Lecture 7 Marketing of Agricultural Commodities

1. Lecture 7Marketing of Agricultural Commodities Required Text: Chapters 3 and 13

2. Marketing of Agricultural Commodities • Agribusiness marketing can be categorized into two broad categories • Marketing of Agricultural Commodities • Production, handling and sales of farm products • Marketing of Food Products • Commodity procurement • Processing • Wholesaling • Retailing

3. Marketing of Agricultural Commodities … • Much of the U.S. agricultural production fits relatively well with the perfect competition model • There are many relatively small producers (price takers in the market) • Homogeneous commodities (not much product differentiation) – cannot be promoted by individual producers • free entry and exit (easy to begin or cease production) • Thus marketing of agricultural commodities involves decision on what and how much to produce and how to market the production.

4. Marketing of Agricultural Commodities … • Producer Decisions: Producers must decide what and how much to produce and how to market the production. • Which commodity to produce and how much • A particular farmer’s choice of which commodity to produce is related to factors such as available land and soil quality, production technology, climate, variable inputs (seeds, fertilizer, water, and labor), investment capital, economies of size, government programs, expected input and output prices, and risks (price, production, and financial risks) • Special consideration: Biological constraints - biological lags and perishability of the output, distance to the market, and available marketing channels.

5. Marketing of Agricultural Commodities … • Which commodity to produce and how much • A particular farmer’s choice of which commodity to produce is related to factors such as available land and soil quality, production technology, climate, variable inputs (seeds, fertilizer, water, and labor), investment capital, economies of size, government programs, expected input and output prices, and risks (price, production, and financial risks) • Special consideration: Biological constraints - biological lags and perishability of the output, distance to the market, and available marketing channels.

6. Marketing of Agricultural Commodities … • When and how to market the agricultural commodity • Storage – available storage facility, storage costs • Identifying the location of the market – distance, marketing channels • Transportation – truck lines, railroads, barges, and ocean freight • Marketing alternatives are limited for agricultural commodities • Marketing by farmer groups • Risk management plays a greater role in the overall profitability of agricultural commodities

7. Marketing of Agricultural Commodities … • Marketing by Farmer Groups • By acting jointly, farmers can often benefit economically by working together in groups • Generally, groups of producers seek one or more of the following objectives • To improve commodity demand • To regulate supplies and qualities more in line with demand • To improve competitiveness and efficiency in the marketing channel • To gain more channel control and leadership for farmers • Generic promotion, marketing cooperatives, and bargaining associations

8. Marketing of Agricultural Commodities …Marketing by Farmer Groups • Group promotion of agricultural commodities • Generic promotion is the promotion of a particular commodity (rather than a brand-name product) financed collectively by producers of the commodity. • Promotion includes advertising and numerous other activities designed to increase the demand of the commodity. • The purpose of generic promotion is to • increase demand to raise the price of the commodity, or • increase the volume that will clear the market at a given price • No single producer can afford to go it alone in commodity promotion because the individual benefits will certainly be less than costs.

9. Marketing of Agricultural Commodities …Marketing by Farmer Groups Price • Assume that D1 and S1 are the current demand for and short run supply of a commodity. • Generic promotion increases demand to D2raising price. • If the position of D2is maintained in the long-run through promotion, the producers will increase supply to S2. • Thus, in the long-run, price declines to the level determined by the intersection of D2,S2,and LRS. • The long-run price may still be higher than the initial price. S1 S2 LRS D2 D1 Quantity

10. Marketing of Agricultural Commodities …Marketing by Farmer Groups An effective program for generic promotion should do the following • Adopt clear, measurable objectives • The turkey industry set out to promote year-round consumption • Develop a strategy that fits the commodity, the marketing system, and buyers’ attitude • The turkey industry developed and promoted “new products” – parts and boneless portions for non-holiday seasons. • The grain sorghum industry contacted feed grain purchasers abroad and convinced them to try U.S. sorghum • To offset the “negative image,” the pork industry promoted the “other white meat” and invested in education, research, and legal actions • The Florida citrus industry developed an aggressive promotion program and distributed nearly 2 billion consumer coupons for frozen concentrated orange juice.

11. Marketing of Agricultural Commodities …Marketing by Farmer Groups • When advertising is a part of the adopted strategy, use a good professional advertising agency • The “Got milk” campaign has been an effective campaign of the milk industry • Obtain and spend sufficient money to achieve a high probability of obtaining the objectives • Small expenditures are often a total waste – too little to capture the attention of potential buyers • Set up a program to evaluate results (economic evaluation) • The costs of a promotional campaign are easily measurable. • The benefits are not so easily measurable – requires sophistication • Did the demand curve move to the right or become less elastic due to promotion?

12. Marketing of Agricultural Commodities …Marketing Cooperatives • Marketing Cooperatives • A cooperative (coop) is a special type of business firm – “a user-owned and –controlled business from which benefits are derived and distributed equitably on the basis of use.” • The following three principles are currently the most important for agricultural coops: • User ownership – ownership by coop member-patrons • User control – democratic member control • User benefits – distribute benefits to its users equitably on the basis of use

13. Marketing of Agricultural Commodities … Marketing Cooperatives • Goals of Marketing Cooperatives • To provide the most efficient marketing outlet • To expand demand for their members’ commodities • To provide better coordination between production and consumption • To provide more dependable market outlets, including sometimes the only remaining outlet • To achieve channel leadership, including vertical integration, and even market power for the members

14. Marketing of Agricultural Commodities …Marketing Cooperatives • Traditional coop principles • Open membership • No supply controls • Member profit retained as growth capital • No secondary market for equity • Criteria for successful marketing coops • Increased demand at the farm level for the marketed commodity • Increased assurance of dependable and efficient market access with some power and influence in the marketing channel

15. Marketing of Agricultural Commodities …Marketing Cooperatives • Virtually all agricultural coops were organized as small local businesses – grain elevator, farm supplies store, packing shed for shipping fresh fruits, etc. • Over time many coops have failed while others have grown. • Currently, the large coops are known as federated, centralized, and a hybrid mixture of the two. • Federated Cooperative – cooperative or cooperatives – local coops formed a second level coop to perform various marketing functions such as processing distribution, advertising, and merchandising. • Local coops are members of the federated coop • Farmers exercise their control of the federation through a board of directors elected through the local coops • Example: Florida’s Natural Growers (part of Citrus World, Inc.)

16. Marketing of Agricultural Commodities …Marketing Cooperatives • Centralized cooperative – formed as a merger of numerous local cooperatives into one regional cooperative – the coop’s total operations are owned and controlled as a unit • Farmer members vote directly to elect directors • Farmer control seems to be more direct and democratic • Appear to have been more successful than federated coops • Example: Dairy Farmers of America (DFA) – founded in 1998 • Hybrid Cooperative – combination of the previous two organizational types – a federated coop may rescue some local units that are in financial trouble by purchasing their assets, thus moving from a federated toward a centralized organization. • The degree of farmers’ democratic control may depend more on how committed the top management is to farmers’ objectives

17. Marketing of Agricultural Commodities … Marketing Cooperatives • Special problems of marketing cooperatives • Raising capital – the biggest problem of marketing cooperatives • Responsibility to patron-owners – conflict of interests • Directors vs. managers – directors direct but not manage • Competition with other coops – at both local and regional levels • Organizational variation and innovations • Midwestern/Great Plains Grain and Livestock • Performs a simple assembly-and-sales function and does little or no processing • Capital requirements are low relative to sales • Membership is open and may be obtained automatically by selling crops or livestock to the coop • Returns from coop savings provide the equity capital

18. Marketing of Agricultural Commodities …Marketing Cooperatives • Organizational variation and innovations • American Crystal Sugar • Started in 1973 with 1400 members, an investment of $86 million in six sugar bit factories, $ 20 million of equity capital, and a market share of 13% of the U.S. sugar beet market • The coop acquired the American Crystal Sugar Company • Grower-member provided initial capital equal to $100 per acre of beets grown and signed five-year contract with the coop to market all of their beets through it • West Coast Fruit and Vegetable Processing Coops • High fixed costs in orchards and harvesting machinery - typically have high capital requirements relative to sales • Raise capital through sales retains – compared to Midwestern grain producers, the financial commitment is much higher for the fruit and vegetable growers

19. Marketing of Agricultural Commodities …Marketing by Farmer Groups • New generation coop principles • Closed membership • Upfront equity position by members • Delivery rights in proportion to equity positions • Transferability of delivery rights and the existence of a secondary market for delivery rights • The possibility of immediate returns of profits to members • Examples – ethanol plants built in the late 1990s and early twenty-first century.

20. Marketing of Agricultural Commodities … Bargaining Associations • A farmers’ bargaining association is a coop that represents its members by collectively negotiating terms of trade but does not engage in the physical aspects of marketing such as assembly, processing, and distributions. • It is not a cartel that controls supply of a commodity and raises farm price to a revenue maximizing level – free rider problem. • Generally, bargaining associations operate in contractual markets, engaging in both marketing and production contracts. • The function of a bargaining association – to bargain price and non-price terms of trade – can be performed only when a buyer is willing to negotiate with it. • Buyers usually consent to bargain when they are faced by a united group representing a large segment of their supplies – the bargaining association has more clout when it clearly has control of the commodity

21. Marketing of Agricultural Commodities … Bargaining Associations • Structure of Bargaining Associations • Membership in bargaining associations, like other coops, is voluntary, but once undertaken it involves definite rights and duties. • Capital requirements and operating expenses are small. • Bargaining associations are generally financed by deductions from crop receipts, although some groups receive dues from growers. • Most bargaining associations pool their marketing so that each member receives the average price of a particular grade of the crop. • Bargaining associations have been most active in dairy, fruits, vegetables, sugar beets, and other specialty crops. • Functions of Bargaining Associations • Discovering price and other non-price terms of trade • Non-price terms of trade may include harvest scheduling, harvesting techniques, determination of grades (quality), delivery quotas, the provision of shipping containers, hauling allowances, and costs.

22. Marketing of Agricultural Commodities … Bargaining Associations • Bargaining Accomplishments • Group bargaining involves the strategic use of maneuvers, offers and counter offers, and threats and counter threats. • Net prices are a little higher on the average than they would have been without bargaining. • Prices are likely to be more stable from year to year. • Prices may be more equitable among producers within the group. • Significant gains in efficiency may be obtained through group negotiations • Individual growers gain security and confidence that they will be treated like all other growers.

23. Marketing of Agricultural Commodities … Bargaining Associations • Fruits and Vegetable Bargaining • The California Canning Peach Association (1922) is one of the oldest bargaining association - canning peaches are a highly perishable commodity with only one market – canneries. • It takes ownership of the commodity and then pools returns to members. • The entire peach canning industry is in California, and the association handles a slight majority of the state’s production. • The association seeks to negotiate all contract terms before harvest – but, negotiations are sometimes prolonged to a much later date.