exports, the multinational corporations have high involvement in the export of cocoa, coffee, tea, bananas, canned fruits, vegetable oils, and specialty fish, and have moderate involvement in the export of beef, vegetables and fresh fruits, and sugar.
Coming to domestic / local markets, the multinational corporations have emphasized mostly on branded foods rather than staple foods. The multinational corporations’ emphasis was mostly on items like dairy, canned fruits and vegetables, refined oils, soft drinks, margarine, coffee, and poultry.
Multinational corporations are mostly the leaders in technology and marketing in the products or commodities being offered to market.
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Multinational corporations are also involved in backward vertical integration through production and processing activities in some products like tea, coffee, bananas, etc. Multinational corporations are also important suppliers of farm and factory inputs such as seeds and equipment. For example, in India PepsiCo has supplied potato seeds to farmers who supply potatoes on contract basis to it.
The multinational corporations are now focusing on developing nations because the developed countries markets have become saturated and are highly competitive, and hence they find the developing nations markets very lucrative because of their growth capacity, rising incomes, and less competition. So these multinational corporations consider the markets in developing nations as strategic growth markets.
iv) Local Firms
Majority of agro industries are locally owned. Sometimes these agro industries may enter into tie-ups by way of joint ventures with multinational corporations for accessing the needed technology, marketing know-how, or to export to foreign countries. Usually it is being noticed that agro industries are a part of a local ‘business group’. These groups have varied interests in various business sectors and have many companies operating in different businesses but have one common management controlling those companies. Mostly these groups are family owned.
Specifically we can see that agro industries such as beer companies are likely to be a part of these groups because they are solid cash generators. And these beer companies were frequently the dominant type of industry in the country in the early stages of industrialization and business group formation.
Some of these business groups have originated from the agricultural sector and have integrated themselves vertically into agro industries.
The business groups have more access to information, capital , and managerial resources because of their large size and also this large size enables to have more bargaining power when dealing with suppliers, buyers, and the government.
v) Marketing Intermediaries
The commercialization functions in the production chain are performed by the marketing intermediaries also known as middlemen. Even though the farmer or the agro industry can perform these commercialization functions by themselves but mostly independent marketing intermediaries are involved in these functions.
The marketing intermediaries are the major players in the movement of the agricultural produce to the produce markets or the agro industry from the producer. Marketing intermediaries are often criticized for giving a rough deal to small farmers and exploiting them as the small farmers are lacking bargaining capacity. And they are also blamed for increasing the end price of the product by increasing the marketing costs. These criticisms on marketing intermediaries lead to the intervention of the state-owned enterprises.
The marketing intermediaries may be sometimes involved in exploiting because of imperfect market conditions and lack of bargaining power in the hands of small powers. But still in majority cases they efficiently carry out the function of crop assembly by locating and rapidly transporting small amounts of produce which are geographically dispersed.
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The agro industry is also going to have linkages with other organizations in addition to the above five mentioned institutions. So as to manage the business- government relationship the agro industry has to interact with a number of government organizations such as the public health and food standards department or the customs bureau which are particularly important for the agro industry. Also the agro industry has to deal with important private entities like financial institutions and industry associations at any point of time.
The identification of the most important institutions in the production chain is a critical task for the analyst. The analyst has to understand the nature of these organizations very well so as to design relationships that bring fruits to the agro industry by strengthening them.
Activity 3.3: List the main types of economic institutions operating in the production chain.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Section 4. International Linkages
International linkages are the final analytical element in the systems approach framework. Agro industries are no more isolated from the international economy and are connected to it in various ways. All international markets are increasingly accessible quickly and economically quickly because of the rapid advancements made in transportation technology.
Similarly, advancements in electronic information and financial institutions have led to the emergence of highly integrated international capital markets. As countries are becoming more liberalized they are allowing their national currency to be floated and these floating exchange rates with the above factors has helped in creating close links between the international financial and commodity markets. Now there is greater instability in commodity prices because of volatility in currency values. So the analyst has to identify and examine each of these various international linkages so as to find their impact on the input and output sides of the agro industry.
On the input side the agro industry may have the option of or dependent on the import of raw materials, packaging materials, chemicals, fertilizers, capital, technology, equipment, and services. So how better the agro industry utilizes the international market for its inputs/supplies have an affect the performance of the agro industry regarding risks, costs, and facing competition.
Regarding the output side, the international markets act as outlets for the exports made by the agro industry but at the same time a source for potential competition in the local markets. Sometimes actions or conditions in an industry in one country can have an impact on agro industries in other countries but in the same industry. For example, lowering taxes or subsidizing coffee exporters in Kenya can have serious affect on Ethiopian coffee exports.
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So there are threats and opportunities for agro industries in international markets and so the analyst has to identify those factors which create an impact on the operations of agro industries and assess their implications.
The international linkages have to be given higher priority because the governments are reducing the trade barriers and opening up their markets for competition. Most governments have turned their policy of import substitution to export promotion and making domestic agro industries competitive.
Activity 3.4: International linkages have impact only the input side for an industry. Discuss.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Checklist
If you understand the following phrases put a tick ( ) mark in the box, otherwise read the unit again.
Yes NoProduction chain linkagesMacro-micro policy linkagesInstitutional linkagesInternational linkages
Self-testing Questions
Answers are provided at the end of the Module.
Multiple Choice Questions
1. The agroindustry may be forced by the retailer to adjust all, except:a) product designb) packagingc) delivery schedulesd) none of the above
2. Which one among the following reason is not important for the government to involve itself in the agro system?
a) socialb) culturalc) economicd) politicale) none of the above
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3. Which among the following is a macro policy?a) Creditb) Interest ratesc) Revenuesd) Pricese) All of the above
4. An agroindustry depends externally for the following inputs, except?a) Raw materialsb) Packagingc) Equipmentd) Capitale) None of the above
5. Duties or quantitative restrictive restrictions imposed by government on imported products could affect all of the following, except:
a) Access to market by foreignersb) Costs of local producersc) Competition of importsd) None of the above
Questions for discussion1. Explain about production chain linkages.2. Discuss about macro-micro policy linkages.3. Discuss the role of state-owned enterprises.4. Discuss the role of marketing intermediaries.5. Explain international linkages.
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UNIT 4: AGROINDUSTRY – PROCUREMENT AND PROCESSING FACTORS
This unit enables the readers to have a better understanding on both the procurement and processing factors of an agroindustry. The reader will be able to know what elements are primary in the procurement and processing operations in an agroindustry.
Unit Objectives
List the primary elements of agroindustrial procurement system Make understand why an agroindustry requires adequate quantity of raw materials Make understand why an agroindustry requires adequate quality of raw materials Explain the importance of Appropriate Timing in procurement Explain the importance of raw material costs in procurement Explain the Organization of the Procurement System List the primary elements of agroindustrial processing system Explain the importance of technology selection in an agroindustry processing operation Define the considerations that are to be considered in choosing the plant location. Examine the factors that are to be considered in inventory management of an agroindustry Examine the packaging and other input needs of an agroindustry Review of programming and control procedures in an agroindustry Discuss the importance of by-products to the economics of an agroindustry
Section 1. Procurement Factors
Introduction
Before an agroindustry company invests in a processing plant, the procurement of raw material inputs must be studied as carefully as the marketing activities. Agroindustries transform inputs; if those inputs are defective, processing and marketing will suffer accordingly. In addition, because raw materials are the dominant cost for most agroindustries, the procurement system is a major determinant of the project’s economic feasibility and competitive advantage. Procurement is also critical to the project’s effect on rural development because it links the industrial and agricultural sectors: by transmitting market stimuli to the farmer, the procurement system directly affects rural families.
1.1. Primary Elements
An effective agroindustrial procurement system has five characteristics that provide a solid foundation for the processing operation: sufficient quantity of inputs, adequate quality of inputs, time-sensitive operation, reasonable cost, and efficient organization. In short, a well-organized procurement system is able to supply enough raw material of acceptable quality at the appropriate time and at a reasonable cost.
1. Adequate Quantity of Raw Materials
Agroindustries frequently end up with excess capacity because they fail to ensure an adequate supply of raw materials. Analysts should examine the factors determining the output of raw
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materials and consider competing uses for those materials that may reduce supply. The factors that have to be examined during the analysis of the supply of raw agroindustrial materials are the area, yields, and alternative uses. The analysis of supply of raw material consists of two steps. The first step of supply of raw material consists of examining two factors: area and yields. With regard to land/area, the analysts have to consider the raw material’s historical, current, and projected planting area. While analyzing yields, the other determinant of output, the analysts should concentrate on quality of land, use of farm inputs, and techniques of cultivation (or animal husbandry). The above two factors are those which affect the production of raw material.
After examining the factors that affect the production of raw material, the second step in analyzing supply of raw material is to estimate the amount that will be available for the project’s use. To do that, the analyst must first identify the competing uses of the raw material – on-farm consumption, fresh consumption, animal consumption, other industrial use, and use by competitors – and quantify the amount each will absorb. The analyst then can compute the net amount available to the processor by taking gross production and subtracting the quantities consumed for other uses and the quantity lost because of damage or spoilage.
Activity 4.1: Assume that you are setting an agroindustry to produce various products out of Cactus (Belles) fruit. So what factors have you to consider with regard to the supply of the raw material (cactus fruit). Discuss________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
2. Acceptable Quality of Inputs
A firm should not only have an adequate supply of raw material, but the materials should meet the qualitative requirements of the operation. Raw material of poor quality may yield a product of poor quality, which can create consumer resistance and have long-range effects on the firm’s market position. Poor-quality raw material can increase operating costs and decrease efficiency. The marketplace requirements have to be taken into consideration while purchasing the inputs by an agroindustry. Once the qualitative demands of the market are identified, the analyst must translate them into qualitative requirements for the raw materials.
Several factors affect the quality of raw material, and they must be adjusted to attain the quality required by the marketplace. The attention of the analyst should be focused on the following three factors: inputs; handling, transport, and storage; and government standards. These three factors affect the quality of raw material. The input that importantly affects the product characteristics and quality is the seed for crops and breed for livestock. The other inputs include insecticides and fertilizers. Both of these inputs should be used properly to achieve the desired results. The handling and transport of the product – particularly if it is fragile and perishable – can also significantly affect its quality. Defective or insufficient storage can also affect the nutritional quality of the product that remains after losses from excessive humidity, heat, or insect damage are taken into account.
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Quality requirements are not only dictated by the marketplace. Often governments institute food and fiber quality standards for agricultural raw and processed materials. The lack of accepted standards makes market information more imperfect and hinders price comparisons and trade communication, leading to inefficiencies and unfair practices.
After examining how product quality is affected by the quality of inputs, transport, handling, storage, and government standards, the next step is to develop quality control measures. The processor should consider providing the farmer with improved inputs, such as better seed, not only to increase yields but to improve quality. To ensure that the inputs are used properly, the firm may again need to offer technical assistance and training and provide facilities such as warehouses and dryers. The costs of these measures should be weighed against the higher prices the processor can charge for higher quality goods.
Activity 4.2: Assume that you are setting a wheat flour mill. So what quality factors should you consider in purchasing wheat for producing wheat flour. Discuss.___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
3. Appropriate Timing
Because of the biological nature of the raw material, time is an important consideration in the agroindustrial procurement system. Timing is complicated by several factors. The raw material’s seasonality, perishability, and period of availability are all dependent on time. The seasonality of production, inherent in the biological nature of the raw material causes an uneven flow to the factory. This cyclical pattern creates a peak flow, which requires extra processing or storage capacity. The agroindustrial firm should consider methods to spread the flow of raw materials more evenly.
Perishability of raw material similarly emphasizes the importance of timing in moving produce from the farm to the factory. Raw materials are perishable in varying degrees. Some materials must be processed immediately or the product suffers a significant loss in quality and economic value. Perishability requires that great care be given to planning the harvest and scheduling the farm-to-factory transport, and the analyst must determine whether the suppliers have adequate resources for these tasks. The Storage and processing techniques can reduce losses because of deterioration.
Availability – determined by the raw material’s growth cycle and the expected duration of supply – also affects procurement timing. Availability is affected by improper cultivation techniques, which can exhaust and erode the soil, making the land unproductive. The analyst should consider this longer-term availability and examine the cultivation techniques to ensure continuing supply. A crop’s availability can be jeopardized when suppliers switch to other crops. Before going ahead with its project, a firm should measure the certainty of supply and the relative performance of the crop.
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4. Reasonable cost
Not surprisingly, raw material costs dominate the economics of most agroindustries. Unlike most other manufacturers, food processing is usually not an additive process but a subtractive process in which the original material is reduced to another form. The main additional inputs in most agroindustries are labor, ingredients, and packaging. The costs of raw material in various agroindustries could constitute from 40 to 93 percent of the total operating costs. Because of the central importance of raw material costs, the analyst should explore alternative pricing mechanisms and test the sensitivity of profits to cost changes. The effects that government policies have on costs and prices should also be examined.
The analyst must examine the main factors affecting costs: supply and demand, opportunity costs, structural factors, logistical services, and governmental interventions. The mechanisms and alternatives for establishing raw material prices should be also evaluated: spot prices, governmental price supports, contracting, joint ventures, and backward vertical integration. In addition, the analyst should calculate the sensitivity of profits and investment returns to changes in raw material prices.
5. Organization of the Procurement System
Whether the agroindustrial processor obtains an adequate supply of quality raw material at the appropriate time and for a reasonable cost ultimately rests on the organization of the procurement system. This organization can be examined through the system’s structure, power relationships, vertical integration, and producer organizations.
The procurement system’s overall effectiveness ultimately rests on its organization. To achieve a sound organization, the firm should study the farm-to-factory structure, which is built upon the number, size, and location of farmers, intermediaries, transporters, storage operators, and other industrial buyers. The analyst should also examine the pattern of farmland ownership, existing degrees of vertical integration, and the volume and channels of commodity flow. This structural analysis leads to an examination of power within the supply channels, the basis of that power, and the implications for the project’s raw material supply. The plant’s major alternative to using the existing structure is backward vertical integration, and the desirability of this alternative should be assessed in relation to control, capital requirements, flexibility, costs, social effects, and political feasibility.
Project analysts should also determine whether producers are, or could be, grouped into cooperative organizations and how such organizations would affect the agroindustry’s procurement system. One last option in examining procurement activities for a project is the possibility of farmers’ integrating vertically forward into processing.
Activity 4.3: list the primary elements in the procurement system of a agroindustry.____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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Section 2. The Processing Factor
The transformation activity of an agroindustry is known as processing. Processing is the central operation in an agroindustrial enterprise and the point at which project analysis must make crucial investment decisions.
2.1. Primary Elements
To analyze the processing component, it is important to understand its functions, which are both technical and strategic. From a technical standpoint the purposes are to make plant or animal materials portable, palatable, and preservable – the “3P’s” of food processing. Most processing involves reducing the bulkiness of the raw materials or converting them into a more easily or economically transportable and tradable form; for example, sugarcane to sugar, and palm nuts to oil. Processing also achieves palatability – creating a product that is edible (or industrially usable), digestible, nontoxic, and pleasurable to the senses in taste, sight, smell, and texture. Additionally, the processing operation aims to reduce the natural processes of deterioration inherent in all biological material, thereby preserving the product’s quality until consumed.
Processing functions should also be understood as strategic activities that add value in the production chain and create competitive advantage. These goals are achieved by designing and operating processing activities in ways that attain cost economies or product differentiation. The technical functions of processing should be viewed from this strategic perspective.
Although food and fiber processing varies widely in form and complexity, depending on the type of process and kind of raw material, the processing operations themselves share several common factors. The transformation of the raw materials occurs through physical, chemical, or biological processes, and the processing operations generally involve all or some of the following: receiving, conditioning, storing, separating, concentrating, mixing, forming, stabilizing, and packaging. These common features suggest six primary elements that should be considered when examining an agroindustry’s processing stage:
Processing Technology. Before choosing appropriate processing technology, the analyst reviews the market requirements; technical processing requirements; costs and availability of labor; capital, energy, materials; capacity utilisation; skill capabilities; and nutritional consequences.
Plant location. The analyst examines considerations of raw material, market, transport, labor, infrastructure, land, and how the plant is likely to affect development in the area.
Inventory management. The analyst assesses storage capacity, physical facilities, and financial aspects.
Packaging and other materials. The analyst assesses storage capacity, physical facilities, and financial aspects.
Packaging and other materials. The analyst evaluates the functions of and options for product packaging and identifies needs for other input required in the processing operations.
By-products. The analyst examines the economic possibilities of secondary outputs of production.
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1. Processing Technology
Technology selection is often the most important decision in designing the project’s processing operation. A note of warning: although the discussion here focuses on the factors to be considered in selecting processing technology, once the choice is made, it is critically important to do adequate pilot testing of the chosen technology, particularly if the technology or materials are new to the country or the company. Appropriate performance guarantees and ongoing technical and engineering backup need to be obtained from the technology suppliers at least through the start-up and initial operation stages. Technical and operational glitches are inevitable in plant start-ups, and the uncertainties surrounding technological newness magnify these problems. Rushing into full-scale production without adequate pilot testing has led many agroindustries into costly, or even fatal, operating problems.
The processing technology should be tailored to meet the market’s requirements for product quality. The processing technology is a potential source of product differentiation. Various factors, such as the need for minimum size that is still economical, or to attain a specific degree of precision, or comply with government food safety standards, will impose certain limits on choice of technology. Another critical selection criterion is cost, and here the analyst should examine the possibilities for substituting labor for capital as well as the relations between energy and raw material usage. Other criteria for technology selection include the degree to which the technology minimizes the plant’s downtime because of seasonality, and the skill capabilities required to meet the supervisory and technical demands of the technology. The processor must also consider the technology’s potential effects, both those that might adversely affect nutrient quality and those that might nutritionally enhance the product and provide a basis for product differentiation.
Activity 4.4: Write down the criteria for selection of processing technology.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
2. Plant Location
Where to locate the processing plant is another critical decision in project design. The first consideration is where the plant should be relative to its raw material suppliers and its markets; transport is an essential component of this decision. Other considerations are labor supply, the availability of infrastructure, land costs, and developmental effect.
The agroindustry must decide whether to locate the plant near the raw material or near the market for finished goods. The decision depends on the characteristics of the raw material and its transformative process, as well as on the costs and availability of transport services. Agroindustries are not much affected by the supply of unskilled labor because they normally do not employ many workers directly. But agroindustries would be affected by the supply of skilled labor and managerial talent. This is so because they are difficult to find and especially if the plant is located in a rural area. The availability of infrastructure and its quality should be considered while deciding upon the location of plant. This is so because defective infrastructure can increase costs
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and reduce quality, the agroindustrial firm should consider the facilities and services available at alternative locations.
Land costs usually represent a relatively small percentage of total capital outlay because processing plants do not need much land. Nonetheless, land costs vary, and comparative shopping for a site is necessary. There is much variance in urban and rural land costs. The firm should purchase enough land to accommodate future expansion.
The final consideration concerns the different developmental effects of alternative locations. The analyst should consider the increased employment and income redistribution the project will generate. Developing relatively backward regions may be a governmental priority, and locating a processing plant in a backward region might provide the necessary market outlet to stimulate agricultural production, furnish a use of marginal lands, or stem rural-to-urban migration.
Activity 4.5: Write down the considerations that have to be considered with regard to where to locate the processing plant.____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
3. Inventory Management
Inventory management for agroindustries is complicated by the biological nature and the seasonality of the raw material. In recommending an inventory management system, the analyst should be sure to examine the capacity factors, physical facilities, and financial aspects of the project.
The purpose of managing raw material inventory is to minimize any imbalance between supply and processing capacity. Seasonal raw materials may require the plant to store its entire annual, or semiannual supply of raw material until it can all be processed; for example, a factory may receive its annual supply of wheat all at once but process into flour over the course of a year. Some raw materials, such as tomatoes, must be processed quickly because of their high perishability. Raw materials that perish quickly reduce the need for storage capacity but increase the capacity needed for processing and storing finished goods.
Processing reduces some products’ ability to be stored, a factor that can pose significant problems for inventory management. Under proper conditions, for example, wheat can be stored for years, but after processing, it is much more perishable.
One inventory management alternative is intermediate storage. The raw material can be semiprocessed – into forms such as tomato paste, orange juice concentrate, or powdered milk, for example – to reduce its perishability; the semiprocessed form can than be stored for later
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processing into the finished product. The analyst should consider the tradeoff between the cost of raw material and the cost of inventory facilities for finished goods.
The major causes of post-harvest losses are pest and insect infestation and microbial infiltration. Proper storage can partially eliminate these problems. Adequate physical facilities are essential to prevent losses in product quantity and quality from pest or insect infestation or microbial growth. Inventory facilities should include preparation facilities, such as drying houses, as well as storage structures. Biological materials naturally deteriorate. Bacteria, yeasts, molds, enzymes, temperature, moisture, air, oxygen, and time all contribute to deterioration. Water activity in foods is a significant factor in deterioration. At high levels bacteria cause the most deterioration; at lower levels yeast and mold growth become the prime spoilage organisms. If microbiological problems are eliminated by controlling the water activity, chemical reactions, such as nonenzymatic browning (reaction of sugars and proteins) or lipid oxidation may limit storage life.
The raw material’s seasonality accentuates both the processor’s needs for working capital and the inventory’s exposure to price risks. The processor should explore the methods available for handling both. The seasonal nature of the agroindustrial products raises the peak working capital requirements of agroindustries to levels proportionately higher than those in other industries. Many processors have encountered problems of undercapitalization because they have inaccurately estimated needs for working capital. If the processing plant runs out of funds during the height of the harvest period, farmers will sell to other processors and leave the plant short of raw materials, which means that the plant will not run at full capacity and will suffer adverse financial consequences. Thus, the analyst should determine when the plant’s working capital needs will be highest and verify that credit lines correspond to these peaks.
Another financial determinant is the price level of the raw material, which will only be known at harvest time unless a fixed price, long-term contract exists. Consequently, credit lines must be flexible enough to cover price variations. Large inventories also increase the processor’s price risk. The price of the processed product can fall during the inventory period, thus leaving the processor with fixed raw material costs and a lower profit margin. Many U.S. processors use the futures markets to hedge against the inventory price risk. Most of the developing countries do not have futures markets and so the processor in these countries cannot hedge against the inventory price risk.
Activity 4.6: Explain the role of raw material’s seasonality in processing operations.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
4. Packaging and Other Inputs
To analyze the agroindustry’s packaging and other input needs the analyst needs to understand the functions of packaging; select the optimum packaging, taking into consideration market requirements, the nature of the product, and the attributes and cost of the packaging technology; and consider the availability of packaging supplies and other inputs.
Packaging plays a vital role in agroindustries. It provides quality protection and meets various consumer needs. Clearly, packaging contributes to each of processing’s three P’s: portability, palatability, and preservability. It is a vehicle for achieving product differentiation and is a major
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cost element. Packaging plays an increasingly significant role economically and competitively as countries’ marketing systems develop and consumers become more demanding. The type of packaging used will be determined by the interplay of consumer needs, the products’ characteristics, and the attributes and costs of the packaging technology. The sources of packaging and other production inputs need to be carefully assessed for availability and delivery dependability.
The major ancillary agroindustrial supplies in addition to packaging materials are added ingredients (for example, flavorings and preservatives), processing chemicals, and maintenance supplies. It is preferable – but frequently infeasible – to buy these products locally. The ancillary supply industry do not exist mostly in developing countries or even if exists, develops very slowly and/or otherwise may not meet the processor’s requirements for export, or even domestic, markets. This is particularly true for packing supplies because product preservation and appearance can be important variables in the consumer’s purchasing decision. The processor may be forced to rely on imported ancillary supplies until these local industries are established or improved.
Activity 4.7: Define the role of packaging in agroindustries.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
5. Programming and Control
Three aspects of programming and control merit the particular attention of the agroindustrial project analyst: production design, quality control, and environmental control.
The analyst should review at least the following items of the project’s production design: its implementation plans, engineering, and production scheduling. It is important for the analyst to ensure that the investment, if approved, can be successfully implemented. Consequently, a preliminary implementation plan should exist that delineates the steps to be taken after the investment decision and before production begins. The plan should include adequate pilot testing of the technology and operating systems before full-scale operations are launched.
In drawing up its implementation plans, the project can make use of such management techniques as Gantt charts, which divide the implementation process into distinct activities with time periods attached to each. For more complex projects, other networking diagramming techniques – such as CPM and PERT – might be used. In formulating or reviewing the implementation schedule, the analyst should keep in mind the seasonal nature of the agroindustry’s raw material. The timing of this availability sets basic temporal parameters for the start of production.
This implementation programming should also encompass a plan for preventive maintenance. Too often this aspect is neglected in planning and handled in an ad hoc way. The result can be serious
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erosion of the physical plant, leading to unexpected and highly costly breakdowns. Preventive maintenance is an investment vital to operational sustainability.
The project’s investments, production design, and organization should be based on detailed engineering, the degree and sophistication of which will depend on the size and nature of the undertaking. According to UNIDO, the preparation of following charts and layouts is often useful: general functional layouts, materials flow diagrams, production-line diagrams, transport layouts, utility consumption layouts, communication layouts, personnel layouts, and physical layouts.
The scheduling of production is complicated by the seasonality of the raw material. The processor should design a master schedule that programs dates and quantities of raw material procurement, processing volume and duration, and inventory levels. From this the analyst can explore the possibilities of reducing investment in equipment capacity by operating multiple shifts, extending the processing period by multiple crop inputs or semiprocessing raw materials, minimising fluctuations in product flow, and obtaining adequate supplies of labor and material.
Agroindustries in developing countries frequently lack systematic quality-control procedures. As a result, their product quality is erratic, can cause consumer dissatisfaction, and, sometimes, can be hazardous to consume. Product quality is influenced by many factors, beginning with the genetic material (seed or breed) used on the farm and the farmer’s agricultural practices. It is at this stage that quality control must begin. At the processing stage, quality control should be applied to the raw material inventory, work in process, and finished goods.
Another area to be considered in project design is pollution control. The first environment that must be protected is that of the plant itself; employees should not be endangered by contaminants arising from the processes or other aspects of the operations. The entire production process should be reviewed to see if air quality, materials contact, and procedures contain any sources of endangerment, and, if so, measures should be taken to guarantee worker safety.
The other protection is of the external environment. Agroindustries, like most other industrial operations, produce gaseous and liquid emissions and solid waste. These can contribute significantly to pollution of rivers, land, and air. Agroindustries are often particularly heavy users of water in their processes, making wastewater effluents a primary focus of environmental controls. The processor’s water effluent control system should focus on measures within and after the processing operations. To the maximum extent safely feasible, water should be reused within the operations. In some instances, water can be treated and recycled to its original use. In other instances water can be put to a different use requiring lower water purity (spent cooling water, for example, might be used to clean the plant). Such practices reduce total effluent output.
The project design must include adequate equipment and facilities, including extra land area, to treat discharges. Considerable progress is being made in developing biological treatment systems that reclaim processing effluent for reuse in the processing operations. By using biological processes, the organic content of the effluents are reduced.
Activity 4.8: Briefly discuss on production design of an agroindustrial project.______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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________________________________________________________________________________________________________________________________________________________________________________________________________________________________
6. By-products
One final aspect of processing is the role of by-products. Unlike other manufacturing operations, agroindustrial processing generally disaggregates one raw material, rather than aggregating various materials. The biological nature of the raw material endows it with many useful parts, and the product often has multiple derivatives. Because by-products can be important in the economics of agroindustries, they warrant close inspection.
The analyst should identify all the outputs of the processing flow. Pure wastage should be minimized, but economic opportunities form possible by-products are often overlooked, especially in an agroindustry’s early development. The analyst should look for recoverable but economically unexploited by-products. Such an example was the discarded mung bean protein that was eventually used as weaning food or animal feed.
To forecast total revenues accurately, the processor must project the prices of its by-products. Even though this is sometimes difficult because it requires an analysis of supply and demand conditions in another commodity system, these projections should take into account price levels and variability. If the realizable revenue and profit margin are small relative to the main product, then extensive price projections are not warranted. Nevertheless, estimates of by-product’s market are important – in some cases the by-product might become more valuable than the main product. For example, a sugar manufacturer in a South American country has made more profit on sale of bagasse, its by-product, than on sale of sugar, its main product.
The analyst must realize that, in keeping with agroindustry’s intersectoral nature, the agroindustrial firm is in many businesses simultaneously and that a project’s operating strategies must be adjusted according to the overall price dynamics.
Another aspect worth considering is the extent to which the variability in by-product price provides countercyclical or seasonal balancing to the variations in the primary products’ prices. A further consideration is whether the by-products can be used as energy sources. Some feedlots in the United States recycle and convert their animal waste into fuel, thereby simultaneously solving problems of waste disposal and environmental pollution. The energy created from by-product processing might be saleable to outsiders.
Checklist
If you understand the following phrases put a tick ( ) mark in the box, otherwise read the unit again.
Yes NoAgro industrial raw material procurementInput qualityAgro industrial raw material processingAgroindustrial by-products
Self-testing Questions
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Answers are provided at the end of the Module.
Multiple-choice Questions1. Most processing involves, except:
a) reducing the bulkiness of the raw materialsb) converting raw materials into a more easily tradable formc) increasing the bulkiness of the raw materialsd) a & be) b & cf) a & c
2. Palatability means all of the following, except:a) digestibleb) nontoxicc) pleasurable to the sensesd) ediblee) none
3. Processing functionsa) add value in the production chainb) create competitive advantagec) all of the aboved) none of the above
4. In processing, the transformation of the raw materials occurs througha) physical processesb) chemical processesc) biological processesd) all of the abovee) none of the above
5. The processing operations generally involve all or some of the following, except:a) conditioningb) storingc) concentratingd) stabilizinge) none of the above
6. The major causes of post-harvest losses are, except:a) lack of sufficient rainsb) pest infestationc) insect infestationd) microbial infiltratione) none of the above
7. Which among the following does not contribute to deterioration of biological materials, except:a) bacteriab) enzymesc) temperatured) timee) yeastsf) none of the above
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True/False Statements
___________1. Deterioration is not inherent in all biological materials.___________2. Processing can reduce the natural processes of deterioration
inherent in all biological materials.___________3. Processing reduces some products’ ability to be stored.___________4. Procurement is known as the transformation activity of an
agroindustry.Answers for Self-testing Questions (Module 1)
Unit 1Multiple-Choice Questions True/False Statements1. __E___ 1. False2. __D___ 2. True3. __A__ 3. False4. __C___ 4. True5. __C___ 5. False6. __C___Unit 2Multiple-Choice Questions True/False Statements1. __B___ 1. True2. __D___ 2. False3. __B__ 3. False4. __D___ 4. True5. __D___ 5. FalseUnit 3Multiple-Choice Questions1. __D___2. __B___3. __E__4. __E__5. __D___Unit 4Multiple-Choice Questions True/False Statements1. __D___ 6. __A___ 1. False2. __E___ 7. __E___ 2. True3. __C__ 3. False4. __D___ 4. True5. __E___
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UNIT 5
The Agribusiness Marketing Management
Objectives
To examine agricultural marketing from the viewpoint of the agribusiness firm
To become familiar with the managerial approach to agricultural marketing
To recognize the marketing mix that a firm must manage
To examine the agribusiness management processes of planning, implementation, and
control
To enable students develop a marketing plan in agribusiness
Activity 5.1 What is the difference between agricultural marketing and agribusiness marketing? __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Which one do you think is broader? Why?_________________________________________________________________________________________________________________________________________________________________ Is there a real difference in the application of the four Ps in agriculture from their
application in industry? Explain.___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
5.1. Agricultural Marketing and The Agribusiness Firm
Managerial Approach to Agricultural Marketing
The managerial approach to agricultural marketing is a process whereby management
systematically identifies the needs of customers and then creates a marketing program that will
satisfy those needs. As the managerial approach to agribusiness marketing focuses on the needs
of consumers or industrial users, these persons and organizations benefit as well as the firm.
The managerial approach focuses on the direct relationship between the individual firm and its
customers. Government and competitors are treated as external influences. The managerial
approach is decision oriented. The managerial operates within a shorter time span. For example,
implementation of current year’s marketing plan.57
Marketing concept
Marketing concept is the means by which the managerial approach to agricultural marketing is put
into action. The marketing concept has three basic characteristics and these are
i) Customer-Orientation
ii) Coordinated effort
iii) Profit-Orientation
A firm that employs the marketing concept is referred to as market-oriented and firms not usually
employing it are usually referred to as production- oriented. The market-oriented firm tends to stay
in touch with its customers and is always thinking of how it can serve the customer needs better
and efficiently. Many firms in the agricultural production sector consider themselves so far removed
from consumers that they tend to concentrate on efficiency in production that is, producing more
and more at low costs.
The production-oriented firm first produces a product and then tries to market it. Conversely, the
market-oriented firm starts with consumers’ needs and then produces and markets to fill those
needs. Most agribusiness firms that produce consumer goods are market-oriented and apply the
marketing concept. For example, corporations like general foods, Beatrice foods, etc apply the
marketing concept.
On the other hand, most of the firms in the farming business are production-oriented. The family
farm management is primarily concerned with production efficiencies and coping with the
uncertainties of nature. The production-orientation of farmers is, however slowly giving way to a
market-orientation.
5.2. Commodity Marketing
Most farm products enter the marketing process under a common or generic name such as apples,
potatoes, or corn. Only when agricultural products are graded, packaged, or processed into some
other form does a brand name such as “Selam Baltina” or “Elsa Quollo”. In some cases, farm
products are marketed with regional designations, such as “Sheno Qibe”, “Adaa Teff”, “Tigray
Maar”, etc. For this first stage of marketing, we use the term commodity marketing that begins with
the producer-the farmer or rancher.
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Food grains like wheat are first taken to a local grain elevator. Atb that point it may be sold to a
grain dealer, who may still leave it at the elevator. Later it is sold to a flour mill for processing into
flour. The flour may be sold and transported to a further processor, who makes, say bread or other
bakery products, or spaghetti or macaroni. These products go to food wholesalers and finally
marketing channels to consumers for home baking and cooking. This also works for feed grains
like corn, oats, and barely.
What do producers want from Commodity Marketing
What agricultural producers expect from marketing varies somewhat with the kind of product being
sold. The following list includes most of the objectives of agricultural producers.
Continual access to information about supply, demand, and prices.
Ready access to a cash market that will buy the harvested product whenever offered
Ability to contact the sale of a crop before harvest( or even before planting), for future
delivery at a specified price
Immediate acceptance of the product at warehouses or other delivery points
Satisfactory grading methods to determine the products characteristics and quality
A satisfactory price for the product under existing supply and demand conditions, which to
the producer means the maximum possible
Cash payment for the product at the time of the sale
5. 3. Marketing Program of Agribusiness
In applying the marketing concept, the agribusiness firm puts together a marketing program
composed of four parts called the marketing mix. The major parts of the marketing mix or decision
variables are the four Ps. These four Ps are the Product, the Price, the Promotion, and the Place.
These four parts of the marketing program are interrelated. The decisions about one part of the
marketing mix will usually have affect on actions related to the other parts of the marketing mix.
The management tries to achieve a right combination that produces optimum results taking into
consideration the interactions among the four constituents of the marketing mix.
I) Product
The product part of the agribusiness marketing mix has several dimensions. The first dimension is
the physical aspects of the product. The second dimension is about the decisions to be taken in
changing the existing products and keeping them up to date. The third dimension is about new
products development. The last dimension is about the decision related to the product mix. The
product part of the marketing mix includes also decisions about branding, packaging, labeling, etc.
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II) Price
Once the product is ready for launch into the market the managers of the agribusiness should
come out with a pricing strategy so as to price the agribusiness product. The strategy must take
into considerations the competitors’ retaliatory actions, the image sought, etc. in addition to the
basic pricing strategy; the agribusiness marketer must also formulate some pricing tactics to deal
with discounts, transportation, and other price-related situations for distributors.
III) Promotion
By using this part of marketing program the agribusiness marketer informs, reminds, and
persuades potential and present customers. The components of promotion are advertising,
personal selling, publicity, and sales promotion.
IV) Place/Distribution
This is the final part of the agribusiness marketing program and is also known as the ‘channels of
Distribution’. The distribution represents the bridge between the producers and the consumers. A
channel of distribution includes all the intermediaries involved in the movement of the goods to the
consumer from the producer. The agribusiness manager job is to see that the consumers get the
needed products and services when and where they want them and at a reasonable cost. So
accordingly he or she has to select channels which ensure that the consumer gets the products
and/ or services at the right place, right time, and at the right price.
Basic Stages in Managerial Marketing in Action
Once the agribusiness firm makes a decision to enter a marketing program, then it must put that
marketing program into action. There are three basic stages in this action process and these are
Planning, Implementation, and Control.
Planning
This is the first stage and in this stage it is decided what has to be done and the time frame for the
things to be done.
Implementation
This stage is about putting the plans into action.
Control
In this stage, the actual sales results are measured and evaluated with the planned results and if
any deviations are found they are corrected.
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All the decisions in the three stages are affected to some extent by the environment in which the
agribusiness operates.
Activity 5.2 What environmental forces are unique to agribusiness as compared to the industrial
business? __________________________________________________________________ ____________________________________________ Enumerate the elements of the microenvironment that are relevant to the agribusiness firm? ______________________________________________________________________ ______________________________________________ Enumerate the major components of the marketing plan?
________________________________________________________________________ __________________________________________________
5.4. The Marketing Environment of the Agribusiness Firm
The external forces – the forces making up the external situation in marketing – are referred to as
the marketing environment. The set of forces that make up the marketing environment operate not
only on the individual firm but also on its competitors and on the rest of the industry. These forces
can be categorized in to:
Economic Forces
Structural Forces
Political forces
Social Forces
Technological Forces
Theses forces are often referred to as exogenous uncontrollable variables or societal variables or
macro environmental variables.
Economic Forces
The two major economic forces in the marketing environment are the performance of the economy
and the level of consumers’ confidence. The two are closely related but not identical.
The performance of the economy is what is actually happening; and the level of consumers’
confidence in the economy is how consumers perceive what is happening in the economy. Taken
together, the two exert an overriding influence on the firm: if the economy is booming and
consumers are buoyant, business is generally good. But because these two forces are not the
same, each deserves separate consideration before their combined impact is considered.
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Performance of the Economy
The most commonly used measures of the performance of an economy are the Gross Domestic
Product (GDP) and the Gross National Product (GNP). These two factors determine the level of
income of consumers that directly influences the demand for the agricultural products.
Consumers Confidence in the economy
This deals with the consumers perception of what is happening or what is going to happen in the
economy. It is affected by a number of factors including:
Amount of disposable income
Level of unemployment
Rate of inflation
Information about general trends in business activity
Structural Forces
Structural forces refer to external forces created by the market structure of an industry. These
forces are often influenced by the workable competition.
Political Forces
Politics is defined as the application of the science of government. Many political actions affect
agribusiness marketing because the ultimate management of a nation lies on the political system.
In unit three we have seen the public policy impact chain. As a result there areas of agribusiness
that are directly or indirectly influenced by political forces. There are rights of employees as well as
rights consumers. The philosophy of consumerism is often advocated by governments in the
domestic market.
Agribusiness activities are easily influenced by a web of laws and regulations that are directly or
indirectly related to its day to day operations. Therefore the legal aspect of agricultural marketing is
a basic factor for consideration in the agribusiness management.
International politics does also affect agribusiness marketing. This is displayed through
globalization where the agribusiness is susceptible to.
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Social Forces
Social forces such as such as social values, demographics, custom, culture, traditions can directly
or indirectly influence consumer attitudes and thereby their demand for agribusiness goods and
services. Rates of participation in the labour force are also social forces that can directly or
indirectly influence the agribusiness operation system.
Technological Forces
Science the systematic body of knowledge while technology is the application of science to solve
socio economic problems. Technology affects all aspects of agribusiness through out the four
production chain linkages: input, farm or production, processing, and distribution sectors.
In addition to the mega forces mentioned above agribusiness is influenced by the following
elements of the microenvironment:
Consumers
Suppliers
Competitors
Transporters
Warehousing institutions
Shipping and forwarding agencies
Banks and insurance
Mass media, etc.
These forces are collectively referred to as the task environment
5.5 The Marketing Plan
Once the agribusiness firm establishes its purpose and objectives, the marketing plan becomes
the starting point for the rest of the planning process. The marketing plan gives a complete
assessment of all the factors surrounding the customer needs the agribusiness firm hopes to fulfill.
Most marketing plans cover either a single product or lines of products. A detailed marketing plan
is needed for each business, product, or brand.
A marketing plan should include the following topics: the current situation, opportunity and issue
analysis, objectives, marketing strategies, implementation plans, financial analysis, and needed
controls.
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1) The Current Marketing Situation
This step in developing the marketing plan is about correctly assessing the present situation of the
firm and its products.
i) The Market Situation
The background and current situation on consumer needs, perceptions, and buying trends is
provided in this section. The information should include data on the current size of the market and
its past growth in total, by submarkets, and by geographic area.
ii) The Product Situation
This section should provide information about recent history of sales, costs, and profits for a
current product.
iii) The Competitive Situation
This section provides information on the major competitors to the agribusiness firm and their size,
goals, market share, product quality, marketing strategies, and anything else that is appropriate to
understand the competitors’ position in the market or their intentions.
iv) The Distribution Situation
This section should help in identifying how much sales has been made through each type of
middleman (direct sales, wholesalers, and retailers) in the distribution channel and the level of
importance attached to each type of middleman. This section should also give further information
on the trade practices, trade terms, and prices used to motivate the middleman to perform a better
job.
v) The Macroeconomic Environment
This section provides the information on the general economic situation which has an affect on the
successful operation of the agribusiness firm. The information is provided on factors like
demographics, the economic climate, the political environment, the technological situation, legal
issues, social and cultural climate, etc.
2) Opportunities and Issues Analysis
The marketing manager of agribusiness firm has now to identify the opportunities and issues the
firm and its products faces based on the analysis of the current situation.
i) Threats and Opportunity analysis
This part assesses the major threats and opportunities that the agribusiness firm may face in
general and in particular about the product from factors external to the firm. This helps the
agribusiness management to anticipate important positive or negative developments that might
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have an impact on the firm and its strategies. The different threats and opportunities should be
listed in order of priority so that the more important ones can be given more attention. Each threat
or opportunity should be accompanied by a suggested response by the firm.
ii) Strength and Weakness Analysis
This part deals with the major strengths and weaknesses of the agribusiness and its products.
These are the factors internal to the firm and so could be developed or rectified.
iii) Issues Analysis
To define the main issues that should be addressed in the marketing plan, the firm uses the
findings of the SWOT analysis. Certain issues may limit the choices the agribusiness firm has as it
sets its marketing objectives and establishes marketing objectives and so the identification of
issues is important. The types of issues that should be identified and analyzed include such
strategic matters as new product development or continue producing existing products.
3) Objectives
Once the current marketing situation and issues are clearly defined, the agribusiness firm has to
establish both its financial and marketing objectives. Among these two types of objectives, financial
objectives are established by the agribusiness firm and then the marketing objectives. The
financial objectives are generally established for a period of one year and above. Financial
objectives can take the form of having a ‘average return of 15 percent on investment per year’ over
the next five years, or ‘a profit of Birr 300,000 per year’. The financial objectives should be
established using some measurable criteria such as dollars or percentages, and be internally
consistent.
The marketing objectives are based on the financial objectives but are converted into marketing
terms. For example, to achieve the minimum profit levels set in the financial objectives, the
agribusiness manager has to convert these into sales goals in terms of units sold, dollars, and
prices. These goals should then be given some ranking so that the manager knows, for example,
whether it is more important to meet the unit sales or the dollar sales objective.
4) The Marketing Strategy
This step outlines the broad marketing logic by which the agribusiness firm hopes to achieve its
marketing objectives. This section includes broad decisions on the specifics of target market,
product positioning, marketing mix and marketing expenditure levels. For achieving the earlier
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established financial and marketing objectives the agribusiness manager will be looking for the
right combination of the 4 Ps. The marketing strategy section outlines specific strategies for each
element of the marketing mix and explains how each responds to the threats, opportunities, and
critical issues given earlier in the marketing plan.
The specific items covered in this section are the identification of target markets, product
positioning, product line size, product’s price, distribution outlets number and types, sales force
size, service quality and level, product promotion, etc. the above items deal with factors which are
under control of the agribusiness firm and can be made part of the firm’s marketing mix.
To be successful these marketing plans have to be coordinated with all the other activities of the
agribusiness firm to make sure that the timing is perfect and the resources needed to support
these efforts are available.
5) Action / Implementation program
Once the marketing plan is approved, the agribusiness manager has to develop an implementation
program so as to effectively and efficiently turn the marketing plan into reality. The failure of plans
is more of poor implementation than that of poor plans. So the marketing plan has to be
implemented well. This specific action program include clear statements regarding: what will be
done? When will it be done? Who is responsible for doing it? How much will it cost?
6) Budgets / Financial Analysis
This section details a supporting marketing budget that is essentially a projected profit-and-loss
statement and thus translates the marketing plan and the implementation program into revenues
and expenses. The budget shows the expected revenues (forecasted number of units sold and the
average net price) and expected costs (of production, distribution, promotion, etc). Revenues and
expenses are combined to show how the marketing plan is going to contribute to the achievement
of the earlier established financial and marketing objectives. The difference between the revenue
and expenses is the projected profit.
This step of putting the plans and strategies into financial terms helps the agribusiness manager
see the consequences of their decisions and how all the pieces fit together.
7) Controls
This section outlines what types of controls or feedback mechanisms need to be established to
measure the agribusiness firm’s and the products’ progress toward the achievement of the
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established goals. These controls help top management to review implementation results and spot
products that are not meeting their objectives.
Controls often take the form of monthly or quarterly reports. These reports help agribusiness
managers to spot any serious deviations from expectations early on so corrective action can be
taken before things go seriously out of hand.
5.6 Developing a Marketing strategy
The process of marketing strategy development involves the following steps:
Developing a marketing goal
Setting operational objectives
Selecting a major market
Selecting the policies and courses of action
Establishing the basis for a specific marketing program
Assemble and implementing the marketing program
1. Developing Specific Marketing Goals
A goal generates guidelines for employees to follow. Marketing goals are often expressed in terms
of the following:
Leadership in the industry
Coverage of market territory
International and sectoral and diversification
Emphasis of product lines or services
Quality orientation
Service motto
2. Selecting Operational Objectives
Operational objectives are often more quantitative ends or targets. They can be explained in terms
of:
Profitability rate and trend
Growth rate
Addition of new products
Market coverage
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3. Selecting a Major Market
This involves recognizing the potential market for agribusiness products. Once the goals and
objectives are set, the next step selecting a major market from the following.
Consumer Home Food Market
The consumer home food market is the market for foods to prepared and consumed in the home.
Most of these products are purchased from retail food stores.
Industrial Market
The industrial market is composed of firms that utilize agricultural products as inputs into products.
It includes users of products such as fabrics and upholstery destined for the automobile and
furniture industries industrial alcohol, etc.
International Market
International market refers to a group of consumers outside the territorial boundary of a nation. The
impact of socio cultural factors on internationally traded agribusiness products is significant and
thus international markets should be carefully selected.
4. Selecting a Course of Action for Each Market
This involves a choice between food service market, institutional market and government market.
Food service market is the market for foods people consume away from home in restaurants,
cafeterias, snack bars and fast food out lets. Institutional food market is the market for food
purchased, prepared and selected by someone other than the consumer and provided incidentally
to the main purpose of an establishment. On the other hand government is the market for food and
agribusiness products by governmental institutions such as hospitals, schools, colleges, etc.
The course of action to be selected a strategy includes the following.
Market Penetration _ Existing products to existing market
Market Development _ Finding new market for existing products
Product Development_ Introducing new products to an existing market
Diversification _ Introducing new products to new markets
5. Establishing the Basis for a Specific Marketing Program
This step involves establishing the basis for a specific marketing program to implement the plans
and policies established in the preceding steps. This step involves four sub steps.
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Delineating a Market
This refers to the process of deciding how much of or what part of a market to serve. It involves the
choice between mass marketing and target marketing.
Segmenting the Market
This involves choosing one or more market segments to direct a firm’s goods and services. The
basis for effective market segmentation involves measurable variables, Accessibility of the market,
substantial size or adequacy.
Evaluating Market Segments
This involves evaluating a market from the view point of size, spending power, stability, and
accessibility
Anticipating Consumers Behavior
This involves identifying potential response and perception of buyers. It is establishing stimulus
response association and stimuli involve physical, symbolic or social stimuli.
Self test Exercises
Choose the best answer for each of the following questions and encircle the letter of your choice
1. Which of the following marketing functions provide time utility?a) Buyingb) Sellingc) Transportationd) Storage
2. A marketing philosophy that is usually exercised in the agricultural sector is:a) Production orientedb) Product orientedc) Selling d) Societal marketing concept
3. Which of the following is not a function of agricultural marketing?a) Assembly of raw materialsb) Transportationc) Processing and packagingd) Grading and classificatione) None
4. Which of the following is not an element of the economic forces in the marketing environment of the agribusiness firms?a) Natural/Physical environmentb) Consumers’ confidence in the economyc) Consumerismd) Availability and price of labor
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5. All of the following are indicators of consumers’ confidence in the economy, except:a) Unemployment rateb) Gross domestic productc) Inflation rated) Disposable income
6. All of the following are expressions of marketing goals, except:a) Profitability rate and trendb) Leadership in the industryc) Diversificationd) Quality orientation
Write "TRUE" if the statement is correct or "FALSE" if the statement is incorrect _____1.Competition may stem from complementary or dissimilar products._____2. The macro policies of Kenya can have an impact on the performance of the Ethiopian
agribusiness sector._____3. Confidence in government and its politics refers to socio-cultural forces._____4 The age structure of a population can have a direct impact on the performance of
agribusiness marketing.
_____5. Snack bars and restaurants are examples of institutional food market.
Fill in the blank spaces with appropriate answers 1. Write any three costs unique to agricultural and agribusiness marketing
________________________________________________________________________________________________________________________________________________________________________
2. What are the three elements of the agribusiness marketing managerial process?________________________________________________________________________________________________________________________________________________________________________
3. Enumerate any three factors that affect the agribusiness marketing system.________________________________________________________________________________________________________________________________________________________________________
4. Mention any two major areas of social values in the socio-cultural forces.________________________________________________________________________________________________________________
5. What are the conditions for effective market segmentation?________________________________________________________________________________________________________________________________________________________________________
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UNIT 6
The Agribusiness Marketing Mix
Objectives
To understand the four Ps in the agribusiness
To define and identify agribusiness products from other products
To consider how products are differentiated through changing features
To recognize the product mix decisions in the agribusiness
To identify the distinctive features of agribusiness products
6.1. Agribusiness products: Definition, Features, Product mix decisions, and the
Agribusiness Product Lifecycle
6.1.1. Definition of an agribusiness Product
A product is a set of tangible and intangible attributes, including color, price, manufacturer’s
prestige, retailer’s prestige, and manufacturer’s and retailer’s services, which the buyer may accept
as offering satisfaction of wants and needs.
Agribusiness product is a product that has significant agricultural origins or is used in agricultural
production. This definition includes agricultural commodities, most food products, and many fiber
products, as well as farm inputs and services.
The definition of agribusiness products includes products that are used predominantly in
agricultural production. Farms use an extremely large number of products in their operation.
A useful way to classify agribusiness products is by whether they are destined for final
consumption, are bought as inputs into a production process, or are bought for resale. The
products that are destined for final consumption are consumer products and those products that
destined for industrial uses, for institutions, for resale, for government purchases, or for other
nonconsumer markets. The consumer products have quite different features from that of
intermediate products.
Agribusiness products include commodities like grain, teff, corn, food products like cheese, butter,
flour, fiber products like shirts, blankets, bed sheets, and farm inputs and farm services like
harvesters, pesticide sprayers, tractors, etc.
It should be noted that for a product to be classified as an agribusiness product it should have
predominantly components of agricultural origin.
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6.1.2. Common Product Features
The attributes of agribusiness products are its features. The attributes could be both tangible and
intangible. The features in an agribusiness product help in attracting the customer and make the product
desirable for the customer. The customers who buy products for final consumption have different needs with
that of who buy for intermediate uses.
Activity 6.1 Enumerate the distinctive features of agribusiness as compared to industrial products _____________________________________________________________________________________
Packaging is a silent salesperson. Explain_____________________________________________________________________________________
Packaging
The sum total of all the activities which relate to the container or wrapper of a product is packaging.
These activities include all the planning that goes into the design and production of the package
and require the services of a wide range of professionals, including artists, engineers, and lawyers.
Packaging protects and promotes the product. Packaging has transformed from a technical matter
to that of a marketing tool. The earlier purpose of packaging was to protect it from contaminants
but now it has added many other purposes importantly promoting the product.
Functions of a Good Package
A package has to provide a number of marketing services. The package must not only protect,
preserve, and transport the product but also it should help in selling the product from the view point
of the seller. The major functions of a package are following.
i) Protection
The first function of a good package is protection. Under this function, the package protects the
product from physical damage and extends its shelf life. So if the package for an agribusiness
product is good than the chances of spoilage are less.
For many agribusiness products, there is a need for good packaging so that the products do not
spoil. For instance, milk has to be packaged in special packages so as to increase its shelf life.
Grapes and apples are to be packed in layered containers of Styrofoam trays so that they do not
get bruised. Each agribusiness product may need a special kind of package so as to protect if from
damage and spoilage.
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ii) Cost Efficiency
This is another important function of a good package. Cost efficiency is determined by the cost of
the material used to make the package, the cost of fabricating the package, and the cost of labor
required to get the product into and out of the package.
There are many examples of cost efficiencies in the agricultural input sector. Feed and seed
sellers in the farm supply sector have moved away from the natural fiber bags made of jute, hemp,
etc. to other durable, cheaper and convenient materials made from plastic and paper. Same is the
case with fertilizer manufacturers; they have changed from jute bags to plastic and paper bags.
The agribusiness marketers by changing to new technologies in packaging away from natural fiber
bags have seen their packing costs falling down. Sometimes changes in packaging could lead to
higher costs and fall in sales and so the agribusiness firm has to take this consideration when it
goes for change in packaging.
iii) Product Recognition
One more function of a good package is to provide easy identification of the product. The
recognition of a product is facilitated through the design aspects, such as color, shape, and size.
a) Color:
In the food industry, color plays a major role and the package’s color or lack of color, is an
important factor. Many food products, such as rice and vegetables are packed in clear and
transparent plastic bags so that consumers can see the contents inside the package. Coffee is
often packed in dark brown plastic bags or containers to connote the product color.
b) Shape:
The shape of a package also helps in identifying its contents by the consumers. For example,
olives are always packed in cylindrical glass bottles.
c) Size:
The size of a package also helps in identifying what product it is carrying. For example, the cereals
manufacturers have gone for maximizing the height and width of the container and minimizing the
breadth. This package change helps the manufacturers to use it for printing promotional material
so as to catch the attention of the consumers.
iv) Handling Characteristics
A major function of a good package is that it should make the package easy to handle and to store.
This function is significant for the agricultural producers, industrial users, and the final consumers.
Handling characteristics are affected by the package’s size, design of the package, and the
material used in the package.
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For the agribusiness products sold to agricultural producers, the size of the package is an
important characteristic. Livestock and poultry feed is now packed in 25 pound paper bags from
the earlier 100 pound cloth bags. This change led to better handling and reduction in costs in
packaging. The handling characteristics of packages are also an important feature to consumers
and agribusiness marketers are putting special efforts in providing packages which are convenient
to the consumers to carry and handle.
v) Information
Packages could be used for passing on a lot of information. Not only information about price and
quantity but also other information could be provided on the packages. The package could provide
information about the nutrients, contents, and the expiry date also. Information about the primary
use and alternative uses of the product could be provided also on the packages.
Branding
A branded product is any product that uses a name, symbol, design, or any combination of these
to distinguish if from similar products. For example, salt is just salt unless it is Duck salt, and olives
are just olives unless they are marked as Jordanian olives. Branding is widely used in agribusiness
and is used for naming commodities such as chicken and rice. So chicken is sold by branded
names as Perdue, Holly farms, etc., and rice is sold by branded names such as Dawat, Dana, etc.
By branding a product the agribusiness firm helps to separate that product from that of competitors
in the minds of consumers. By purchasing a branded product the consumer feels often that he is
receiving a special assurance that this product serves his needs better than that of competitors’
products. The agribusiness marketer may gain also additional sales and profits because of the
customer’s preference to their product.
Significance of Branding
Agribusiness product brands offer advantages to both the marketer and the consumer. The
advantages of branding to agribusiness product marketer include possibility of higher profits, better
market segmentation, easier introduction of newer products, and a better corporate image. These
advantages are especially important for those agribusiness marketers who sell staple convenience
products such as food that is purchased largely out of habit. If branding is successful, it helps in
establishing customers’ loyalty and makes them buy the familiar, trusted brands of the marketer in
repeat purchases.
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Some agribusiness marketers apply their brand name to a family of items. For example, Nestle
uses Maggi brand for a number of agribusiness products like ketchups, sauces, instant noodles,
pickles, soups, and stock. The consumers or buyers of agribusiness products also derive
advantages from branding. Buyers are willing to buy a branded product without inspection or
comparison because the brand name or sign denotes certain level of quality and they feel assured.
This reduces the uncertainty in the purchasing process.
Problems in Branding
The process of establishing a brand in the market place can be time-consuming and expensive.
Moreover, the agribusiness marketers’ national brands are facing competition from ‘generic’
brands or ‘unbranded’ products.
6.1.3. Distinctive Features of Agribusiness Products
There are two types of agribusiness products: consumer and intermediate agribusiness products.
Consumer agribusiness products are sold for ultimate or personal consumption. On the other hand
intermediate agribusiness products are sold for generating other goods and services.
Distinctive Features of Consumer Agribusiness Products
The distinctive features of a consumer product are attributes that add to, or detract from, its
appeal. The features of a consumer product are the, flavor, texture, appearance, smell, and
service.
i) Flavor
The feature perceived by taste is flavor. For eating purposes, flavor was used by early humans to
distinguish things as good and bad, and still human being use flavor for this purpose. A strong
flavor may indicate that the product is not suitable for eating and there is something wrong with
that product. For example, a small amount of salt to food helps in relishing the food but if there is a
large amount of salt in food it is dangerous to humans because it is toxic. At that time the taste
buds picks up the product flavor and indicates that this food is unsafe to consume.
ii) Texture
The product’s texture is the structural quality determined by the way fibers and tissue are shaped
and arranged. Human beings react to texture by their tactile sense, that is, by touch. Texture could
be either smooth or rough. Rough texture occurs when the fibers are widely spread and uneven.
Rough texture offers resistance to teeth, tongue, or skin. Smooth texture occurs when fibers are
closely and evenly packed.
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Texture is important for both foods and fiber products. Consumers expect foods to have a
predictable nature. Apples should be ‘crunchy’, bananas ‘soft’, bread ‘crispy’, meat ‘tender’ and if
they are not the change in texture tells the customer that something is wrong about the food. For
fabrics, the texture is very important because the customers prefer fabrics according to the texture.
Consumers who work in an open environment prefer fabrics which are rough on the top and
smooth inside. For those who work in hot environments prefer the smooth and soft feel of one
hundred percent cotton.
iii) Appearance
For agribusiness products, appearance is a significant factor. The appearance is cosmetic in
fibers; but the appearance of food products can indicate acceptability or quality. It is noted that the
appearance of the food products denotes its acceptance. For example, consumers buy bananas if
they are green or ripe yellow in color and if the bananas are black in color they do not buy them or
otherwise buy them at a discounted price. Same is the case with oranges; consumers buy them
only when they appear round in shape.
iv) Smell
Smell is also known as aroma, and is helpful in knowing the quality of the product. Generally,
consumers react negatively to strong smell, since most agribusiness products take on a strong
odor as they deteriorate through enzyme action. Consumers are put off by the smell of decaying
fish. However, some products are expected to have a strong smell. Some agribusiness products
which are considered as good by their strong smell are coffee, garlic, spices, etc.
v) Service
Service is also an important feature of agribusiness product along with the above mentioned
features. Service is an attribute that is ‘built into’ the product when it reaches the consumer. For
instance, service may be ‘built into’ a food product by making it convenient to cook and less time-
consuming like Maggi instant noodles or soup powders. Service is also ‘built into’ a fiber product by
making it easier to iron or even not to iron.
Distinctive Features of Intermediate Agribusiness Products
Intermediate products are those products which are sold to agricultural producers, wholesalers and
retailers. These customers have different needs and buying habits when compared to individual
consumers. The intermediate buyers’ emphasis regarding the features of agribusiness products is
more on the price, physical specifications, versatility, and durability whereas the consumer is more
interested in the sensory features such as aroma and flavor. But both are much interested in
service feature of the agribusiness product.
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i) Price
The price of the product is one of the most important features of intermediate products. As the
intermediate buyers purchase these products for resale or for use in industrial process they are
very much particular about the exact price of the product.
ii) Physical Specifications
This is also an important feature which an intermediate buyer looks for in an intermediate product.
The intermediate buyer is keen to know what the exact nature of the product is. Many products
have physical specifications which are normally set by the government organizations or otherwise
by the product associations.
iii) Versatility
This feature is also an important feature sought by intermediate buyers for many intermediate
products. A product is said to be versatile when it can be shifted from one purpose to another
purpose without losing much of its efficiency. Versatility feature is very much sought for the
intermediate products used in the farm supply sector. An example of versatile intermediate product
is the tractor. The tractor can be used for tilling, leveling, or as a transport carrier. Another example
is the sprayer. This sprayer could be used to spray insecticides, pesticides, and also liquid
fertilizers.
iv) Durability
This is another feature of intermediate products. All the intermediate buyers are interested in
durable intermediate products. Agricultural producers look for intermediate products which are
longstanding. For example, tractors, harvesters, etc. This durability feature is very much important
in products that are used in the maintenance of farm buildings and machineries, and particularly
where a lot of labor is required to apply them. Products like paints, fence materials, sheets, and
other materials used in farm buildings must be durable and so should have a long life. Also
retailers would seek this durability feature because they seek products which have a long shelf life
and do not spoil before they are sold.
v) Service
Intermediate buyers like the consumers give importance to the service feature of an agribusiness
product. The intermediate buyers expect that the product which they want to buy should provide
strong warrantee or guarantee and also expect that the seller should provide repair services at
convenient locations and at reasonable prices.
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6.1.4. Product Positioning
The features of an agribusiness product are altered often when it is needed to change the position
of the product. The ‘position’ of a product is its image in relation to the competitor’s products or of
the other products marketed by the same agribusiness firm. The product is often positioned to
serve the needs of a particular market segment. The agribusiness firm can position its products
according to the product characteristics, target consumers, target benefits, etc.
An agribusiness product could be positioned by using literally thousands of features. For
example, agricultural commodities (such as olives and kiwi fruit) are often identified by where they
are produced (Spanish olives and New Zealand kiwi fruit); location or area of production is a
feature of such products. The agribusiness manager has to spend much time in managing
products because there are many features in agribusiness products.
6.1.5. Product Mix Elements and Decisions
A product mix refers to the total number of products that a firm handles. Product mix dimensions
include depth or length and width or breadth. The depth of a product mix is measured by the
assortment or number of product items within a product line. Product mix width or breadth is also
measured by the number of product lines that a firm handles.
The product line concept is needed to have a better understanding on how product decisions are
made. An agribusiness product line consists of a broad group of almost similar products and that
are used for similar purposes. The ultimate goal of the agribusiness marketing manager is to
develop a total product offering that satisfies the desires of target consumers. To achieve this
objective, sometimes multiple products are marketed by agribusiness firm. Examples of product
lines are beverages, soups, shirts, etc. a single agribusiness firm can carry several product lines
and each time it adds a product line, it is increasing its product mix.
The agribusiness product mix consists of all the products that are being offered to consumers for
sale. A product mix has both breadth and depth. The breadth of a product mix refers to all the
product lines that it carries whereas the depth of a product mix refers to the assortment of sizes,
colors, and shapes of containers offered within each product line. For example coca-cola company
has several product lines like soft drinks, and soft drink concentrates. Within the soft drinks it has
depth like 200 ml, 300ml, 500 ml coming to size and regarding to containers it is sold in glass
bottles, cans, and pet bottles.
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The product line may be expanded or reduced by the agribusiness firm. As consumers and
markets change, new products are added and old products are dropped to meet the new needs of
the consumers. The product line may also be changed according to the movement of the products
through their product life cycle.
6.1.6. Product Life Cycle
This concept describes the sales and profit history of a product from ‘birth’ to ‘death’. All products
pass through four distinct stages in market development from introduction to demise. These four
stages of the product life cycle are introduction, growth, maturity, and decline. The sales and
profits of a particular product are determined largely by the product stage in the product life cycle.
So it is quite important for the agribusiness manager to know in which stage of the product life
cycle is the product. And according to the stage of the cycle the product is, the firm’s marketing mix
has to be adjusted. The competitive environment and the resultant marketing strategies will
ordinarily differ depending upon the stage of product in the product life cycle. The agribusiness
firm’s marketing success can be affected considerably by its ability to understand and manage the
life cycles of its products.
Product Life Cycle and its Management
Maturity
Money Growth Sales volume
Decline
Introduction
Profit
0
Introduction
In this stage, the product is launched into the market with heavy promotion. The promotion
activities can take the form of either advertising or trade and consumer incentives to distributors
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and consumers. For informing about the new product to the potential consumers promotion is
needed.
Generally, the prices of most products are market higher at this stage so as to recover the product
development costs. Sales are low but begin to grow as the product gains momentum. Due to the
heavy promotion expenses and low sales there are no profits at this stage. And most products lose
money at this stage because of low sales and the high development costs added to the product
costs. The agribusiness firm has to provide sales incentives to persuade distributors to stock their
product in their shelves.
Growth
This stage is also known as the ‘market acceptance’ stage, and is the second stage in the product
life cycle. Because of the heavy promotion efforts in the introduction stage the product is accepted
by the market. There is rapid increase in product sales as the product becomes better known
because of heavy promotion. The profits also increase as the sales rapidly increase offsetting the
promotion costs and the developing costs added to the product costs. So as profits increase, it
catches the attention of competitors and competition arises. The product price is usually decreased
because of competition. But the total market is growing fast enough so as to accommodate all the
products. To maintain and broaden the customer base and to face competition, the agribusiness
marketer makes improvements in the products by adding new features or models.
Maturity
This is the third stage of the product life cycle and leading to the decline of the product profits
because of several reasons. First, as the market has become saturated the product sales growth
begins to slow down. Second, because there is too much of competition and little product
differentiation. To prolong this stage of the product life cycle, the agribusiness marketer tries to
improve the product and find new markets and new uses for the product.
Decline
In this stage, the sales and profits of the product continue to fall off as new and better products are
introduced in the market by competitors. The product is now almost ready to be replaced and a
decision by the agribusiness firm is just needed to remove the product or replaced by another
product. The assumption is that all products exhibit this life cycle, but the timescale will vary from
one product to another. Even though as of now there are some agribusiness products such as
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breakfast cereals, potato chips, and pitta bread have simply moved from the introductory and
growth stages into maturity but never seems to decline. Some products, for example, fashion
clothing, may go through the entire life cycle in a matter of months. Others, like pitta bread, have a
life cycle measured in thousands of years, and may never become obsolete.
Apparently, the product life cycle is valid for many agricultural products, particularly specific brands
and versions of a basic product, because they are more likely to be faced with competition.
Summary of Product life Characteristics
Introduction Growth Maturity Decline
Characteristics
Sales
Profits
Cash flow
Customers
Competitions
Responses
Strategic focus
Mktg. Expenditure
Mktg. Emphasis
Distribution
Price
Product
Low
Negligible
Negative
Innovative
Few
Expand market
High
Brand awareness
Patchy
High
Basic
Fast growth
Peak levels
Moderate
Mass market
Growing
Market penetration
High(declining %)
Brand preference
Intensive
Lower
Improved
Slow growth
Declining
High
Mass market
Many rivals
Defend share
High(rising)
Brand loyalty
Intensive
Lowest
Differentiated
Decline
Law or zero
Low
Laggards
Declining
Number
Productivity
Low
Selective
Selective
Rising
Rationalized
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6.2. Promotion of Agribusiness Products
Activity 6.2 Describe the role of promotion in reducing the impact of seasonality and perishability
agribusiness products_________________________________________________________________________________________________________________________________________________________________________
6.2.1. Concepts and Significance of Promotion
The purpose of promotion is to increase product or specific brand sales. Promotion can be defined
as ‘any additional sales effort for a product over and above the normal process of taking orders for
sales.’ Promotion involves all forms of communication between the marketer and potential
consumers; it is designed to influence attitudes and buyer behavior. To be more specific, the
objective of promotion is to convince the target consumers to buy the marketer’s product.
Importance of Promotion to Agribusiness Producers
Promotion is very important to agricultural producers. The agricultural producers may direct their
promotion activities toward commodity assembly merchants; wholesalers, retailers, and other
distributors; processors using agricultural crop inputs, and; consumers. Commodity merchants and
processors have to be reminded of even the best products as they products for their ability to earn
repeat sales. Producers therefore find it advisable to remind marketing firms and consumers of the
advantages of their crops or products. Examples of successful promotions by farmers include
those Idaho potatoes, California (Sunkist) navel oranges, etc.
Because of basic demographics also promotion of agribusiness products is important. In any given
year, about 13-15 percent of the nation’s consumers fall in the age group of 18- 24, and they are
just beginning to learn purchase decisions. Hence, the need for education of consumers through
promotion never stops.
Also, promotion is beneficial to agricultural producers in another way. They are benefited by the different promotion activities of the manufacturers and distributors of farm supply inputs.
Importance of Promotion to Agribusiness Marketing ManagementMarket promotion contributes directly to the efficiency of the processing phase of the agribusiness
marketing management. Promotion pushes prices down and sales up, to the benefit of both
producers and consumers. Promotion helps the producers by creating awareness of the product
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and increasing the sales and thus lowering the production costs. It also helps the consumers by
making them aware that the right product with a right price is available at a right place.
Promotion helps the agribusiness firms in another way. Promotion can increase demand for a
product; and increased demand often means that a less (more inelastic) demand curve develops.
Pulling the demand curve to the right will usually make demand (and sales) more stable. Or just
simply, promotion can increase demand for a product and will usually make demand and sales
more stable.
6.2.1. Promotional Mix Elements
The objective of promotion to convince target consumers to buy the marketer’s products is
achieved by applying the following three promotional methods: personal selling; mass selling
(advertising and publicity), and; sales incentives (sales promotion).
1) Personal Selling
The first promotional method is personal selling. It is one-on-one selling by a salesperson, and it involves
communication between individuals. Personal selling is very much important in the promotion of
intermediate products, and of consumer products at the intermediate or wholesale level. Personal selling is
accomplished through salespeople and they fall into three categories. These three categories are following.
Activity 6.3 Briefly describe the process of personal selling________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
i) Order getters
Order getters are the most typical type of sales people. They are charged with much of the
responsibility for obtaining new business for the agribusiness firm. Hence, they need a lot of
motivation plus considerable creative and persuasive ability. In farm supply marketing businesses,
such as the fertilizer and feed industries, the competition for customers such as large farmers and
major farm supply dealers and cooperatives is so keen that it is essential to have order getters who
have the drive, aggressiveness, and hard-working nature.
ii) Order takers
These types of sales persons are found in situations where purchases are more common. Order
getters are common at the service wholesale level, where sales force members have well –
defined routes for calling on retailers, checking inventory levels, stocking displays, and writing 83
managers write orders. For example, beverage manufacturer coca-cola distributors use order
getters to call on retail stores to take orders and providing them with the ordered items.
iii) Missionaries
This type of sales people function is not to take or get orders but to create goodwill among present
and potential customers. Missionaries may be employed by pesticide and fertilizer manufacturers
to provide advices to the farmers and thus create goodwill for the company. ‘Missionaries’ can also
be representatives who attend trade fairs both nationally and internationally to provide information
and create goodwill.
Advantages of Personal Selling
i) Sales persons can accomplish things that media simply cannot.
ii) Sales persons can tailor their efforts to the characteristics of each prospect.
iii) By listening and observing, the sales person can obtain immediate feedback and this
permits him to change his messages if necessary.
iv) Sales persons can provide the needed technical information to wholesalers, retailers and
even to consumers.
Disadvantages of Personal Selling
i) Personal selling is expensive and is the most expensive method in terms of cost per
receiver reached.
ii) Huge expenses are also incurred on recruiting and training.
iii) There is also lack of control because they are mostly away from the office.
2) Mass Selling (Advertising and Publicity)
Activity 6.4
What are the similarities and differences between advertising and publicity?
___________________________________________________________________________________________________________________________________________________________________________
Which of them do you prefer? Why? ______________________________________________________________________________________________________________________________________________________________
____________
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This is the second major promotional method. It is selling to a large number of potential consumers
at a single time. There are two forms of mass selling. The first is advertising, which includes all
forms of paid mass selling. The second form is publicity, which includes all types of unpaid mass
selling. The agribusiness marketer uses mass selling by way of print, audio, and visual media to
communicate with large numbers of potential consumers at the same time. Mass selling when
compared with that of personal selling method of promotion is less flexible because it cannot be
tailored to each individual receiver’s needs nor the marketer can immediately respond to the
feedback.
On the other hand, it has several advantages. First, the cost of reaching people is less. Second,
there is high degree of control. The marketer knows exactly what the message is and when and
where it is being transmitted or printed.
i) Advertising
Advertising is the most widely used form of mass selling. It may be defined as ‘all the activities
involved in presenting a sponsored message about a product or company to a nonpersonal group.’
The message is called the advertisement and is paid by the sponsor. The advertisement is
disseminated through one medium or several media.
Advertising may be focused on a product, an organization, or an institution, that is, an industry.
Each of these options has its own objectives.
a) Product advertising is focused at distributors or the end users of agribusiness products. It
seeks to stimulate demand for a particular product brand or product line. In most cases, product
advertising seeks to inform consumers about new products or catch the attention of users for
whom the product has been designed / launched.
b) Organizational advertising is used to strengthen the image of the company.
c) Institutional advertising promotes an industry as a whole and not a particular product or a
company. It is usually aimed at a broad market. By improving the image of the industry,
institutional advertising tries to build good will for that industry.
ii) Publicity
Publicity is usually free. Through publicity, the agribusiness marketer wants to promote the
company’s products and intends to build a good image and increase sales without incurring
expenditure. For publicity purposes, the agribusiness could use various media like print and visual
media and sometimes it may take a form of speeches by agribusiness representatives before civic
clubs or professional groups or writing for professional journals.
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3) Sales Incentives (Promotion Tools)
This is the final promotional method and is also known as ‘sales enhancement programs’. Sales
incentives include a wide variety of important activities. In essence, sales incentives are designed
to complement other promotional activities like mass and personal selling. It can be very effective
in raising the short-run level of demand by speeding up the time of purchase.
There are three approaches to sales incentives. The first targets the consumer of the product.
These efforts are the familiar in-store point – of - purchase items such as banners, free samples,
aisle displays, coupons, and contests. The second approach targets the people in the marketing
channel (wholesalers, jobbers, retailers). These efforts are generally price related and include price
deals, promotional allowances, sales contests, and gifts. The third approach targets the
agribusiness firm’s own sales force. It includes selling aids, bonuses, contests, etc. each of these
approaches is designed to increase the firm’s sales and to complement the other methods of
promotion.
Sales incentives of the following types are aimed at consumers, processors, and distributors. The
sales incentives directed toward consumers are contests, prizes, coupons, product
demonstrations, and information and recipe booklets. The sales incentives aimed at processors
are technical assistance, and personnel training aids. Lastly, the sales enhancement efforts
directed at distributors (wholesalers, retailers) are sales contests, sales training, and promotional
allowances.
6.3. Distribution of Agribusiness products
Activity 6.5 Is channel of distribution for agribusiness products longer shorter than that of industrial
products?___________________________________________________________________________________________________________________________________________________________________________
Channels of distribution
Channels of distribution are systems of institutions and resources that managers utilize to move
agribusiness products from farmers to consumers. Agribusiness managers at all levels – farmers,
processors, wholesalers, and retailers – have the need for channels of distribution and use it.
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Agribusiness marketers can utilize a number of channels to reach consumers. For example, food
processors can sell directly to consumers by establishing their own retail outlets; or, alternatively,
they can sell to distributors who will move the products on to the consumers.
The decision about which channel to use is extremely important because both potential profits and
potential costs are involved. Largely because of the economic factor, the agribusiness manager
needs to fully understand the nature of channels of distribution and what factors are important in
selecting a channel.
Nature of Channels of Distribution
Several aspects of channel of distribution can be considered to increase our understanding of the
nature of channels of distribution and these are:
1) Physical Flows versus Title Flows
2) Participants and Facilitators
3) Intensity of Distribution
4) Complexity of Distribution
1) Physical Flows versus Title Flows
The people and organization in a channel of distribution work together with a common purpose,
that is, the movement of goods. Movement of goods can be thought in terms of either physical or
title flows.
Physical flows can be described as all those people and organizations that move goods to the
consumer from the producer. For instance, the physical flow of wheat can be described as follows.
The product first moves from the farm where it originates and then moves to wholesaler. From the
wholesaler to the processor, who transforms the wheat into flour, then from the processor to the
wholesaler. From the wholesaler it now moves to the retailer, and ultimately to the consumer. In
between there is a use of different types of transportation in the physical flow of the product.
For the purposes of management, it is much better to think of channels of distribution as title flows.
In title flows, the title to a product moves from one participant to another. For example, consider
meat. The sheep is raised by the farmer. Then he sells it to the meat merchant. The meat
merchant sells the sheep as meat. While the sheep is transformed into meat, the title is passed
from the farmer to merchant and from merchant to consumer.
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2) Participants and Facilitators
In channels of distribution there is a need for both participants and facilitators because they play a
important role in it. Participants are those persons or organizations who take title to the product in
the channels of distribution. Facilitators are those support personnel who play an important role in
the channels of distribution in facilitating the flow of title but do not take title to the product.
The participants are primary to the channels of distribution in agribusiness. They may take many
forms and be called by many names such as consumers, retailers, jobbers, wholesalers, drop
shippers, institutions, processors, etc. but all types of participants have one thing in common, that
is, they all take title to the product they handle.
Two participants with distinct differences are the wholesaler and the drop shipper. A wholesaler is
a person or organization that buys an agribusiness product for resale and performs all the
marketing functions. A drop shipper is a person or organization who sells a agribusiness product
and then arranges for its delivery to the customer’s door by the manufacturer. While drop shippers
carry out the functions of exchange, information, and risk, they do not carry out the functions of
finance, storage, or transportation. Hence, the essential difference between these participants has
to do with what functions they perform.
It is also necessary to note how participants in channels of distribution are linked together. The
participants may be linked by ownership, contracts, informal agreements, simple proximity, etc.
when participants are linked by ownership, a participant at one point in the channel may own part
of an organization elsewhere in the channel. For example, a farm supply manufacturer may be a
silent partner in a distribution.
The facilitators are those persons or organizations who do not take title to the product in the
channels of distribution. Facilitators could be truckers, warehouses, bankers, barges,
manufacturer’s representatives, etc. even though they may not be the ‘prime movers’ in the
channels of distributions but stilly they are very much needed. The facilitators play a important role
in the flow of perishable products.
3) Intensity of Distribution
Intensity of distribution can be described as how much of the market is exposed to the
agribusiness product or products or the number of consumers exposed to the agribusiness
product.
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Depending upon the type of product and level of service required in the channels of distribution,
the agribusiness firm can select three approaches when deciding where to sell its products. These
three approaches are intensive distribution, selective distribution, and exclusive distribution.
i) Intensive distribution
With this intensive distribution approach, the agribusiness firm sells its product through any outlet
that is willing to take it. Intensive distribution describes a channel that exposes a very large number
of consumers to a product by permitting almost any retailer to handle it. For many food products,
such as fresh fruit and vegetables, the products are sold at many places because the channels of
distribution for these products are intensive. This intensive distribution approach is very popular for
most staple convenience products such as food, chewing gum, and candy. This is one reason why
these products are available in places like bus stations, gas stations, as well as convenience
stores. Intensive distribution gives these products maximum place utility, which is important for
high sales for this product class.
ii)Selective Distribution
In this approach, the agribusiness firm allows only a limited number of sellers to handle the
product. This selective distribution approach leads to the reach of only a fewer number of
consumers. Products like frozen foods and dairy foods require close quality control and so for
distribution of these products, selective distribution approach is used. This helps in exercising
control and leads to maintaining quality of the product. This approach is more popular for
shopping and specialty products.
iii)Exclusive Distribution
Under this approach, the agribusiness firm allows a small number of intermediaries to handle its
products in specified territories. This approach is used for shopping goods where consumers
spend considerable time looking for particular brand names, require technical help, and make
product comparisons as a common part of the purchasing decision. In return for exclusive rights of
distribution, the intermediaries of agribusiness products are required generally to provide strong
sales and service effort. Retailers of fine furniture have an exclusive right to a specified territory.
Agribusiness firms use all of the three approaches in distributing their products. Agribusiness firms
in the agricultural input sector use the selective distribution approach whereas agribusiness firms
producing consumer food products use an intensive distribution approach.
4) Complexity of Distribution
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In agribusiness marketing, the channels of distribution range from simple to complex in terms of
the number of participants and how they are linked. For instance, a channel of distribution for
agricultural equipment could be simple. It could consist of the manufacturer, dealer, and the
customer. A channel of distribution for an insecticide product could be very complex and it may
consist of more than 15 participants and each one of them playing a important role in the channel.
Generally, the channels of distribution of agribusiness products tend to be complex and so the
decision about which channel to use to distribute the product must be made with care.
Factors in choosing the Channels of Distribution
For two major reasons, the selection of channel of distribution is very much important. The first
reason is that of the size of the investment. This investment size has to take into consideration not
only the financial capital but also the human capital. The second reason is that it allows an
opportunity for the agribusiness firm to develop productive relationship through assertive action.
This helps in making a production-oriented firm into market-oriented firm.
The factors that are to be considered in deciding how the channel should be organized could be
categorized into two categories. The first category consists of those factors external to the
agribusiness firm (exogenous) and the second category consists of those factors which are internal
to the agribusiness firm (endogenous).
Factors External to the Agribusiness Firm (Exogenous)
The external factors that affect channels of distribution are characteristics of customers’, class of
the product, and the competition in the industry.
i) Customers’ Characteristics
Several characteristics of customers’ are important in determining how a channel of distribution
has to be organized. The first characteristic is the large number of consumers. The channels of
distribution tend to be long and numerous when the consumers for a product are large. For
example, the channels of distribution for candy are many and wide spread.
The second characteristic of customer is their location. When the customers are geographically
dispersed, the most effective channel could be mail order or having a distributor covering a wide
area.
The third characteristic of customer is that of his size of purchase. The channels of distribution
tend to be long when the purchase amount of consumers is small.
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The last characteristic of consumer is that of his way of communication. If the consumers collect
information and advice from retailers in a location then the retailers should be included in the
channel for that area. This relying is common for farmers in purchasing fertilizers and pesticides.
ii) Product Class
In some cases, this factor plays an important role in the selection of channels of distribution for
agribusiness products.
Perishable agribusiness products, such as fruits and vegetables, often require less complex
channels or simple channels with less number of participants. This is because of two reasons. The
first reason is that if many participants handle the product there is a chance of spoilage. And the
second reason is that these products require specialized skills and personnel with product
knowledge and intricacies of the market in marketing them. If the channel for the above products is
complex then the chances for things going wrong are much more.
Short channels of distribution are also appropriate for other kinds of agribusiness products also.
Agribusiness products that are highly technical in nature usually have less complex channels. For
example, livestock pharmaceuticals are distributed through a short channel with less number of
intermediaries. Also, agribusiness products that are very costly or having a high markup per unit
are marketed through simple channels either through the firm’s representative or a single
intermediary in between the manufacturer and the consumer.
iii) Competition in the Industry
In some agribusiness marketing situations, the competition among agribusiness firms is so fierce
that it influences the selection of channels of distribution. This is so in market situations where
there is stability in the market shares for some products, and those product managers do not want
to rock the boat by making changes and create instability. For the agribusiness manager, it is more
advantageous to continue with the existing channel of distribution than to go for another alternative
innovative channel of distribution even when having high level of competition.
Factors Internal to the Agribusiness Firm (Endogenous)
The internal factors that affect the selection of channels of distribution are the firm’s experience,
requirements of control, and economic aspects. These factors are sometimes unique to the firm.
i) Experience of the Firm
The firm’s experience plays a considerable role in the selection of channels of distribution or the
channels it utilizes. A firm having experience and in the business for long time may prefer to select
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a channel of distribution in which it could play an active role in the distribution of the product until
delivery to the customer. This is because it is well established and having marketing expertise, and
existing relationships. Whereas, a new firm with little expertise would prefer to use those channels
of distribution which has experienced intermediaries and are able to do much of the marketing
activities because it is not yet fully established and having production problems.
ii) Control Requirements
In many cases, an agribusiness firm may desire to have a simple channel of distribution. This is so
because the firm desires to maintain control over the quality of the product. And so this leads to
less complex channel of distribution.
iii) Economic Aspects / Considerations
For many agribusiness firms, it is a fact that they select channels of distribution based on
economic criteria. The agribusiness firm’s objective is to achieve higher profits and so would select
that channel of distribution that produces the highest profits. The agribusiness firm analyses each
distribution channel in terms of potential sales and costs so as to determine which channel offers
the highest profit.
Different channels could result in different levels of sales for an agribusiness firm. In a simple
channel, where the firm uses its own sales force, the sales effort and the resulting sales may be
greater than they would be if a more complex distribution channel with sales agents were used. On
the other hand, the channels could also have quite different cost structures. In terms of fixed and
variable costs, the channel using the firm’s own sales force would have higher fixed costs and low
variable costs, while the channel with a sales agent would have low fixed costs and higher variable
costs.
Conflicts in Channels of Distribution
The possibility of conflict and competition arises when the channels of distribution used for
agribusiness products are complex. This conflict and competition results from what is called dual
distribution. Dual distribution occurs when an agribusiness manager uses more than one
distribution channel to distribute his products to the consumer. Two sellers coming under two
different channels but are located nearby feel threatened by each other.
The conflicts created by dual distribution could be classified as ‘vertical conflict’ and ‘horizontal
conflict’. Vertical conflicts occur between participants at different levels, such as between
processors and retailers. A good example of vertical conflict is found in the feed industry, where
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processors sometimes sell directly to large customers or institutions, thereby bypassing the
retailer. And eventually the retailer would feel threatened by the processors. Horizontal conflicts
occur between firms at the same level of distribution. For example, the supermarkets and
convenience stores may be serviced by different channels of distribution for the same product. But
as they are at the same level of distribution conflicts occur.
A threatened dealer is just one aspect of the conflict in distribution channels. When there is
horizontal conflict, competition can develop into a price war where sellers react to the lower price
of competitors and initiate a round robin of price cuts. When there is a vertical conflict, the injured
party can refuse to handle the agribusiness firm product and shift to another firm; or retailers can
refuse to cooperate in promotion schemes to attract new customers – all of which leads to an
uncomfortable relationship.
6.4. Pricing of Agribusiness Products
Utility, value and price are closely related concepts. Utility is the attribute of an item that makes it
capable of satisfying human wants. Value is the quantitative measure of the worth of a product to
attract other products in exchange. Price is the value expressed in terms of money or any other
medium of exchange.
Once a firm has developed a successful product, the next step is to price it appropriately and
attractively. Pricing is the only element that produces revenue in the marketing mix while the other
elements produce cost. A seller usually sets prices for a combination of the physical product and
several services. To a customer, the value of a product or service can have tangible factors, in
terms of cost minimization, and / or intangible factors in terms of pride of ownership. Price is the
value of goods/service expressed in terms of money or any other medium of exchange. Price is the
only element in the marketing mix that produces revenue; the other elements represent cost. To
sum up, price may be defined as the amount of money and /or products that are needed to acquire
another product and its accompanying services.
Be it in monetary or non-monetary form price is the key element in any marketing transaction. As
one of the basic concepts of exchange transaction, the rise in the relative importance of price is
attributable to rapid cost increases, greater price aware ness on the part of consumers, and
shortages leading to high prices.
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Price places a value on the combination of marketing variables offered to customers, such as
product attributes, store location and image. Customer service levels, prices charged to channel
members, and promotional costs are affected by price. An incorrect price mistakes the value of a
product or service and can adversely affect a firm’s sales and profits. Thus price decisions must
be integrated with the other marketing activities of a firm.
The market price of a product influences wages, rent, interest and profit; that is the price of a
product influences the price paid for the factors of production – land, labor, capital, and
entrepreneurship. Price thus is the basic regulator of the economic system because it affects the
allocation of these scarce resources. As an allocator of scarce resources, price determines what
will be supplied or produced (supply) and who will get the goods and services that one produced
(demand)
In setting pricing policies and objectives the following are vital for consideration.
1. How flexible prices will be
2. At what level they will be set over the product life cycle
3. To whom and when discounts and allowances will be given and
4. How transportation cost will be handled.
I. Profit Oriented Pricing Objective
a) Achieve Target Return on Investment
A target return on investment objective sets a specific level of profit as an objective. This pricing
objective is used by middlemen and manufacturers that are industry leaders because they can set
prices independently of competition than the smaller firms in the industry.
a. Maximize Current Profit
Many companies want to set a price that will maximize current profits. They estimate the demand
and costs associated with alternative prices and choose the price that will produce the maximum
current profit. A profit maximization objective seeks to get as much profit as possible. It might be
stated as a desire to earn a rapid return on investment. Some people believe that anyone seeking
a profit maximization objective will charge high prices – price that are not in the public interest.
However, this point of view is not correct. Pricing to achieve profit maximization does not always
lead to high prices. Demand and supply may bring extremely high prices if competition can't offer
good substitutes. But this happens if and only if demand is highly inelastic. If demand is very
elastic, profit maximizers may charge relatively low prices. Low prices may expand the size of the
market and result in greater sales and profits.
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II. Sales Oriented Pricing Objective
a. Maximum Sales Growth :
In this objective, the company wants to achieve maximum sales growth (unit sales, dollar sales or
share of market). In this case, companies believe that high sales volume will lead to lower unit
costs and higher long run profit. However, sales growth doesn't necessarily mean big profits. This
kind of thinking causes problems when a firm's costs are growing faster than sales or when
managers don't keep track of their costs. Usually, company's set the lowest price assuming that
the market is highly price sensitive and it is called penetration pricing.
This will be possible and effective
i. When the market is highly price sensitive and a low price stimulates more market
growth.
ii. Production and distribution costs fall with accumulated production experience.
iii. A low price discourages actual and potential competition.
b. Market Share Objectives :
Many firms seek to gain a specified share of a market. A benefit of a market share objective is that
it forces a manager to pay attention to what competitors are doing in the market. In addition, it's
usually easier to measure a firm's market share than to determine if profits are being maximized. If
a company has a large market share, it may have better economies of scale than its competitors.
Therefore, it sells at about the same price as its competitors, it gets more profit from each sale, or
lower costs may allow it to sell at a lower price and still make a profit. A company with a long–run
view may decide that increasing market share is a sensible objective when the overall market is
growing. The hope is that larger future volume will justify sacrificing some profit in the short run.
III. Status Quo Pricing Objective :
Managers satisfied with their current market share and profits sometimes adopt status quo
objectives. Managers may say that they want to stabilize prices, or meet competition, or even
avoid competition. This thinking is most common when the total market is not growing.
Non–Price Competition: a status quo pricing objective may be part of an aggressive overall
marketing strategy focusing on non–price competition–aggressive action on one or more of the Ps
other than price.
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This pricing style is also called stabilizing pricing, which avoids price competition by following large
firms that are price leaders and when the products are highly standardized. The major reason to
use this objective is to alert price war.
There is also other pricing objective, i.e., survival–companies set survival as their major objective if
they are suffering from over capacity, intense competition or changing consumer preference. To
keep the plant going and the inventories turning over, they will often cut prices. As long as their
prices covered variable costs and some fixed costs, they will continue to business. However,
survival is only a short run objective. In the long run the firm must find a way to add value in the
market or face extinction.
Basic Methods of Determining Price
Most of the approaches used by many companies to establish base prices for their products are
variations of one of the following methods:
1. Mark–up pricing
2. Target Return on Investment Pricing
3. Market Based Pricing
Price determined in relation to market alone
Cost- plus pricing is one extreme among pricing methods. At the other end of the scale is a
method where by a firm’s prices are sets in relation only to the market price disregarding cost.
This method is used to meet competition or it may be set either above or below the market price.
Pricing above the market
This is based on charging prices that are higher than those of competitors. It may also be referred
to as skimming pricing and it is commonly applied when producers introduce a new product. The
producer charges a high price during the introductory stage, and later reduces it when the product
is no longer a novelty and competition heats up. The price is set high relative to the cost, which
results in high gross profit. Consequently, it often attracts competitors. Companies, which adopt a
skimming policy, try to cover their development costs as quickly as possible through high initial
prices.
Pricing below the market
Charging prices, which are below those of competitors, is called pricing below the market. It is
also called penetration pricing. A producer charges a low price during the introductory stage and
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plan to get back to the initial investment through big sales. It may be economical because
producing large quantities- production oriented approach-saves money. This policy is practiced by
a company coming in to a market in which competitors are well established.
Pricing with the market
Premium pricing is another name for pricing with the market. It is charging prices that match with
those of competitors. By pricing with the market producers avoid tremendous effort required to find
out what the consumer would actually pay. This pricing also creates a business climate in which
all firms can avoid the unpleasantness of price competition. Companies prefer to compete through
brand differentiation rather than through price competition although competitors gain a small profit
per unit.
Pricing Procedures
The procedures to determine the price of a certain product are similar for a new and existing
products. In fact to set price for a new product is more difficult than for already established
products. The pricing procedures adapted by many firms are following.
1. Estimation of demand for a product
2. Anticipate competitive reactions
3. Consider company marketing policies
4. Select pricing strategy to reach the market
5. Select a specific price.
The most commonly used pricing strategies include the following:
Skim the cream pricing
The cream skimming pricing involves setting a price that is high in the range of expected prices.
This strategy is particularly suitable for new products for the following reasons.
In the early stages of a product life cycle, price is less important, competition is minimal and the
product’s distinctiveness lends itself to effective marketing.
If the original price is too high and market does not respond, a firm can easily lower it. But it is
very difficult to raise a price that has proven too low to cover costs
High initial prices can keep demand within the limits of a firm’s productive capacity, and
generate large profit at the beginning of the marketing stage
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Penetration pricing
In penetration pricing, a low initial price is set to reach the mass market instantly. It is often
employed at the later stage of the product life cycle. Penetration pricing has an advantage over
skimming if the following conditions are fulfilled:
If the product has highly elastic demand
If substantial reductions in unit costs can be achieved through large scale operation, and
If the product is expected to face very strong competition soon after it is introduced to the
market
Penetration pricing discourages other firms from entering the market because of anticipated low
margin, and helps to expand market share.
Premium pricing
Premium pricing is an extension of skimming pricing strategy. In this case firms develop equally
high prices with other competitors. Premium pricing should be accompanied by the following:
strong product in terms of quality
high promotional activities
high quality customer services
Based on an appropriate method(s) assumed by the firm, we select a specific price that best
matches the market and generates higher profit.
Price Discounts and Allowances
Discounts and allowances result in a deduction from the base or list price. The most common
types of discounts and allowances are:
Quantity Discounts- are deductions from the list price of the product fined by a seller to encourage
customers to buy in larger amounts or to make most of their purchases from that seller. Quantity
discounts can be either cumulative in which the discount is based on the total volume of purchase
over a given period of time, or non-cumulative in which the discount is based on a single purchase
of one or more products. These discounts are designed to increase sales potential.
Trade Discounts – trade discounts, also called functional discounts, are reductions from the list
price offered to buyers when they perform a service or function within a channel of distribution. A
manufacturer quotes a retail list price of 500 discount of 45 percent and 8 percent. Then the
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retailers cost will be 275(500 minus 45 percent). The wholesaler will pay 253(275 minus 8
percent)
Cash Discount – is a deduction granted to buyers for paying their bills within a specified period of
time. This is computed on the net amount that is after deducting trade and quantity discounts from
the list price. If a buyer owes 360 and the seller offered terms 2/10, n/30 on an invoice dated
September 8, the buyer may deduct a discount of 2 percent (7.20) and the bill is paid within 10
days after the date of the invoice. Otherwise the entire bill of 360 must be paid in 30 days
(October 8) cash discount is designed to encourage buyers for cash payment and minimize
uncollectible accounts.
Seasonal Discounts – are price reductions for buying merchandise out of season or slack season.
Off-season orders enable manufacturers to make better use of their production facilities and / or
avoid inventory-carrying costs.
Promotional Allowance – it plays a dual role; it is a pricing tool and a promotional device.
Promotional allowance is price reduction offered by the seller in payment for promotional services
performed by buyers. For example the manufacturer may share half of the cost of advertising
made by the retailer. Promotional allowance can also be given in terms of free goods.
Freight Allowance – the seller may absorb all or part of the actual freight charges. It is used where
competition is intense or when breaking into new market areas. It is advantageous when the size
and cost of goods is large and the distance of transportation is long.
Merchandise Bonuses – it refers to the provision of excess merchandize, beyond the agreed
amount, for various purposes such as to offset damages. It may also be effected in the form of
complimentary goods and trading stamps.
Self test Exercises
Choose the best answer for each of the following questions and encircle the letter of your choice
1. Which of the following is of primary requirement for Teff, Honey, Chat and other agricultural products of different places in Ethiopia?a) Transportationb) Assemblyc) Grading and classificationd) Distribution
2. Which of the following is not part of a product?a) Colorb) Price
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c) Manufacturers’ and retailers’ prestige and servicesd) None
3. Which of the following statements is TRUE?a) Flavor is perceived by touchingb) Texture is sensed by tastingc) Texture is important in both food and fiber productsd) None
4. The following statements are TRUE about packaging, except:a) It communicates priceb) It contains promotional materialc) It increases costd) It speeds checkoute) None
5. Packaging affects the cost structure of a product in all of the following, except:a) It limits the consumer’s ability to select and may reduce revenueb) It reduces labor costc) It minimizes spoilage rated) Alle) None
6. Which of the following does not affect the choice among promotional tools?a) Costs involvedb) The product lifecyclec) Nature of the marketd) Adoption process and rate e) None
7. Which of the following statements is FALSE?a) Characteristics of consumers affects the choice of a channelb) Choice of a channel is affected by product classc) The desired level of control is a basic factor to determine distribution strategyd) None
8. Which of the following is a facilitator in the distribution of agribusiness productsa) Consumersb) Wholesalersc) Warehousing institutionsd) Retailerse) Producers
9. Which of the following is not an element of the microenvironment for the farm output firma) Competitors
a. Fiscal policiesb. Transportation companiesc. Suppliers
Write "TRUE" if the statement is correct or "FALSE" if the statement is incorrect. ______1. In fibers appearance is cosmetic but for food products it may indicate quality or
acceptability.______2. Aroma is a major indicator of agribusiness product quality______3. Number of product lines in a firm shows the depth of product mix.______4. Expiration date shows when the retailers should remove the product from the shelf.______5. The purpose of branding is to provide protection and safety to the product.
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Fill in the blank spaces with appropriate answers
1. List any two features of intermediate agribusiness products.________________________________________________________________________________________________________________
2. A product life cycle stage where profits decline while sales increase refers to ________________________________.
3. The three types of salespeople are________________________________________________________________________________________________________________________________________________________________________
4. Enumerate any two pricing tactics for open sales________________________________________________________________________________________________________________
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Unit 7
Government Marketing Services
Objectives
To understand why government services are used to assist marketing
To see how the marketing information system is organized
To understand why commodity grades are important in all trading
To see how commodity grades are important in future market trading
To realize why government is called upon to monitor trade practices
To see how government protects consumers with regard to product marketing
Activity 7.1 What do you think the role of the government should be in supporting agribusiness in
ensuring rural development?___________________________________________________________________________________________________________________________________________________________________________
Marketing of agricultural commodities, including processed forms of foods and fibers, is greatly
influenced by government facilitating services. Most of these are in three areas:
Collection and dissemination of Market information
Assistance to actual marketing operations( as in the establishment and monitoring
of grades and grading practices
Market surveillance to ensure fair competition and trade practices
7.1. Market Information Services
A government can provide the following marketing services:
Crop reporting services
Foreign agricultural service
Market news service
Crop Reporting Service
Crop and livestock reporting is one of a government’s first activities. This involves providing
information concerning farm products. Intentions for planting, prospects for production, final crop
estimates, and price received by farmers are reported.
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Each year a government may release estimates of the number of all types of livestock and poultry
on farms, number of cattle on feed, size of the pig crop, chicks, etc. The volume of milk produced
and the output of major dairy products by processing plants are also reported.
Future supplies of dairy products and livestock products are influenced by current prices of
products and prices of feeds used in their production. Demand estimates for commodities appear
mostly in a separate series.
Foreign Agricultural Marketing Service
Although the domestic supply and demand expectations are of primary importance to most
commodity marketing and processing firms, the current supply and demand outlook in foreign
markets is specially important to grain and fiber crops.
Market News Service
Although the annual supply and demand picture can give the tone of a market, commodities are
traded daily, and short run price movements can greatly affect profits at all levels in the
agribusiness economy. This creates a need for fast information about day to day changes in
volume traded and prices that is daily market information network. The most extensive market
news network may be particularly needed for fruits, vegetables, and other perishable agribusiness
products.
7.2. Assistance to Market Operations
Government market news is considerably more useful if prices quoted from day to day and from
market to market are for the same sizes and qualities of products. Therefore grading and container
sizes become important. A government can provide assistance to agribusiness market operations
in the form of product grades and grading, standards for containers, and regulation of futures
trading.
Grades and Grading
Grades set forth the physical characteristics a commodity must possess in order to meet a given
classification and also specify tolerances permitted. Grades must be practical or usable when
applied on a large commercial scale. They must serve meaningful classification purposes, but they
cannot be unrealistic, or else they lose their value to marketing.
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Government assistance to marketing through grading is surprisingly extensive. But if government
were to relinquish its role, some industry organizations would have to provide the same functions
for grades and standards are absolutely vital to trading efficiency.
Standard Containers Act
The impetus for efforts to standardize containers comes largely from marketing themselves. Price
comparisons in trading are much easier if the prices relate to the same quantity measurement, i.e.
a direct effect to standardization of containers.
Futures Trading Regulations
The need for trading standards goes beyond daily marketing of commodities; it extends into futures
markets as well. As will be discussed in agribusiness risk management in late chapters, futures
market permits one to lock in a price for future delivery of a product and also make it possible for
marketing and processing firms to hedge against price risks on inventories held or used in
processing. Such advantages would be impossible if futures market trading were not closely
supervised and regulated. Without regulation one firm or individual could hold a sufficient number
of contracts to directly influence the futures market price.
7.3. Market Surveillance
In addition to providing marketing information and assisting marketing operations, the government
also assists in maintaining fair and workable competition among marketing firms. Between each
marketing stage and the next, a physical exchange of product, title or both usually occurs. There
are millions of such transactions each month and some misunderstandings are inevitable; but, as
in any line of business, a few unscrupulous traders attempt at times to practice intentional fraud or
deceit. Therefore, government has often been called upon to formulate trading regulations and
standards of practice.
Market surveillance is quite useful for fair trade practices that apply to practices among businesses
within an industry and also between business firms and consumers. Many of them apply to food
and fiber marketing. Ensuring ethical business and fair trade practice are on e of the major
responsibilities of any government. This is particularly important in transforming agrarian
economies into industrial economies.
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Assistance to consumers
Markets surveillance is also a tool for providing assistance to consumers. Do consumers need
assistance or protection? And with the rise of consumer advocacy groups, consumers’ desires are
more clearly focused than ever before. Government assistance to consumers has produced
guidelines in several categories:
Product safety, ingredient labeling, and packaging
Consumer grades and grading
Packaging
Nutritional labeling
Pricing protection, and
Information services
In spite of the services it provides, government marketing services result in a lot of costs.
5ffrr55rCosts of government marketing services include the following costs.
Direct costs of maintaining staff and services for regulatory activities at the federal, state,
and local levels
The added cost to marketing firms of complying with regulations
The cost to consumers of any limitations on supplies entering the market because of
exclusions on regulatory grounds
Activity 7.2 How do you evaluate the support that is being provided by the federal and regional
governments in supporting agribusiness vis-à-vis their intentions and their policies? _____________________________________________________________________________________________________________________________________________________________________
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UNIT 8
Managing the Market Risk
Objectives
To enable students understand the different types of risks
To Identify all possible risks that may be faced in the agribusiness ector
To identify the different types of market risks and means of managing them
All kinds of businesses encounter risk. There any many challenges that agribusiness managers
face and risk is one among those challenges and it has to be managed successfully like with other
things in the business. A part of the salary paid to agribusiness manager is for successful
management of risk.
All kinds of businesses face many forms of risk. But agribusiness firms face with an excessive
amount and variety of risks. In fact, the major difference between an agribusiness firm and other
types of businesses are the risks inbuilt in running the agribusiness. Some of the many risks which
an agribusiness firm may face are a drought, cyclone, pests, a rapidly spreading livestock disease,
refrigeration problems, or a failure of a new product after heavy development costs.
8.1. Types of Risk
The risks faced by a business could be categorized into two categories. These two types are the
financial risk and business risk.
Activity 8.1 Identify the main business risks that are faced in the agribusiness sector_____________________________________________________________________________________
What are the different types of market risks of the agricultural sector?_____________________________________________________________________________________
Financial Risk
The possibility that the agribusiness firm will be unable to meet its financial obligations is known as
the financial risk. As the amount of debt in a firm’s capital structure increases in comparison to its
equity or net worth, so does the level of financial risk. If an agribusiness firm is unable to pay its
debt because of low or negative income, the lender takes action to recover his money. This could
mean either taking the assets pledged against the loan or foreclosure. Any one of them could
mean disaster for an agribusiness firm.
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A firm can reduce its financial risk by keeping the debt amount in its capital structure within
acceptable limits. The proportion of debt to equity varies from industry to industry and with
economic conditions.
Business Risk
The second type of risk is business risk. The variation in net income that arises from normal
fluctuations in business activity is known as business risk. From industry to industry the level of
business risk varies. In industries like agribusiness where the investment is huge, the products are
perishable, production cannot be quickly adjusted to meet changes in the level of demand, and
prices can vary greatly, the level of business risk can be very high. The agribusiness managers
have a number of methods, some unique to agribusiness, to reduce the high levels of business
risks the agribusiness encounter.
Activity 8.2Most of the times insurance may not be the best tool to control market risks? _____________________________________________________________________________________
8.2. Common Types of Business Risk
The agribusiness firms face some of the following common types of business risk. They include
i) production risk
The biological nature of production processes for agricultural producers, commodity processors,
and food manufacturers creates production risk which adds uncertainty to the expected level of
output. Weather, floods, disease, and pest infestations are the most common sources of
production risk.
ii) Casualty Risk
It now includes also the loss of property even though originally it included only the loss of life due
to unforeseen circumstances. Some of the unforeseen occurrences include fire, theft, vandalism,
and flood.
iii) Technological Risk
Technological risk is created by the adoption or nonadoption of new technology, obsolescence,
and equipment breakdowns.
iv) Personnel Risk
The illness, injury, or death of one of the principals in a firm can severely affect the business.
There is also the risk that a key employee will quit and go to work for a computer.
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v) Risk due to Actions of others
Most people in business are reliable and responsible. But there are always a few, both within the
firm and in other firms with which the firm conducts business, which can cause problems and risk
of loss.
vi) Market Risk
Market risk can be described as the risk of adverse movements in the prices of inputs and
products. A variety of things like change in consumer tastes and preferences, embargoes, etc., can
lead to adverse price movements and fall in the firm’s profits. If this happens than there would be
either a decline in price for someone intending to sell or an increase in price for someone intending
to purchase.
8.3. Ways to Reduce Business Risk
Most of the agribusiness firms are averse to risk. This means they avoid taking risks even when
they can take those risks. The agribusiness firms just want to run their firms prudently and make
profits as much as possible without the danger of losing everything. Risk taking is not making
losses always and there are ways to reduce business risk.
A first way is to maintain financial cushion. Even though financial cushion by itself doesn’t reduce
or shift risk for the agribusiness firm, it can guard against the possible consequences of business
risk. An agribusiness firm is said to have financial cushion when it has cash reserves, or large
balances in credit or savings account. Or otherwise it can have financial cushion also when it
doesn’t fully utilize its borrowing capacity and majority of its borrowing capacity is underutilized. If
the borrowing capacity is underutilized the agribusiness firm can utilize it at times of difficulty.
The second way of reducing business risks is to have those risks covered through insurance. So
risks like casualty risk (fire), personnel risk (life insurance), and some production risks like hail
storms can be reduced or passed on to insurance companies by taking insurance. By purchasing
insurance against these types of losses agribusiness firms trade the known probability of annual
small losses (the premiums) for the unknown probability of potentially large losses.
Business strategies could also be used to reduce the business risk and these strategies include
diversification, vertical integration and rapid adoption of new technology. Diversification is doing
business in more than one industry. If the market for an agribusiness firm’s only product runs into
hard times it could find itself with sharply reduced revenues and profits. But by diversifying into
different products or even different businesses, the firm can reduce the downturn for one product
or business putting the firm’s future in jeopardy. For example, until 1970 most of the products were
packed in jute bags and these jute industries were prospering with their single product. Once other
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material bags came for packing purpose, they lost their markets and most of the jute mills were out
of business. If at all, they had diversified into different products or businesses they wouldn’t have
met this fate.
Risk could also be reduced through vertical integration. Vertical integration occurs when one
firm enters a business at two or more levels in a marketing channel by either acquiring a firm or
through contractual agreement. The reasons why agribusiness firms use vertical integration to
reduce risk are
i) to assure themselves of a supply of raw material
ii) to guarantee an outlet for their supplies
iii) to protect themselves from the actions of others in the marketing channel
iv) to reduce the cost of buying or selling raw materials or products
v) to gain more market power
The third business strategy is rapid adoption of new technology. But this is by itself risky. The risk
is that this new technology may not work. The firm utilizing this new technology incurs costs in
adopting but at the same time there may not be much benefit through increase in sales. That is the
reason why many agribusiness firms are hesitant to use new technology and see how it works.
However, if the new technology works properly, it can reduce risk. A worm resistant cotton seed
can help the cotton farmers in production risk for the farmer. A new technology which helps in
reducing cost of production can reduce the risk of price decline of a product or commodity.
8.4. Ways to Manage the Market Risk
Market risk in the form of adverse movements of commodity prices can also cause great variation
in the net income of an agribusiness firm. The amount of market risk that occurs to the
agribusiness firm because of adverse price movements can be reduced by a number of unique
ways by the agribusiness firm. As the agribusiness firms want to avoid risk as much as possible,
several market instruments were developed to reduce the amount of market risk caused by
fluctuations in price. These market instruments are cash forward contracting, futures markets, and
options markets. Each instrument offers a special way for the agribusiness firm to reduce the
market risk that arises because of price fluctuations.
8.4.1.. Forward Contracting
One of the most important ways to reduce market risk by agribusiness firms is to use forward
pricing. The establishment of the exchange price of a commodity or product before the physical
transfer to the new owner is known as forward contracting.
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Price locking or locking in the price is the most important feature of forward contracting. The
market risk that an adverse price movement will cause a loss to the agribusiness firm is nearly
eliminated by forward contracting. Forward contracting works well for both the seller and the buyer.
The buyer knows in advance the price for his output and the seller is assured of a selling price
before physical delivery is made.
Forward contracting could be either cash forward contracting or futures market forward contracting.
1) Cash Forward Contracting
The forward contracts made in the cash market are called cash forward contracts. In a cash
market the price of a commodity or product is normally the subject of negotiation, and physical
delivery of the product or commodity in the contract is expected. Farmers sell at least part of their
grain far ahead of harvest using cash forward contracting. For example, in August when a farmer
has some idea of the crop size that he will produce, the farmer negotiates with the grain elevator
over the price for the crop he is going to harvest in December.
Once the contact is signed both the farmer and the elevator are free from some worries. The
farmer doesn’t have to worry about fall in crop’s profits due to a drop in the price of the crop and
the elevator is assured of certain quantity of grain at a certain price. The elevator may also, in turn,
negotiate another cash forward contract with another buyer before December to lock in profit and
eliminate market risk on the selling side.
2) Futures Market Forward Contracting
Price forwarding or forward price can also be done by agribusiness firms by using the futures
markets. The futures markets are separate and distinct from the cash markets for commodities.
The two markets are related only because
i) Prices in the two markets respond in a similar fashion to the same factors, and
ii) To fulfill futures markets contracts, the sellers can deliver physical commodities to
the buyers.
For any commodity in the futures market, the contract price is only left open for negotiation. All the
other factors other than the contract price are standardized and already filled up in the contract.
The other factors include the quantity specification, quality specification, delivery date, and the
delivery place. Contract price is negotiated through public auction in government licensed
exchanges.
The futures contract seller promises to deliver the item as specified in the contract at the time set
in the contract. The futures contract buyer agrees to take delivery of the item and pay the agreed
price to the seller. The unusual thing about this futures contract is that any one of the parties to the
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contract is generally willing to fulfill their part of the contract. This is so because the main purpose
of the futures contract is to transfer temporarily the risk of adverse price movements to someone
else. The seller’s promise to deliver the commodity can be cancelled by buying back the contract.
Likewise, the futures contract buyer can cancel his obligations by selling another contract.
Thus by making equal but opposite transactions in the futures market anytime before the due date
of the contract, the sellers and buyers can cancel their contractual obligations like delivering and
receiving the commodity arising from contract without losing the price protection offered by the
futures contract.
8.4.2. Hedging
The process of shifting price risk by forward contracting using the futures market is called hedging.
Hedging can be described as ‘the simultaneous taking of equal but opposite positions in both the
cash and futures markets. Hedges are of two basic types and these are the selling hedge and the
buying hedge.
1) Selling Hedge
The owners of a commodity use the selling hedge so as to shift the risk of downward movement in
the commodity price to someone else. In a selling hedge the owner of a commodity sells futures
contracts to protect a cash market ownership position. Selling hedges are routinely utilized by
farmers, marketing middlemen, processors, and food manufacturers to protect themselves from
very real losses arising from price declines on the commodities they own.
2) Buying Hedge
The buying hedge is similar to the selling hedge in concept but differs in motivation and
implementation. In a buying hedge he person wishing to purchase the commodity buys futures
contracts to protect a cash market ownership position against an upward movement in price. An
unexpected price increase for a commodity purchased as a raw ingredient or for resale can wipe
out any profit and may put the firm in a loss position. The buying hedges are regularly used by
commodity merchants, processors, and food manufacturers. These agribusiness firms routinely
make commitments to sell commodities or products at a negotiated price, often before they have
purchased the commodities needed to fulfill the commitment. The live in constant fear of
unexpected price increase in the commodity and hence use the buying hedge to shift the risk of
price increases to someone else.
8.4.3. Options Markets
The agribusiness firms need no longer be worried about the prices of their commodities once they
have been hedged. But they may lose the chance of gaining from advantageous price movements.
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To capture the prices arising from favorable price movements the agribusiness firm can use
several ways. These ways include
i) not using hedge until the price is moving in an unfavorable direction
ii) place a hedge but be ready to remove it to benefit from an favorable price movement,
and
iii) using options
If the first two ways are used by the agribusiness firm and not done in the right way then it will be
risky and costly. For the agribusiness firm the use of option offers a new way to overcome these
problems and reduce exposure to the price risk.
An option gives the buyer the right, but not the obligation, to buy or sell an agricultural futures
contract at some specified time in the future for a price set at the time the option is purchased. The
option contract for the right to buy a futures contract is called a ‘call’. The option contract for the
right to sell a futures contract is referred to as a ‘put’.
The buyer of an option contract can choose not to exercise the option to buy the underlying futures
contract at a set price if price movement of the commodity would produce a loss. However, if the
cash price moves favorably, then the option buyer can use the option as protection from the
adverse price movement, thus, through the use of options the hedger gains the flexibility to take
full advantage of favorable movements of prices while still being able to gain the protection from
advance price movements offered through hedging. To gain this protection the buyer must pay a
premium. The premium which must be paid at the time the option contract is purchased can be
looked upon as a price risk insurance premium payment.
8.4.4. Speculation
Speculation can be described as a transaction in commodities or financial obligations that
assumes a risk in the hope of favorable price movement. To shift the market risk, that is, the risk of
adverse price movements the agricultural producers, commodity processors, exporters, food
manufacturers, etc., use the futures market to shift it to someone else. That someone who
assumes this risk is the speculator.
A commodity speculator is a rational business person who is willing to take on price risk in hopes
of making profit and assumes a risk that arises naturally. In agribusiness, price risk is a natural part
of holding inventories of agricultural commodities. If not for the speculators who take the price risk,
the agribusiness firms’ costs would increase because of the losses incurred from adverse price
movements. This increase in costs of agribusiness firms would eventually lead to increase in their
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products, that is, food and fiber products. As the commodity speculator assumes the price risk,
agribusiness firms are able to produce products at lower cost, and society benefits.
Self test ExercisesChoose the best answer for each of the following questions and write the letter of your
choice
1. Which of the following is not a type of production risk?a) Theftb) Flood c) Weatherd) Disease
2. All of the following are casualty risks except:a) Floodb) Firec) Vandalismd) Property damage
3 Which of the following is not a special problem in the agricultural production?a) Variability in quantityb) Bulky nature of the productsc) Demand problemd) Bulky nature of the products
4. Which of the following is not a cause for market risk? a) Changes in customer tastes
b) Limited Product varietiesc) Poor backward integrationd) Lack of adequate working capitale) None
5. A farmer who wants the right, but not the obligation, to sell a particular commodity at a specific price would use a:
a) Basis contractb) Put optionc) Call optiond) Cash forward contracte) None of the above
6. A farmer who produces grain could use the options market to reduce his price risk by:a) Buying a grain Put optionb) Selling a grain Put optionc) Buying a grain Call optiond) Selling a grain Call optione) None of the above
7. Tadesse, a Farmer has just harvested and put in storage 10,000 bushels of corn
at the same time he sells two 5,000-bushel corn futures contracts, he has:
a) Speculated on the futures market.b) A call option for two 5,000-bushel corn futures contractc) A hedge.d) A put position.e) None of the above
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UNIT 9
Operating the Agribusiness
9.1. Production Planning in the Agribusiness
The set of procedures and activities that result in the creation of a product or service is known as
production. Production management can be described as the complex network of decisions that
support the production process. The principles of production management have been incorporated
into the interactions of labor, materials, and machines; cost and quality controls; and the design
and location of facilities in a wide variety of businesses. Regarding agribusinesses, the principles
of production management have provided many benefits in improving the methods of collection,
sorting, and grading, processing, and manufacturing, and packaging and shipping agricultural
products.
Production management involves a complex network of decisions that affect the production
process. The kinds of production processes relate to the number and kind of raw materials, or
number and kind of end products. Production may be either intermittent or continuous, depending
on whether it is handled by function to produce variable outputs or handled as a continuous, step-
by-step process to produce very similar products.
Production of agricultural products is hampered by severe problems of seasonality, perishability,
bulkiness, and variations in quantity, quality, or value. Production involves planning, and must be
viewed as a total system involving location, size, and layout of plant; purchasing; inventory control;
and production controls. There are several categories that affect each of these decisions, and
agribusiness managers are urged to consider all factors and their effect on the total system before
making a decision.
9.2. Production Processes
The agribusiness activities take place within the framework of any one of the four production
processes. The four production processes are Analysis, Synthesis, Extraction, and Fabrication.
The first process is the analysis process. The analysis process of production involves creating
many different products from one source of raw material. For instance, peanuts depending how it
is processed and packed can be made available to the consumer either fresh, roasted, boiled, in a
container, as oil, etc. The agribusiness firms that depend on a single raw material for the
production of different products may find it convenient and economical to locate their production
base nearer to the source of raw than to the ultimate market. The factors involved in such a
decision include not only cost but also the perishability and bulkiness of the raw material. For
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instance, a sugar factory should be located in the area where sugarcane is grown because
sugarcane has to be processed within certain hours after cutting to get maximum content out of
that sugarcane.
The second process of production is synthesis and it is an exact opposite of the analysis process
of production. In the synthesis process, a single product is produced using many raw materials. It
involves combining two or more materials to form a single product. An agribusiness firm using
synthesis process for production should generally locate its production facilities near the target
market. This is so because of convenience to the firm as the several raw materials have to be
sourced from different places, and the firm can incur minimum costs to transport its output
products to its target markets.
The third kind of production process is extraction. Extraction occurs when a product is extracted
from a natural setting, as when trees are felled for lumber or food flavorings are derived from the
leavers, fruits, nuts, or wild flowers.
The last kind of production process is fabrication; fabrication does not deal with natural forms but
with the change in form of some basic material to make it more marketable. Chicken meat is
available in various forms such as breasts, joints, legs, etc., so as to appeal to the consumer.
Sometimes two production processes occur simultaneously; thus, as hogs are transformed into hot
dogs, pork chops, sausages, etc., they are simultaneously undergoing analytic and fabricating
processes.
9.3. Types of Production
All processes of production form a part of the total production network. The total production
network is of two types and could be either a continuous or intermittent depending upon the
continuity of the production.
1) Continuous Production
The continuous or uninterrupted way of inputs flow through a standardized system for producing
outputs that are basically the same is known as continuous production. This type of production is
used by those agribusinesses producing chemicals or those canning plants using assembly-line
techniques. Continuous production is generally felt to be a relatively simple and undemanding
operation because the variations in the production process are minimal and there is not much need
for creativity.
2) Intermittent Production
The production process that involves variable outputs, variable procedures, and often variable
inputs as well is known as intermittent production. For instance, an agribusiness firm producing
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cheese, butter, yogurt, ice cream, milk powder, and various other dairy products will be engaged in
many different sequences and activities to provide such a variety of products.
Flexibility will be required in the use of machinery, placement of workers, and transportation links,
both from agricultural producers and to distributors. There is no one flow of inputs through a
streamlined funneling system with a single purpose; instead, the diversity of the operation makes
for intricate problems in location, transportation, storage, and scheduling.
9.4. Special Problems in Agricultural Production
The problems inherent in the production of agricultural production are perishability, bulkiness,
seasonality of the products, and variations in product quality, quantity, or value.
The perishability and bulkiness have widespread implications in the choice of plant location,
method of transportation, and scheduling.
The agribusiness firms involved in the farm supply sector are engaged in highly seasonal
production processes. The production facilities are often strained during the peak season to the
utmost to produce the services and products farmers need to consume within a short time. While
the production of farm supplies is scheduled as evenly as possible throughout the year to
maximize efficiency, lack of sufficient storage to accommodate peak season needs places
tremendous pressure on production facilities as they struggle to keep up.
In some cases, seasonality is related to problems of perishability. Majority of the fruits and
vegetables are highly perishable by nature and hence have to be processed quickly so as to avoid
spoilage. Most of these fruits and vegetables are seasonal that agribusiness firms involved with
those have to remain idle other than the time those fruits and vegetable are available. For
instance, agribusiness firms involved in extracting pulp from mangoes have to remain shut for
nearly eight months of a year because mangoes are available for only four months in a year. Some
agribusiness firms have evolved ingenious and successful ways of counteracting this dual problem
of seasonality and perishability; the tomato industry is one. The tomato industry uses aseptic, non-
refrigerated, stainless steel vats to eliminate the problem of deterioration. Operations that produce
tomato products are now able to run consistently for 12 months without fear of spoilage, thus
reducing costs during the peak season and increasing productivity in the off-season.
Another big problem of agricultural industry is the variability in quality and quantity of the
agricultural products. Processors, canners, and freezers of fish must weigh and differentiate
among fish of unequal quality. Rice, teff, corn, and so many agricultural products have to be
graded.
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Bulkiness is another problem typical to agricultural products. Because of the bulkiness factor many
agricultural products are costly. For example, the price of one kg of bananas in Arbaminch is
around one birr and the price of the same bananas in Mekelle is three birr. This is so because of
the huge transportation costs for carrying the bulky crates of bananas. These transportation costs
are reflected in the customer price, and if the consumer price is too high, consumers may not buy
enough reducing demand for the product leading to fewer sales. The physical problem of storing
bulky products as they wait processing or shipping is also reflected in the costs of the products.
A final difficulty experienced in the production of agricultural products is variation in value. Price
efficiency demands that production managers manufacture outputs with the highest possible value
consistent with the costs of production. A dairy-processor may find that cheese has a higher
market value than milk for table consumption; but if its value is only one-third more than that of
milk, and it requires twice the production cost, then price efficiency tends to favor producing the
milk. Because there is such a wide variety of value in agricultural products (in different cuts of beef,
for example) this is an important area for agribusinesses to explore.
9.5. Planning Production
Careful planning is required in production management. Among the issues involved are the
location of facilities, plant size, layout, purchasing, inventory, and production control. The above
issues are part of a total systems overview.
Production as a Total System
The systems concept covers all areas of management and so the agribusiness manager has to
view the area of production as a total, interrelated, and interacting system. Every decision related
to a production issue has a kind of domino effect on the remaining factors of production. An
agribusiness manager who is able to predict all the possible effects on production variables from
changing one variable is successfully employing the systems outlook.
The Systems View
A system can be defined as a set of entities together with the relationship between them. This
simple definition belies its importance for the production manager, or for management in genera.
The point is that, although most organizations are arranged into departments or sections such as
accounting, marketing, production, and personnel, this is not the way that goods or services are
delivered. Goods or services are made or delivered according to systems or processes which
integrate these organizational entities. Having a systems view is important for an production
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manager, because he or she must be able to see the whole process, from concept to completion.
The entire process may include outside suppliers, service delivery and back-up, and the
information flows that are required.
Systems can be described as having either open or closed systems. These describe the extent to
which communications and interactions occur freely across the system boundaries. Boundaries are
not only physical, like the walls of a specific functional are, but can also be invisible, and represent,
for example, the authority exercised by a manager. In today’s business world, there is often a
global dimension with international companies. An open system has few boundary regulations. A
closed system exists only as a conceptual model.
Systems and sub-systems can be categorized along the open – closed continuum, and recognized
as a ‘relatively-closed’ system. There are costs and risks associated with all points on the
continuum. The more controls in place on a boundary, the greater the cost. The more open a
boundary, the greater the potential loss through theft or mishandling.
1) Location of the Plant
Location is the physical positioning or geographic site of facilities; it must be determined by the
needs and requirements of the organization. Four interrelated issues have to be generally
considered by an agribusiness manager when deciding a location for its production facilities.
These four issues are (i) source of raw materials or supplies, (ii) availability of labor, (iii) location of
markets, and (iv) special incentives offered in different areas.
i) Source of Materials
Agribusiness firms may wish to locate close to their source of raw materials if the business
requires only one raw-material input and that material is costly to ship in its raw state. Since cattle
would be bulky and costly to transport from Mekelle to Addis Ababa, they are usually slaughtered
near their source and shipped long-distance in the more manageable form of cuts and pieces in
boxes.
In other cases, agribusiness firms require so many different raw materials from locations far away
from one another that it is not economical or practical to locate the production facilities near the
availability of any one of the raw materials.
ii) Availability of Labor
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An agribusiness firm requires different kinds of labor and all kinds of labor is not available at one
place of the country. Labor intensive agribusinesses locate where the availability of labor is less
expensive. Agribusiness firms which need labor experienced in technology locate where there is
availability of labor with technical skills. An agribusiness firm that requires a great deal of research
may find it advisable to locate near a land-grant university. All these factors have to be taken into
consideration in choosing a location.
iii) Location of Markets
An agribusiness firm may locate near the target market when the necessary raw materials are
many or easy to transport in their raw state. This location near market may be an advantage for the
agribusiness firm. Proximity to markets is essential for agribusiness retailers because customers
do not travel long distances to buy from a retailer.
iv) Special Incentives
Agricultural industries that require large amounts of water or power must locate in locations in
which supplies are plentiful. For ex, textile plants require large amounts of water and so they
should locate at places like Bahirdar where there is plenty of availability of water. Certain areas to
attract investment will offer concessions in tax, subsidies, investment allowances, etc. A region that
is anxious to attract agribusinesses will have to offer a number of lucrative incentives.
2) Size of the Plant
An important dimension of the agribusiness is the optimal plant size regardless of the location.
Plants which are large are generally easier to operate, but they may turn out to be ‘white
elephants’, that is, costly due to a combination of factors.
i) Economics of Size
According to the principle of ‘economics-of-scale’, larger plants usually result in a lower cost per
unit produced. However, several smaller plants might offer more flexibility in terms of proximity to
raw materials or markets. This leads to lower transportation costs. There are other factors which
help to determine the real economic value of a large plant operation.
ii) Seasonality and Patterns of Production
An agricultural product that is seasonal in nature creates special problems for the agribusiness firm
manager. A plant that is designed to meet the full demand of the peak season becomes a costly
operation when output levels are significantly reduced. In such cases, it may actually be more
economical to run several smaller plants and to close down operations that are not needed during
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the off-season. This does not reduce the drain of costs associated with an unused facility, but it
does limit expenditures for the day-to-day running of a totally unnecessary part of the operation.
iii) Quantity of Output Needed
One of the most important determinants of plant size is the quantity of output required. An
agribusiness firm that is able to sell millions of units of output on a steady basis is more willing to
invest in larger plants than in smaller capacity plants. But the managers of the agribusiness firm
have to take into consideration that long-range factors and be able to predict continued demand at
that high level to justify the long-term investment of funds in a huge facility.
iv) Multiple versus Single Shifts
The multiple shifts are an alternative to the larger capacity plant. Theoretically, it is possible to
produce twice as much in a plant with double shifts. However, agribusiness managers must
consider several factors before going for multiple shifts. Is there sufficient availability of labor to
operate double shifts? Even if it is available, research tells that night-shift workers are not as
productive as that of day-shift workers because the human body does not work at peak efficiency
at night.
3) Layout
The physical configuration of facilities, the arrangement of equipment within facilities, or both is
known as layout. While planning the physical layout of a plant, consideration must be given to all
the processes and procedures that the plant is engaged in, their quantity and quality requirements,
and any future changes in product kind, quality, or demand. All this must be accounted for within
the framework of the most cost- efficient design. There are two basic categories of layout.
i) Process Layout
A process layout arranges activities by function. Thus, in a process layout, regardless of the
product being created or assembled, all like functions are grouped in the same place – that is,
packing equipment with packing equipment, foreman with foreman, etc., process layout is related
to intermittent production, since each function is capable of doing different facets of a variety of
products.
The process layout is used in operation settings that create or process a variety of products. In a
process layout, each type of conversion task is centralized in a single workstation or department.
The packing for all products is done in one designated shop location, and any product that requires
packing is moved to that area. This setup is in contrast to the product layout, in which several
different workstations may perform packing operations if the conversion task sequence so dictates.
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Process layout is often suited to manufacturing settings that produce a variety of custom-made
products, each tailored to the needs of a different kind of customer. For example, a custom wood
furniture manufacturer might use a process layout so that different teams of workers can produce
different styles of chairs or tables made from different kinds of woods and finishes. A process
layout provides the flexibility needed to change the product. Such flexibility, however, often
reduces efficiency because it is expensive.
ii) Product Layout
Product layout is geared specifically to the continuous production process because it produces one
product at a time, step by step, with one function following another in sequence as the product is
assembled, and with a few variations in product. Workers grading and packing apples on a
conveyor belt, for example, are operating within the framework of a product layout.
In a product layout, machines are organised so that each operation needed to manufacture a
product is performed at workstations arranged in a fixed sequence. Typically, workers are
stationary in this arrangement, and a moving conveyor belt takes the product being worked on to
the next workstation so that it is progressively assembled.
The product layout is appropriate when large quantities of single product are needed. It makes
sense to custom design a straight-line flow of work for a product when a specific task is performed
at each workstation. Most assembly lines use this format.
iii) Materials- Handling Problems
The problems in materials-handling experienced by a plant vary according to whether the layout is
process or product oriented. The main idea with process layouts is to allow for flexibility, since
products will not follow any one unvarying sequence. This requirement is generally met by means
of cranes, mobile trucks, and tractor trains for heavy loads. Skids, pallets, and forklift trucks are
used for rapid movement of less weighty loads.
9.6. Controlling Production Processes in the Agribusiness
The total agribusiness production system involves planning such factors as plant location, size of
plant, and layout. Once the ideal plans have been made a reality and facilities are in operation,
production managers are faced with a different task: controlling the processes that are underway.
Controls must be set on purchasing, inventory, scheduling, and quality.
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1) Controlling Purchasing
An agribusiness firm purchases products for three purposes: to resell those products; for
processing those products; or use them to make another product. Efficient purchasing leads to less
production costs and ultimately more profits for the agribusiness firm. Cost-efficient purchasing
involves five interrelated factors: quantity, quality, price, time, and service.
2) Controlling Inventory
Purchasing and inventory control are closely related. Inventory can tie up the much-needed capital
of the agribusiness firm in storage and carrying costs. Production managers of agribusiness firms
attempt to keep their inventory counts current and accurate, so that they can alert the purchasing
department when more stores are needed and so that they can decipher the trends in turnover.
Several kinds of inventory control enable the managers to do the above.
3) Controlling Scheduling
Once management knows through which departments or workstations the product must pass and
in what sequence, it can then schedule the work. Scheduling means assigning the work to be done
to departments or to specific machines or persons. At Nike, cutting leather for the company’s high-
top basketball shoes might be scheduled to be done by the “cutting and finishing” department on
machines designed especially for that purpose. Many approaches have been developed, ranging
from simple trial and error to highly sophisticated mathematical procedures. The scheduling
methods that an agribusiness firm uses depend upon its size and complexity of operation. A small
agribusiness firm will have a relatively straightforward method of scheduling. The larger
agribusiness firms may use any one of the popular ‘network models’ - PERT and CPM.
i ) Program Evaluation and Review Technique (PERT)
The PERT is one popular scheduling technique among large agribusinesses.
Managers using this technique first identify all the major activities required to complete a project.
To produce a McDonald’s Big Mac, for example, involves moving meat, cheese, sauce, and
vegetables from the refrigerator, grilling the hamburger patties, assembling the ingredients, placing
the completed Big Mac in its package, and serving it to the customer.
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Each compete activity is called an event. A scheduler arranges each event in a sequence,
ensuring that an event that must occur before another event I the process does so. For example,
at McDonald’s, the cheese, pickles, lettuce, onions, and sauce cannot be put on a Big Mac before
the hamburger patty is completely grilled and placed on the bun. The scheduler depicts the
sequence of a project graphically as a path, with arrows to connect events that must occur in
sequence. Finally, the time required for each activity is estimated and noted near the
corresponding arrow. The scheduler then totals the time to complete each path. The path that
requires the longest time from start to finish is called the critical path because it determines the
minimum amount of time in which the process can be completed. For example, if any of the
activities on the critical path for production of the Big Mac fall behind schedule, the sandwich will
not be completed on time, causing customers to wait longer than they usually would. Thus, PERT
allows managers to identify critical activities that can be performed concurrently so as to minimize
completion time.
ii) Critical Path Method (CPM)
The scheduling method, CPM, was developed at about the same time as that of PERT. As the
name indicates, CPM networks bear similarities to those of PERT.
The difference between PERT and CPM is one of degree rather than kind. PERT emphasizes time
and provides a way of computing the most probable time; however, CPM emphasizes cost as well
as time. As originally developed, CPM differs from PERT in three aspects.
First, only one time estimate is given for each set of activities leading up to a given event, instead
of the three time estimates required by PERT. Second, with CPM, a cost estimate is included
along with each estimated time for both normal and crash operating conditions. Normal operating
conditions are usually defined as the least costly method for the performance of an activity; crash
conditions represent the time and cost incurred in the performance of activities in less than the
normal time. For example, under normal operating conditions two persons assigned to the day shift
take three days to complete a job. The time can be shortened under the crash conditions by
assigning two persons to each of the three consecutive shifts – a reduction in elapsed time but with
a resultant increase in cost because the workers on the second and third shifts will receive
premium pay. Third, CPM assumes some previous experience w
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4) Controlling Quality
Quality control is no more seen a mere inspection task and is now being viewed as an integral part
of company strategy. One result is that quality control is being practiced increasingly at each stage
of the manufacturing process, making early corrections possible, instead of coming into play only
at an end-of-line inspection where faulty products are discarded or reworked.
Changes are also apparent in the practices companies are adopting to improve product quality.
Many recent quality-improvement efforts encourage worker involvement and management
participation that cut across functions and levels.
Managers make two kinds of quality-control decisions: strategic decisions and tactical decisions.
Strategic decisions set the level of quality for the output of the organization. They influence product
design, training of personnel, selection and maintenance programs for equipment, reward systems,
and so on. Tactical, day-to-day decisions on quality control are concerned with such matters as
when output should be inspected, how much of the output should be inspected, what should cause
output to be rejected, and when corrective actions should be taken regarding the production
process or personnel.
Quality controls are of two kinds: control of inputs and control of outputs. Control of inputs can be
maintained by seeing that they meet the detailed specifications so that quality can be verified.
Regarding outputs, managers should periodically inspect outputs to ensure quality and adherence
to specifications.
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UNIT 10
Evaluating the Marketing Program
Objectives
To complete the sequence of planning, implementation, and control in the agribusiness
marketing
To consider some measures of marketing performance
To consider some common techniques for predicting how a marketing program should
progress
To understand how agribusiness managers take corrective action when a marketing
program does not live up to predictions
Agribusiness firms exist because they efficiently and profitably meet the needs of their target
market. The evaluation of the marketing program is a critical task for management. This evaluation
of the marketing program ensures that the firm is efficiently, effectively, and profitably meeting the
target consumers. This type of analysis requires examining the business from three points of view:
revenues, costs, and financial planning.
Each view point provides a different perspective of the agribusiness firm that is important to the
overall success of the firm. Each of these view points require careful planning on the part of
managers, close attention to detail, and good record-keeping. The secret for success is for
managers of agribusiness firms is to isolate those key factors that influence revenues, costs, and
financial planning, and to monitor those key factors in order to effectively evaluate the performance
of business. This helps in keeping the agribusiness firm in sound financial health, remain
competitive, and profitable.
10.1. Revenue
The income derived by the agribusiness firm by selling products or providing services is called as
revenue. The level of revenue accumulated by the agribusiness firm depends on the number of
agribusiness products or items sold and the price charge per agribusiness product or item.
For determining the firm’s revenue the agribusiness firm manager has first to determine:
(1) What products to sell,
(2) What prices to charge, and
(3) How many products will be sold.
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The factors that affect the agribusiness firm’s revenues are
i) Consumer Demand
The quantity of product that consumers are willing and able to purchase at various prices is known
as demand. Effective marketing managers will know the shape of the demand schedule facing
their products because they intimately know the customers in their target market, what their needs
are, and how the product satisfies those needs.
A main cause of business failure is not keeping abreast of changes in customer needs. So the
managers are always on the lookout for anything that could affect the level of consumer demand.
ii) Market Area
Once consumer demand has been defined, the next step is to find out how many people are there
in the target market, where are they located, and how many of them the agribusiness firm can
realistically count on to buy its products. It is an accepted fact that agribusiness firms service large
market areas so as to remain profitable. Today’s agribusiness firms find that their trading areas
must be larger and may extend over state and even national boundaries.
iii) Pricing Policy
The key factor that is critical to the agribusiness firm’s success is to have the ‘right price’. The
price for an agribusiness product must be set in combination with the other elements of the
marketing mix. The price for a product should be set to achieve specific goals as defined in the
firm’s marketing plan. The product’s price should be fixed taking into consideration the type of
consumer demand the firm faces, the degree of competition in the market, and other relevant
factors that affect consumer buying behavior.
iv) Degree of Competition
The agribusiness firms face a variety of competitive situations. So it is essential for the manager of
an agribusiness firm to know the degree and type of competition faced by each product within each
market. The agribusiness firm can have more sales and profits by entering into niche markets,
untapped markets, and developing differentiated products. This helps the agribusiness firm to
operate in a less competitive environment.
v) Customer Awareness
The purpose of the promotion element in the firm’s marketing mix is to make aware to the
consumers that a right product at a right price is available at the right place. An effective marketing
manager who has planned perfectly knows well the firm’s target consumers, where they are
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located, their needs, how the firm’s product satisfies those needs, and how the consumers
perceive the firm’s product. This will make the agribusiness manager much easier to decide the
type, the frequency, and the budget for promotional efforts. This planning also helps in establishing
the proper mix of mass selling, personal selling, and sales promotion to use in reaching marketing
objectives.
vi) Sales Policy
Majority of the agribusiness sales are on credit. The sales revenues of an agribusiness firm can be
affected by the effectiveness of the agribusiness manager in extending credit and handling of the
accounts receivables. Trade credit may be primarily a financial concern, but when it affects the
level of sales than it becomes also a marketing concern. Trade credit is generally extended to
customers based on trust and customers also expect it. The main objective in providing trade
credit is to expand sales by keeping happy existing customers and to attract new consumers.
vii) Customer Service
Customers usually expect some level of service to be provided by the agribusiness firm for the
agribusiness products they purchase. For some agribusiness products there may be no need for
service at all or if needed it could be little. But for some agribusiness products the level of service
is essential and it may affect greatly the sales. Repeat business for those products is often a
function of the level of service offered by the agribusiness firm. The agribusiness firms should be
truthful and stand behind their products as this is the expectation of consumers. If it is not the case,
customers will buy from the competitors whom they think are truthful.
10.2. Costs
Each product that generates revenue to the agribusiness firm has a corresponding entry on the
cost side of the business. If the agribusiness firm has to make profits, then the costs should be
lower than that of the revenues. The important factors that are likely to affect an agribusiness firm’s
costs are
i) Efficiency
Efficiency is measured by the amount of output produced per unit of input. Efficiency could also be
applicable to marketing management. It can be used to evaluate the efficiency of resource use in
marketing by measuring such things as selling costs per birr of sales, cost per 100 customers
reached in an advertising campaign, the increase in sales per square foot of retail floor space from
a sales promotional program, and so on.
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An agribusiness firm will find that its profits are falling down because the costs are out of control as
it is not monitoring continuously its efficiency.
ii) Break-Even Point
The level of sales to achieve the break-even point should be determined by the agribusiness firm
once the issue level of efficiency in the firm has been tackled. The agribusiness firm should
calculate a break-even point for each major agribusiness product. Knowing the break-even point
for each major product will help the agribusiness manager to identify critical cost items, assess the
profit potential, and develop a means to control costs. And also help in determining each product’s
chance for success.
10.3. Financial Planning: Records and Analysis
Financial planning is the third side of business that requires the attention of an agribusiness
manager. Every action of marketing has some financial implications. The marketing objectives are
often linked with the firm’s financial objectives. Statistics prove that successful agribusiness firms
are those that are in control of their financial affairs.
Even after being aware of the importance of keeping good financial records, many agribusiness
firms neglect them. The major factor contributing to business failure is said to poor record keeping
of financial affairs. To measure the effectiveness of their marketing efforts the agribusiness
manager needs records. Some examples of information available in records pertaining to
marketing in the firm are: market share, the ratio of marketing expenses to sales, sales and
marketing expenses relative to budgeted amounts, and so on.
Good records provide management with a basis for effective decision making and allow for
informed control over marketing operations, through proper feedback and evaluation of marketing
performance, the firm can increase its chances of success.
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REFERENCES
1. Austen, J.E. (1992), Agro industrial Project Analysis, Economic Development Institute, The World Bank
2. Cramer, and Jensen (1994), Agricultural Economics and Agribusiness, sixth edition, John Wiley and Sons, Inc.
3. Downy and Trocke, (1981), Agribusiness Management, McGraw–Hill, Inc.4. Williams and Karen (1985), Agribusiness and the Small–Scale Farmer, Westview Press. 5. Beirleian, Schenneberger and Osburn (1995), Principles of Agribusiness Management,
2nd ed., Waveland Press, Inc6. Branson and Nencel (1983), Introduction to Agricultural Marketing, McGraw–
Hill Book Company.7. James G.Beierlein & Michael W. Woolverton (1991), Agribusiness Marketing
– The Management Perspective, Prentice Hall.8. …….Agricultural Development Led Industrialization Policy of Ethiopia9. …….Rural Development Strategy of the Federal democratic Republic Of
Ethiopia
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AGRIBUSINESS MANAGEMENT (MGT 342)
Course Material For Distance Program
By Tesfay Aregawi
Department of ManagementFaculty of Business and Economics
Mekelle University
July 2006 Mekelle
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