Download Milk production and marketing

Milk production and marketing
Part 5:
Markets
Introduction ............................................................................... 2
Marketing strategies .................................................................. 3
Cooperatives ....................................................................................3
Marketing boards..............................................................................7
Vertical integration..........................................................................10
Direct marketing .............................................................................11
Contract selling...............................................................................15
Dairy marketing ..............................................................................17
Government intervention in marketing..................................... 18
Past support policies ......................................................................18
Current deregulatory policies .........................................................23
Advertising and promotion....................................................... 33
The marketer ..................................................................................33
The consumer ................................................................................33
The message..................................................................................34
The medium, ..................................................................................35
Feedback........................................................................................39
Promoting milk................................................................................39
Evaluating market information................................................. 40
Product statistics ............................................................................41
Market situation ..............................................................................41
Marketing options ...........................................................................48
Government policies and regulations.............................................50
Summary................................................................................. 51
Additional resources................................................................ 52
Suggested answers................................................................. 54
Exercises – Part 5 ................................................................... 60
Milk marketing
1
Introduction
Introduction
In recent years there has been a change in the way farmers approach the
business of agriculture. Rather than “selling what you grow”, the
emphasis is now on “growing what can be sold”. There has been a shift
of focus from production to marketing.
For the majority of commodities there is a range of selling alternatives.
Producers should be aware of all possible alternatives as under different
seasonal and social conditions the most effective selling technique will
vary.
In this, the fifth part of Milk marketing and production, you will use milk
as an example to develop an understanding of how product marketing
can be carried out and evaluated.
This part contributes towards an understanding of Outcome H3.1 from
the Agriculture Stage 6 HSC Course. The syllabus can be found on the
Board of Studies, NSW website at http://www.boardofstudies.nsw.edu.au
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Part 5: Markets
Marketing strategies
Marketing strategies
Access an interactive version of Marketing strategies using this link.
Resume with this material on page 19: Government intervention in
marketing.
Marketing involves directing products from the producer to the consumer in
order to satisfy the market and achieve the business objectives.
Changes in the economic and social climate that impact on marketing
include:
•
consumer trends – consumers are demanding a safe, consistent and
varied food supply
•
business trends – companies have increasing control and vertical
integration achieved through contract purchasing and ownership of
production, processing and retail facilities
•
government trends – Commonwealth and State government policy of
de-regulation is affecting many agricultural industries.
These trends affect the way farmers market their products. You will be
looking at how the following traditional marketing strategies are being
used and adapted:
•
cooperatives
•
boards
•
vertical integration
•
direct marketing
•
contract selling.
Cooperatives
In Part 1 you were introduced to cooperatives – associations that
individual farmers voluntarily form to achieve common commercial
objective(s) more successfully than they could as individuals.
Milk marketing
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Cooperatives range in size and scope from small bargaining groups, with
an informal agreement between neighbours, to formal large scale,
diversified, multi-product businesses with thousands of user owners.
Cooperatives have a board of directors that are voted in and employ
business managers and workers related to value adding processes.
As a result of deregulation a number of farmer cooperatives have joined
with food processing and/or retailing companies. Each of the partners is
able to use its own competitive advantage. The cooperative can
concentrate on the advantages of a guaranteed supply of high quality raw
product. The major food company can concentrate its capital in the
higher risk and return areas of branding, packaging, distribution and final
processing.
A number of dairy cooperatives have formed partnerships or joint
ventures with processing companies. An example of this is the Norco
cooperative which is linked to Pauls, a subsidiary of the multinational
food production company Parmalat.
Cooperatives can be classified according to the function that they
perform.
•
Supply cooperatives – give farmer members the ability to purchase
inputs such as seed, machinery, chemicals or feed cheaply through
bulk buying.
•
Production cooperatives – focus on making better use of machinery
and labour, for example, machinery syndicates, forage making
groups, livestock improvement groups and packaging groups.
•
Service cooperatives – provide members with a service that as
individuals they might find difficult to obtain, for example, juicing,
packaging, grain drying, pest eradication.
•
Marketing cooperatives – provide members with storage, grading,
packing, promotion and farm product selling.
The overall objective of marketing cooperatives is to provide an
independent force, strong enough to exert an influence on the market for
the benefit of, and within the control of, its farmer members. The key
elements are that the farmer members have business continuity,
independence, strength and farmer control.
Advantages of cooperatives
With the support of the farmer members, well run cooperatives are able
to trade to best advantage in the larger scale and more competitive
agricultural system. There are many advantages to being a member of a
successful cooperative, including:
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Part 5: Markets
•
better prices – cooperatives are better placed to negotiate with
professional buyers than individual producers
•
cheaper farm inputs – cooperatives are able to negotiate better prices
on farm inputs and farm services
•
reduced off-farm costs – cooperatives have lower per unit handling
or processing costs through economies of scale because they deal
with larger volumes
•
improved on-farm expertise – cooperatives may employ individuals
and services that would be too expensive for individual farmers
•
expert marketing – cooperatives are able to employ or contract
expert individuals from outside farming to promote products,
develop more permanent markets and exploit new markets
•
improved market knowledge – cooperatives have access to more
relevant information about buyers and markets
•
more market opportunities – cooperatives are often able to meet bulk
supply requirements of large buyers, such as processors, wholesalers
and supermarket chains
•
more economic power – the farmer members are the decision makers
and can direct the cooperatives business activities to achieve
outcomes unavailable to the individual
•
saving time – cooperatives act for all members and save individual
farmer members time in searching out markets
•
longer seasons – capital investment in storage, grading and packing
equipment allows farm products to be supplied to consumers over a
larger portion of the year
•
better quality products – cooperatives capable of quality control can
provide farmer members with feedback to help them improve
quantity and quality of their product.
Cooperatives can also bring benefits to rural communities, including:
•
feelings of security – arising from having an effective business in the
hands of the farmer members
•
social cohesion – cooperatives bring individuals together to discuss
farming and other issues
•
mental health – farming can be an isolating and lonely pursuit,
cooperatives give farmers the opportunity to interact with others
•
providing employment – cooperatives often employ people outside
farming to transport, process and market the commodity, bringing
people and money into the rural community
•
supporting local business – cooperatives buy from other businesses in
the area.
Milk marketing
5
Disadvantages of cooperatives
Members of cooperatives are not merely customers or suppliers – they
are owners of the organisation. If farmer members want the best out of
their organisation, they must make a personal commitment to use their
cooperative, to be involved in its development, and to take an interest in
its health and performance.
Cooperatives rely on the producer members for their success. Problems
that can arise in setting up and operating a cooperative can include:
•
lack of start up funds – outside investment funding is less likely to
be available for a cooperative where returns are limited and control
is impossible, so the farmer members are responsible for
development and finance
•
lack of expertise / time – most ordinary companies have full time
executive directors, while boards of cooperatives are either mainly or
entirely composed of farmer members who are also committed to
running their own farms
•
conflict of interest – farmers who give their time as cooperative
directors may be placed in a position of personal business conflict,
for example where the cooperative elects to charge a levy for
product promotion, increase processing fees or charge more for
inputs such as feed
•
interpersonal conflict – pressures may also be placed on farmerdirectors and management if they need to continuously remind
farmer members of their commitment to a cooperative that is not
merely an investment opportunity or a way to get cheap inputs
•
sharing responsibility – small cooperatives with a loose structure
such as a machinery syndicate may run into trouble because
everybody may want to use the machinery at the same time, for
example with harvesters if weather conditions require crops to be
harvested quickly, or if there are machinery breakdowns because not
all farmer members are equally concerned / skilled at maintaining
the equipment.
1
A group of dairy farmers band together to buy a large round baler to
conserve excess summer forage/pasture. Identify advantages and
disadvantages associated with this type of production cooperative.
Advantages
______________________________________________________
______________________________________________________
______________________________________________________
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Part 5: Markets
Disadvantages
_____________________________________________________
_____________________________________________________
_____________________________________________________
A group of neighbouring macadamia nut growers form a packing
cooperative. They pool money together and take out a collective loan to
finance a packing house. This contains machines and workers to crack,
grade, sort, pack, store and transport their processed product. They are
able to buy packing cartons and other inputs in bulk and can collectively
market their produce.
2
Describe how farmers would benefit from forming this macadamia
packing cooperative.
_____________________________________________________
_____________________________________________________
_____________________________________________________
3
Identify planning that would need to be considered to overcome
problems that could occur with this macadamia packing cooperative.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
Check your answers.
Marketing boards
The benefits of collective marketing gained by a cooperative may extend
to all the producers of the commodity, however, only the members of the
cooperative bear the costs of generating these benefits. In this situation
there is an incentive not to become a member of the cooperative.
Farmers may react to this by seeking government legislation to make it
compulsory for all the producers of the agricultural commodity to
participate in a marketing board.
Marketing boards can be divided into two groups:
•
Commonwealth boards – generally involved in export trade
•
State boards – perform the trading and processing functions of
producer cooperatives.
Milk marketing
7
Marketing Boards are usually statutory organisations established by
Commonwealth or State legislation to market specific agricultural
commodities. They are established in NSW under the Marketing of
Primary Products Act 1983, at the request of farmer organisations, who
seek price stability and increased returns by removing merchants and
middlemen and by using the monopoly power of the board to raise prices.
Strategies used by Marketing Boards include:
•
price control – marketing boards can make use of monopoly powers
to set the price of farm produce and with no competition between
sellers in the marketplace, the price paid by buyers of the commodity
is usually higher than if competition existed
•
pools – marketing boards can minimise price fluctuations of a
commodity over time by selling through a pool where farmers
receive an average price less costs
•
storage – marketing boards may elect to store some, or all, of a
product for a time to overcome price falls or even out supply, for
example when the commodity is harvested at the same time over a
large area and is subject to ‘gluts’.
Marketing Boards are required to accept all of the product that a producer
grows, as long as it meets quality standards. So, although marketing
boards are monopoly sellers, they do not control the amount of produce
delivered to them. If a glut is produced, the price that the marketing
board tries to achieve may not be possible. In some industries
governments have imposed controls over production and domestic prices
in an attempt to boost prices to producers.
Advantages of marketing boards
Marketing Boards are able to:
•
increase the bargaining strength of producers, so buyers and sellers
of a commodity are placed on a more equal level when negotiating
sales
•
achieve economies of scale in handling and distribution because of
their increased size
•
devote resources to market research and development beyond the
scope of an individual producer
•
undertake product promotion and market development campaigns.
Marketing boards have the benefits of having monopoly powers in
controlling price within the state or country. Some marketing boards
have successfully protected producers from the effects of short term falls
in price. This has led to some income stabilisation. However, most
farmers lose control of their cash flow as a result.
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Part 5: Markets
The most successful marketing boards have been those that have
marketed less perishable items, such as wool, and have been able to use
storage of the commodity to achieve greater control of the market.
Disadvantages of marketing boards
Marketing Boards are able to monopolise the local or national market,
but since there is no competition, there may also be a reduction in
marketing efficiency and innovation. No competition in the market place
means marketing boards have little incentive to adjust rapidly to change.
Many Boards contain a high proportion of elected producers, and on
these Boards it will act in the interests of growers. However, many
farmers lack the training and experience to be effective marketing
managers, so many marketing boards have resulted in transfer of control
to Governments and Public Servants.
Most Boards are now subject to, and may be instruments of State or
Federal Government policy. This high degree of government and
bureaucratic involvement has limited the commercial flexibility of
Marketing Boards. For example, Commonwealth marketing boards are
restricted to a set number of staff and these staff are limited to Public
Service salary levels. Because salaries are limited, the quality of staff
attracted to work on these Boards may be affected. As a result,
operations of the Board may not be carried out as efficiently as they
could be. The Australian Wheat Board, for instance, does not have
control over hiring and firing its staff. The Wheat Board is set up as a
commercial organisation to get the best price for Australian wheat
growers and it is up against top rate international competition, but is
prevented from paying competitive rates for the best people.
If you have internet access visit the section on Marketing Boards on the
NSW DPI web site at http://www.dpi.nsw.gov.au to see the commodities
represented by Boards in NSW, how different Boards collect funding and
what activities they undertake.
In the dairy industry there is one Commonwealth Board, Dairy Australia,
which started on 1 July 2003. This is the Commonwealth statutory
authority that replaces the Australian Dairy Corporation (ADC –
responsible for promotion and marketing of Australian milk products
nationally and internationally) and the Dairy Research and Development
Corporation (DRDC – responsible for research and development of
products and processes).
Milk marketing
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Dairy Australia combines most of the functions of the ADC and the
DRDC. It aims to:
•
promote the development of Australian dairy resources
•
conduct research, development and extension activities
•
develop the Australian national market for, and international trade
in, Australian dairy produce
•
provide information and other services
•
carry out other activities for the benefit of the Australian dairy
industry.
Dairy Australia is not involved in selling milk products, so there are no
implications for it under free trade legislation. It is funded by levies paid
by dairy farmers and matching government funds.
If you have internet access visit the Dairy Australia web site at
http://www.dairyaustralia.com.au and see the kind of work done by the
board.
Vertical integration
The amount paid by the consumer rarely reflects the price that the farmer
receives for the raw farm product, so it is in the best interests of the
farmer to increase the product value, that is value add, by getting it closer
to what the consumer wants.
Farmers can value add in two ways:
•
produce a superior value product on the farm to target a niche market
•
control some or all of the means of processing the product into a
value added product (vertical integration).
Vertical integration occurs when farmers own or control aspects of the
marketing chain associated with their product and as a result are able to
increase their percentage of the final amount paid by the consumer.
Farmers may group together to purchase grading and packing facilities,
cool stores, a refrigerated truck or may lease a ‘stand’ at the wholesale
markets.
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Part 5: Markets
Direct marketing
Direct marketing is selling directly to consumers – individuals, families,
restaurants, tour groups, big companies and others.
A typical direct marketing farmer tends to be:
•
small scale
•
diverse in their product range (fruit, vegetables, flowers)
•
flexible – timing their production schedule with their distribution
strategy
•
socially adept – fostering social links with other farmers who direct
market and with consumers.
•
value adding – farmers who are able to value add their product,
benefit from direct marketing
•
using sustainable practices – small-scale production and social
collaboration (farmer-consumer, farmer-labourer, and farmerfarmer) tend to promote social and environmental sustainability.
Figure 5.1:
Milk marketing
Raleigh winery; a small direct marketing, value adding venture
with the motto ‘try before you buy’. (Photograph: LMP – Scott
Hollingsworth)
11
Those that benefit from direct marketing are:
•
small farm operators – that is, those with less than $150 000 in
annual receipts, who work and manage their own operations (this is
over 90 per cent of all NSW farms)
•
consumers – have access to locally grown, farm-fresh produce and
can personally interact with the farmer who grows the produce
•
community – urban communities where fresh, nutritious foods are
scarce can gain easy access to food.
Few dairy farmers are able to take advantage of direct marketing, but it is
developing into an important sales outlet for other enterprises,
particularly for smaller producers.
Advantages of direct marketing
Through a variety of direct marketing strategies, ranging from roadside
stands to internet-based direct sales, local growers are able to carve out a
market niche instead of competing directly with large agribusiness
companies. Direct marketing allows the farmer to capture a higher
proportion of the food dollar by cutting out the ‘middle men’. The result
is higher per unit profit margins, allowing family farms to regain a
competitive edge without resorting to the more conventional survival
mechanism of scale expansion.
Direct marketing allows growers to change the entire marketing mix of
product, price, placement and promotion. A producer/consumer system
utilising direct marketing has the benefit of:
•
increased product quality – because consumers have closer ties to the
farmer, there is an incentive to maintain high quality produce
•
dealing directly with consumers – allows the farmer to cut out
agents, transporters and retailers
•
promotion that focuses on low to negligible costs – farmers dealing
directly with consumers through markets, road side stalls or the
internet have smaller scale promotions that target their clients more
efficiently and at lower cost
•
prices competitive with chain supermarkets – with less overheads the
farmers can charge more than they would with other marketing
strategies and the consumers will still get a good deal.
Use information from the Proteas Gardens case study in part 3 of the
preliminary module Crop this to help you answer the following questions. A
summary of this information is also included in the Additional resources
section of this part.
12
Part 5: Markets
1
Identify the four strategies used by Proteas Gardens to market their
produce.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
2
Outline the advantages of using direct marketing to Proteas Gardens
and the consumers that buy their cut flowers.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
3
Compare the economics of the different marketing strategies.
_____________________________________________________
_____________________________________________________
_____________________________________________________
Check your answers.
Figure 5.2:
Milk marketing
An example of direct marketing is produce markets, where
producers and consumers come together. (Photograph: LMP –
Scott Hollingsworth)
13
Visit a place where direct marketing of your case study product takes place.
A good example of a place where direct marketing occurs is at produce
markets, such as Flemington Markets in Sydney. You could also visit a
local community market, a farm shop or a roadside stand.
Take a close look at one stall and answer the following questions.
1
Identify the product(s) being sold on the stall.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
2
Describe the setting where producers and consumers come together,
for example, roadside self serve.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
3
Outline the reason(s) that the producer has decided to sell their
agricultural produce in this way. If you can, ask the stall holder
about how and why they sell their produce in the way they do.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
4
Describe any value adding that has occurred, for example, organic
growing or processing into jams.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
14
Part 5: Markets
5
Describe how the product(s) are promoted on the stall.
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
_____________________________________________________
Turn to Exercise 5.1. Use the answers to the above questions and any other
evidence you collect while visiting the stall, to prepare a report on direct
marketing of your case study product.
Contract selling
Contract selling occurs when a contract is made today for delivery in the
future. The buyer agrees to pay a specified amount at a specified date in
the future in order to receive a specified quality and quantity of an
agricultural commodity from the seller. Farmers use contracts to
guarantee sale of their product before it is produced.
The contract generally specifies:
•
price
•
quantity
•
quality – including premiums and discounts for any variation
•
date of delivery
•
delivery destination of the commodity.
Advantages of contract selling
A forward contract is a good way to reduce risk for both parties. The
buyer of the contract can eliminate the effects of a price rise in the
commodity. The seller can lock in a price now to reduce the effects of a
price decrease in the commodity at the time of sale.
Contracts are used extensively in the dairy industry. Dairy farmers
negotiate the volume of milk they will supply to processing and
manufacturing companies and the price per litre based on a sliding
quality scale.
Milk marketing
15
Disadvantages of contract selling
Because of the cost to buyers in setting up a contract, it is a market for
large corporations, governments, and other institutions that have access
to credit as a regular part of their business.
The producer must be sure that the contract can be filled. If insufficient
quantity is produced, the farm manager may be forced to replace the
short fall by buying from other producers. If the market price rises after
the contract has been taken, the farm manager is unable to gain a higher
price.
Contract selling involves an extended set of negotiation skills and
management techniques. The farmers need to be aware that individual
farmers are at risk in negotiating a price for their product because they
lack the resources to acquire market knowledge and negotiation skills
that large companies can bring to bear. Farmers can make contract
selling less risky by:
• only entering into contracts with reputable companies, who are
unlikely to consider defaulting on a contract
• banding together with other farmers to negotiate – this is called
collective bargaining.
The Australian Competition and Consumer Commission (ACCC) is an
independent statutory authority that administers the Trade Practices Act
1974 and the Prices Surveillance Act 1983 and has additional
responsibilities under other legislation. The ACCC is concerned with
regulating anti-competitive and unfair market practices, mergers or
acquisitions of companies, product safety/liability, and access to facilities
of national significance. The Australian Dairy Farmers Federation
(ADFF) applied to the ACCC in March 2001 for authorisation for
members to form collective bargaining groups. This authorisation was
needed to avoid prosecution for anti-competitive practices.
The ADFF application was based on the difficulties faced by individual
dairy farmers in negotiating contracts with large multinational
companies. The application was granted in March 2002 and amended in
August 2002 by the Australian Competition Tribunal, after a challenge
by National Foods Ltd.. The ruling allowed dairy farmers to form
collective bargaining groups of farmers with a shared community
interest, provided that they were registered with the ADFF, and the
negotiations remained confidential.
A further application to the ACCC in April 2005 granted the Australian
Dairy Farmers (ADF) an extension of their immunity until June 2011.
If you have internet access you can read the ADF application and the ruling
for yourself at http://www.accc.gov.au.
16
Part 5: Markets
Dairy marketing
In Australia milk and milk products are marketed by two groups:
•
farmer-owned cooperatives
•
public companies.
Traditionally the line between these two groups has been clear cut,
however, the situation is changing with increased concentration of
marketing power and changes to government regulations.
Farmer owned cooperatives
Cooperatives have traditionally dominated the milk industry, producing
about 75 per cent of all milk output. The three largest cooperatives –
Murray Goulburn Cooperative Ltd, Bonlac Foods Limited and the Dairy
Farmers Group – account for over 60 per cent of all milk intake, and over
50 per cent of all milk used for manufacturing.
The largest cooperative has an intake of just over three billion
(3 000 000 000) litres each year and there are a number of medium sized
cooperatives with intakes of between 300 and 500 million litres.
Public companies
As well as cooperatives, there are a number of Australian dairy
companies. These cover a diverse range of markets and products, from
the publicly listed milk processor, National Foods, to highly specialised
farmhouse cheese manufacturers.
In addition to Australian companies there are a number of multinationals
operating within the Australian dairy industry. Fonterra, Nestlé, Kraft
and Parmalat, Meiji and Snow Brand have set up operations in Australia.
Some companies have developed close ties to local cooperatives. For
example, Pauls, a wholly owned subsidiary of Parmalat has entered into a
joint venture with Norco a farmer owned cooperative. Both partners hold
50 per cent share of the joint venture. Farmer cooperatives joining with
dairy companies allow each partner to use its own competitive
advantage.
•
The cooperative can concentrate on its advantages of a guaranteed
supply of high quality raw product.
•
The major dairy company can concentrate on final processing,
branding, packaging and distribution.
Milk marketing
17
Government intervention in marketing
Government intervention
Access an interactive version of Government intervention in marketing
using this link. Resume with this material on page 34: Advertising and
promotion.
Globalisation is bringing new countries and companies into international
markets, creating:
•
advances in productivity and the use of technologies in many
economies, among them Australia's major trading partners
•
greater economies of scale
•
increased competition
•
ever decreasing profit margins
•
a growing list of emerging markets.
These forces have resulted in changes to the economic and social
circumstances of rural Australia and include:
•
declining world agricultural commodity prices
•
a smaller portion of income spent on agricultural commodities
•
greater gaps between rural and non rural incomes
•
changing lifestyles.
As a result of these forces and the resulting changes in rural and regional
economies, Governments have overhauled their agricultural policies.
Past support policies have aimed at supporting Australian agriculture
within the country. Current deregulatory policies aim to promote
Australian agriculture overseas.
Past support policies
Past Government policy was concerned with maintaining welfare of rural
communities by supporting income through various means. One of the
key concerns has always been the instability of farm commodity prices.
The prices of raw agricultural commodities have traditionally undergone
huge fluctuations.
18
Part 5: Markets
Outline three factors that could lead to fluctuations in prices of agricultural
commodities.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Check your answer.
Over the years Governments have supported prices and income by
manipulating supply and demand or by providing monetary payments or
adjustments in an attempt to reduce instability of agricultural prices and
incomes.
Policies have included:
•
regulating supply
•
stimulating demand
•
financial support
•
public works.
Regulating supply
Governments have manipulated supply by using:
•
quotas
•
multiple price schemes
•
buffer stock schemes.
Quotas
The amount of a product supplied to the market can be regulated
(increased or decreased) by controlling production through the use of:
•
input quotas – limiting the amount of a crop that can be sown, or the
amount of a resource that can be used
•
supply quotas – setting the amount that a farmer is meant to supply.
Quotas and incentive payments have been used in the past to control
wheat, sugar, rice and dairy production.
Milk marketing
19
Multiple price schemes
Multiple price schemes involve charging different prices for a product.
This can occur when:
•
there are separate markets such as the domestic and export market
•
a product has different brand names
•
a product has different end uses such as milk, which can be made
into products such as butter, yoghurt, cheese or dried milk.
Selling an export product more cheaply than the same product on the
domestic market is known as a ‘price support’ scheme, and has been used
in the past for dairy products.
There is a fine distinction between price support and ‘dumping’ where
the export commodity is sold at an unrealistically low price. Dumping is
against the World Trade Organisation (WTO) Agreement.
Buffer stock schemes
Many industries have attempted to stabilise incomes by keeping excess
produce from sale when prices are low and selling it when prices
improve.
In the past the Australian Wool Corporation had a minimum price
scheme. They bought all wool that did not reach a minimum price and
sold it later when demand improved. A slump in the market led to huge
stockpiles that became difficult to clear. Payments to farmers were
delayed and the minimum price had to be reduced to clear the backlog.
This scheme no longer operates.
Stimulating demand
Government has tried to increase demand for agricultural products by:
20
•
mandating local content
•
imposing import tariffs and import quotas
•
restricting production or importation of substitutes
•
branding regulations
•
bilateral and multilateral marketing
•
advertising and promotion.
Part 5: Markets
Mandating local content
Government can impose regulations on a manufacturing industry that
forces them to include a percentage of local product, for example,
tobacco manufacturers paid lower tariffs on imported leaf if they used a
minimum percentage of Australian leaf in their product.
Imposing import tariffs and import quotas
An import tariff is a tax that importers pay the Government before they
are able to bring a product into the country. Such a tax increases the
price of the imported commodity and so makes the local product more
competitive.
Import quotas limit the amount of a product that will be accepted into the
country. Many Australian export markets use these to limit the amount
of Australian produce they import, for example, the US has import
quotas for beef.
Restricting production or importation of substitutes
At one time there were restrictions on the production and importation of
margarines in order to protect the dairy industry.
Branding regulations
Branding and labelling legislation has forced manufacturers to specify
information on the place of origin and the contents of their products, such
as the percentage of wool in garments or the presence of genetically
modified material in a food product. This labelling information can be
used by consumers to make purchasing decisions that may favour local
products.
Bilateral and multilateral marketing
Governments try to expand and safeguard markets by negotiating with
other governments to promote mutual marketing deals, for example the
bilateral agreements with Japan, New Zealand and Malaysia.
Advertising and promotion
Government agencies, such as marketing boards and trade delegations,
promote products at home and overseas to stimulate demand, for
example, the highly successful ‘Aussie Beef’ campaign in Japan.
Milk marketing
21
Financial support
The Government has tried in the past to financially stabilise income
through the use of:
•
subsidies
•
guaranteed price deficiency payments
•
adjusting exchange rates
•
stabilisation funds
•
tax considerations.
Subsidies
Government subsidies have usually been in the form of special income
tax concessions to assist in purchase of inputs. An example is the
superphosphate bounty where a tax concession was paid for this
fertiliser.
Guaranteed price deficiency payments
In the past governments provided a guarantee to farmers that they will
receive a specific price. If the price fell below the guarantee, farmers
were paid deficiency payments, for example, in 1952 during the fifteen
year meat agreement with the United Kingdom.
Adjusting exchange rates
Before 1983, when the Australian dollar had an exchange rate fixed by
the Commonwealth Government, they could control the value of the
dollar. The Government could use this to control prices by lowering the
exchange rate and stimulating overseas demand.
Stabilisation funds
In some industries, such as the wheat and dried fruit industries, income
has been controlled by establishing stabilisation funds where excess
profit is set aside for use when necessary.
Tax considerations
Primary producers were once able to gain tax exemption on sales tax for
equipment and materials used in running the farm. In addition they
received tax rebates for capital investment in the farm. With the advent
of the Goods and Services Tax (GST) this system has changed, although
registered primary producers are still able to claim tax rebates.
22
Part 5: Markets
Public works
Governments have always provided regional infrastructure that has
enabled farmers to reduce the costs of production and transport by
building roads, railways and dams for irrigation.
Current deregulatory policies
Since the early 1970s Governments have adopted policies focused on
deregulation and privatisation. Many industries, including agriculture,
have become more exposed to international markets by the:
•
floating of the Australian dollar
•
introduction of financial reforms
•
deregulation of industry.
Agricultural marketing is now on a more commercial footing and the
marketing organisations and farms supplying these organisations have
less financial assistance from Governments. One reason this has
happened is because of fears that Australian primary producers were
losing their international competitiveness.
Floating of the Australian dollar
The value of the Australian dollar has fluctuated since it was floated in
December 1983. Changes in the exchange rate have played an important
part in determining prices, and in encouraging farms to adjust to
changing international market conditions.
When the value of the Australian dollar goes up in comparison to other
countries it means that our dollar will buy more overseas (imports
become cheaper). However, it also means that our exports are relatively
more expensive overseas and so we export less. Since most of our
agriculture is aimed at exports, a rise in the value of the dollar has a
negative impact on farming.
Introduction of financial reforms
As part of Government cost-savings and commitment to 'free market'
solutions governments have moved away from intervention in the
marketing of agricultural products. They no longer provide the same
level of financial support and have acted by:
Milk marketing
23
•
removing marketing boards
•
removing subsidies
•
reducing tariffs
•
removing price guarantees.
Removing marketing boards
In many agricultural industries, including chicken, egg and dairy,
changes to State legislation have led to a removal of statutory marketing.
There is no longer a regulatory body, such as a marketing board, to set
quotas and coordinate marketing of these commodities. The historical
rationale for establishing many agricultural marketing boards was a
concern that farmers needed support and protection against the actions of
powerful buyers. These concerns still exist, fuelled by knowledge that
retail prices of food products have increased more rapidly than farm-gate
prices, and that the farmers' share of final product prices has declined.
In light of these concerns Government, through the Australian
Competition and Consumer Commission (ACCC), has passed a ruling
that allows dairy farmers to engage in collective bargaining. This means
that dairy farmers in NSW are allowed to join forces to negotiate
contracts and milk supply terms with dairy processors.
Multiple price schemes are seen as non tariff trade barriers by the World
Trade Organisation (WTO). The WTO is the international body that
deals with the rules of international trade. The WTO Agreements
provide the legal ground-rules for international commerce. The
organisation's purpose is to increase global economic welfare through the
expansion of international trade. One of the WTO's most important
functions is to provide a forum for trade negotiations.
Both state and Federal governments are committed to removing any
impediments to competition.
Removing subsidies
In Australia, unlike the US and Europe, the political lobbying power of
rural groups is relatively small. The political weakening of the rural vote
has assisted in the implementation of government deregulatory policies.
In the US, farm lobby groups have a much larger say in how the country
is run.
Following is a press release from the National Farmers Federation about
a report from the Organisation for Economic Cooperation and
Development (OECD). The OECD consists of 30 member countries
24
Part 5: Markets
with a commitment to democratic government and the market economy,
and its work covers economic and social issues.
Report Slams Ineffectiveness of Agricultural Subsidies
22 January 2003
News Release 02/03
An OECD report released late last week highlights the ineffectiveness of
agricultural subsidies in improving incomes for the farmers they are designed to
assist, National Farmers’ Federation President Mr Peter Corish said.
The report, titled Farm Household Incomes, Issues and Policy Responses found
that while support policies, whatever their objectives, have raised income and
reduced income variability to some extent, this has been at a very high cost to
consumers and taxpayers, and with significant leakage to unintended
beneficiaries.
Further, most of the support that actually reaches the farm sector goes to larger
farm households who do not usually need it, and in many cases the continuation
of high levels of support have slowed adjustment to more viable and sustainable
types of farming.
The report points out that as much of the support in OECD countries is linked to
production it has significant international spill over effects. Production
enhancing support contributes to lower world prices, which in turn depress farm
income in other parts of the world.
Importantly, from Australia’s viewpoint, the policies that are most efficient in
supporting farm incomes are also the ones that distort international trade least.
The analysis confirms that policies de-coupled from production cause much less
distortion.
Mr Corish said the report provided further logic for agricultural trade reform.
“Not only do high subsidy levels in world agriculture hurt Australian farmers,
not to mention those in developing countries, they don’t even help their
intended beneficiaries.
“This damning report adds weight to the need for agricultural reform through
the WTO Doha Round and should be heeded by all participating countries”, Mr
Corish said.
Copyright © 2003. Reproduced courtesy of NFF.
Downloaded from http://www.nff.org.au/pages/nr03/02.html on 1/6/04
Identify four reasons why the National Farmers’ Federation President
believes farm subsidies are bad for Australian farmers.
_________________________________________________________
_________________________________________________________
_________________________________________________________
Milk marketing
25
_________________________________________________________
_________________________________________________________
Check your answers.
Reducing tariffs
Australia's average tariff level is low by world standards, with an average
of 1.6 per cent for agricultural products in 2005. All agricultural tariffs
are bound at rates ranging from 0 per cent to 29 per cent, in line with the
requirement of the WTO Agreement on Agriculture. The
Commonwealth Government is committed to reducing tariffs further in
line with WTO agreements.
By opening world markets and setting rules for trade, the General
Agreement on Tariffs and Trade (GATT) and the WTO Agreement have
been major factors in an eighteen-fold growth in international trade over
the past 50 years.
Australian agriculture has derived significant trade benefits through
negotiated tariff reductions. Australian negotiators have succeeded in
obtaining significant improvements in access for Australian products.
The most benefits are gained when high tariff countries open up new
areas of access, because our tariffs are already low and need little change.
Even though Australia is committed to liberalising trade through the
reduction and eventual elimination of tariffs, many other countries are
not in agreement. This places us at a disadvantage since our exporters
must still pay the tariff to import their products into overseas markets.
Countries that use protectionist tariffs include the European Union, the
US and Japan.
In addition to the overall tariff levels, tariff peaks, where some
commodities are targeted for higher tariffs, are a serious problem. More
than one third of the European Union’s agricultural tariff lines carry
duties above 15 per cent.
Tariff escalation is also a major problem. Cocoa bean farmers can export
beans to Japan duty free, or to Korea at a 2 per cent tariff, but if the same
farmer wants to set up a factory and export cocoa powder or chocolate,
he or she will face tariffs of up to 30 per cent in Japan, or up to 40 per
cent in Korea.
In order to overcome some of the tariff barriers maintained by some
countries, Australia is looking at bilateral and multilateral agreements.
The aim is to promote trade liberalisation at a faster rate than can be
achieved through WTO negotiations. At the moment the national
26
Part 5: Markets
government is studying the feasibility of achieving a comprehensive free
trade agreement involving ASEAN economies, Australia and New
Zealand by 2010. This involves the removal of trade barriers such as
tariffs between these countries.
Removing price guarantees
The guaranteed minimum price scheme for wheat, the reserve price
scheme for wool and market milk pricing arrangements have all been
removed.
Deregulation of industry
Government monetary reforms have reduced national and state
government spending and have encouraged an increasing range of
services to be provided by the private rather than public sector. This has
led to changes in many sectors such as banking, telecommunications,
electricity, transport and health.
Many rural regions have less provision of services, particularly health
and banking services. Employment opportunities have worsened and
there has been a decrease in the population of rural communities.
This in turn is affecting the community’s ability to market produce,
because of loss of skilled individuals and infrastructure such as rail head
silos to transport grain. Farmers must pay more for transport as well as
communication and banking services in order to market their products.
Deregulation of the dairy industry
The dairy industry is a good example of an industry that has recently
been restructured and deregulated.
Up until July 2000 dairy farmers in NSW operated under a quota system
for the production of fresh drinking milk. Each farm supplying fresh
drinking milk was assigned a quota that had to be met each day. In this
way the supply of fresh milk to consumers was assured throughout the
year.
Milk quotas were first introduced in NSW in 1956 to overcome supply
shortages in autumn and winter (when pastures grow more slowly and so
cows produce less). The quota system ensured an adequate supply of
fresh milk to consumers all year round. Quotas were also the basis for
ensuring access for all farmers throughout NSW to the State's fresh milk
market. At the same time milk producers from other states were
restricted from supplying milk in NSW.
Milk marketing
27
A milk quota was the quantity of milk allocated to a registered dairy
farmer for a particular dairy farm. The quota was used to determine the
individual dairy farmer's share of the total pool of milk accepted for
market or fresh milk. The total quota was about 10 per cent above the
market requirements. This allowed a safety margin for shortfalls in one
area or transportation problems.
In effect farmers had a two tiered system and were paid accordingly.
Quota milk received the highest price (about 45 cents per litre in 1999)
and farmers were paid less for their above quota, or 'surplus', milk
production (about 23 cents per litre in 1999). This surplus milk was used
primarily for manufactured milk products such as cheese, butter, yoghurt
and flavoured milk.
A quota did not restrict the farmer from producing more milk. However,
to ensure supply, penalties applied to farmers who did not meet their
quota.
The average NSW quota was about 7 000 litres per week per farm in
1999. At this time there were about 1 800 registered farms in NSW
supplying milk through this quota system.
1
Complete the following tables that compare the production of two
similar farms before deregulation. Both farms are producing the same
amount of milk overall, however one farm has a higher quota.
Farm 1
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Quota milk for
whole milk
market
7 000
45
Surplus milk
used for
manufacturing
3 000
23
Income/week ($)
Total before
deregulation
28
Part 5: Markets
Farm 2
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Quota milk for
whole milk
market
3 000
45
Surplus milk
used for
manufacturing
7 000
23
Income/week ($)
Total before
deregulation
2
Identify which of the two farms made the most money per week.
_____________________________________________________
3
Outline why milk quotas were introduced.
_____________________________________________________
_____________________________________________________
Check your answers.
Under the old regulated quota system, farms with higher quotas were
making more money than farms with lower or no quotas, even though
they may have been producing the same amount of milk.
To partly offset this, a levy system was imposed. Farmers paid around
1.9 cents/litre on milk they sold as quota milk. Manufacturing
companies also paid a levy of 3.6 cents/litre on all milk used for dairy
products consumed in Australia. These funds were used to make support
payments (approximately 1.6 cents/litre in 1998/99) to farmers who
supplied manufacturing (non-quota) milk.
The major milk processing and manufacturing companies, such as
Nestlé, Dairy Farmers Group, Ballantyne Foods, Norco, Bega Cheese
and Pauls (Parmalat), believed that dairy regulations reduced their ability
to be competitive against imports from overseas and in trying to export
milk products to other countries. Dairy farmers in Victoria, the major
milk producing State with 62 per cent of all Australian production,
supported this opinion.
The companies and farmers from Victoria believed levies and fixed quota
prices were holding back the industry, restricting their opportunities and
Milk marketing
29
limiting returns for their dairy farmers. These groups lobbied the state
and federal governments to change the system and remove quotas.
They believed regulated prices did not give a true idea of the real value
of milk in the market place and limited the processing companies’ ability
to compete domestically and internationally and their ability to increase
domestic sales of value added products such as flavoured milk. It was
argued that the Australian dairy industry could not maintain the quota
system because it protected farmers from competition and could make
them complacent. The regulated system of quotas and the paying of
higher prices for whole milk could keep farmers from producing
efficiently.
The Australian dairy industry competes with the rest of the world to sell
its products on both the Australian (domestic) and overseas (export)
markets. Competition from New Zealand, in particular, limits the
industry’s ability to increase returns from the local milk sales.
Milk production in Australia has increased over the last twenty years.
However, local consumption has not increased at the same rate. This
means that over 75 per cent of Australia’s milk production is now
exposed to competition either directly via exports or indirectly via
competition on the domestic market from imports.
In other countries there is not the same system of government regulation.
It was feared that dairy farms elsewhere in the world were becoming
more efficient. Local producers would not be able to compete on the
export market or with cheaper imports from overseas.
4
Identify some of the milk processing and manufacturing companies that
operate in Australia.
_____________________________________________________
_____________________________________________________
5
Explain why companies such as these want the dairy industry
deregulated.
______________________________________________________
______________________________________________________
______________________________________________________
6
Identify which country in particular is providing competition for
Australian dairy products both here and overseas.
______________________________________________________
Check your answers.
30
Part 5: Markets
Have these fears been bourne out, or is this an exaggeration of what is
happening in the dairy industry in NSW?
The reasons for the varying attitudes can be seen if we compare our two
dairy farms again, but this time AFTER deregulation.
7
Calculate the income per week after deregulation.
Farm 1
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
7 000
45
3 150
Surplus milk
used for
manufacturing
3 000
23
690
Total before
deregulation
10 000
Total after
deregulation
10 000
33
Farm 2
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
3 000
45
1 350
Surplus milk
used for
manufacturing
7 000
23
1 610
Total before
deregulation
10 000
Total after
deregulation
10 000
Milk marketing
3 840
2 960
33
31
8
Compare the income from the two farms before and after
deregulation.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
9
Outline how this affects their economic viability (the ability to stay
in business).
______________________________________________________
______________________________________________________
Check your answers.
You can see that the farm that had a relatively large quota has been
disadvantaged by deregulation. On the other hand the farm that was
producing the same amount of milk, but had a lower quota is now
making more money.
32
Part 5: Markets
Advertising and promotion
Advertising and promotion
Access an interactive version of Advertising and promotion using this link.
Resume with this material on page 41: Evaluating market information.
Factors that need to be considered in the promotion of agricultural
products are:
•
the marketer
•
the consumer
•
the medium
•
feedback.
The marketer
The marketer is the person offering goods for sale. It could be individual
farmers, a farmer cooperative, marketing board or a retail outlet.
The consumer
The consumer is the person purchasing the goods for use. The
consumers of any agricultural product will have different wants,
perceptions and financial capabilities. These consumers can be divided
into various patterns of buying behaviour which marketers call market
segments. Each market segment has its own special needs for the
products being offered.
Think about yourself as a final consumer. Identify one milk product that
marketers have targeted at you.
1
Describe the target group or market segment that you belong to (age and
lifestyle).
_____________________________________________________
_____________________________________________________
_____________________________________________________
Milk marketing
33
______________________________________________________
2
Identify a milk product that is actively aimed at you and people like
you.
______________________________________________________
3
Describe how this product is promoted.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
Check your answers.
Communicating with a diverse group of consumers can be a difficult
process and marketers must remain informed about their target audience.
As well as promoting the product to the consumer, marketers use market
research to gather information about their potential consumers.
The message
A product has a life cycle. Depending on where the product is in its life
cycle, marketers use different messages to promote it.
•
For a product new to the market, the first need is to inform and then
to persuade.
•
For an established product, marketers remind consumers of the
benefits of buying the product and the source of supply.
•
For a mature product marketers reinforce and remind consumers of
the benefits of the product.
th
ow
Gr
Introduction
e
Acceptance
phase
clin
Introductory
phase
De
Acceptance
Maturity
Rejection
phase
Rejection
Time
Figure 5.3: Product life cycle.
34
Part 5: Markets
If the product is altered in some way or has new features added, the
message changes again to inform and then persuade.
Identify an advertisement from TV, radio or newspapers that is designed to:
1
inform
_____________________________________________________
_____________________________________________________
2
persuade
_____________________________________________________
_____________________________________________________
3
reinforce
_____________________________________________________
_____________________________________________________
4
remind.
_____________________________________________________
_____________________________________________________
Check your answers.
The medium
The message can be conveyed to the consumer using a variety of media.
The medium must be chosen so that the consumer is able to receive,
understand and respond to the message.
Promotional media that can be used to communicate with the consumer
include:
•
personal selling
•
advertising
•
publicity
•
sales promotion.
Milk marketing
35
Personal selling
Personal selling is the promotional technique most often used when
expensive items or big volumes are involved. In earlier times, when
companies had a selling orientation, salespeople were much more
numerous than they are today. Because communication technology has
improved there is now less need for specialist salespeople. In the best
organisations, everyone is a salesperson.
Personal selling is important both in the industrial market and in the
consumer retail market.
Review the section on marketing strategies you looked at earlier in Part 5.
1
Identify the farmer marketing strategy that would be best suited to
personal selling.
______________________________________________________
2
Outline a reason for this.
______________________________________________________
______________________________________________________
______________________________________________________
Check your answers.
Advertising
If there are too many people to reach by personal selling, a means of
mass communication is required. Advertising utilises mass media to
communicate with the consumer.
Frequency refers to how often people are exposed to a particular message
in a given time. Radio and television have the highest frequency,
followed by newspapers, magazines and outdoor (poster) advertising.
Reach is a measure of the size of the target audience, for example, it is
likely that a Sydney TV station will have greater reach than a regional
TV station. The cost of running the advertisement is likely to be
proportional to the audience reach.
Advertising media comes in a number of forms, including:
36
•
black and white newspaper – have wide reach and daily frequency,
but a short life and little scope to focus on the target market
•
colour supplements – have a significantly longer life but are more
expensive to produce and do not focus on the target market
Part 5: Markets
•
magazines – designed to appeal to specific consumer groups so are
more focused than newspapers, however their frequency is relatively
low and the medium expensive
•
radio – has a wide target audience, is relatively inexpensive and can
have high frequency, but lack focus unless advertisements are placed
on a station or program that appeal to a specific demographic
•
television – is expensive but has a wide audience and a big impact;
placing ads in specific programs or time slots gives them the
opportunity to target specific markets, and there is potential for high
frequency if the marketer wishes to spend the money
•
internet – is global, wide reaching and can be target specific; internet
‘pop-ups’ and unsolicited e-mails can be counter productive,
alienating the consumer
•
outdoor posters or bill boards – expensive, but can have a big
impact; placement on highways and main roads gives them wide
reach, but no focus
•
point of sale materials – at the point of public sale 'attention
grabbers' are used, they have a wide reach and the selection of
materials targets specific markets (women who generally do the
shopping and young children that accompany them)
•
packaging – presents a message to the consumer and so needs to be
considered as advertising
•
leaflets brochures and booklets – often left on sales counters, these
do not have a big reach or frequency, but may be very target
specific.
Figure 5.4: Advertising media.
Milk marketing
37
Publicity
Print and electronic media in Australia are keen to report on ‘news’ of all
kinds. If you have something new, topical, or local it is likely that you
will be able to find media interests who will report on it for you. This
publicity is free advertising.
Publicity has a high credibility rating and can catch the audience off
guard, since it sounds or it looks different from advertising.
The advantages of publicity can be summarised as follows:
•
high credibility
•
wide reach to 'off-guard' audience
•
a minimal budget outlay
•
short term publicity used for creating new product awareness
•
long-term publicity used for image building.
Sales promotion
Sales promotion is gaining more prominence in consumer marketing.
Sales promotions tend to pick up when the economy is ‘tight’.
Manufacturers and retailers are keen to find means of moving stock and
often resort to special deals so that this can be achieved.
38
•
Point of sale displays and samples – sales promotion personnel move
around retail outlets creating interest, maybe even 'spruiking' to
attract attention, giving samples or demonstrations and answering
questions.
•
Short term promotions with prizes or discount campaigns –
production and distribution of promotional giveaways like toys,
pens, diaries or calendars, which can give the recipient a long-term
promotional message.
•
Trade shows and special event demonstrations – trade shows are
often set up to promote new or revised products. Discount
introductory offers are made for those who attend the trade show.
Part 5: Markets
Feedback
Feedback about a product can be achieved through a variety of strategies.
•
Potential consumers can be surveyed.
•
Post sales customer service (returns, repairs, complaints).
•
Target group profiles can be built up, using methods such as analysis
of transaction records and SMS responses to promotions.
•
Count the number of sales or the money made.
To measure the success of a promotional strategy, marketers can:
•
measure the cost per 1000 consumers reached
•
market research the impact on the target market
•
note the flow of enquiries before and after the advertising
•
market research any attitude changes due to the advertising
•
assess the number of sales before and after the strategy was initiated.
Promoting milk
What promotional strategies are currently
used to market milk to consumers?
Different advertisements have emphasised
the health benefits of drinking whole milk.
Publicity in the form of TV news, lifestyle
programs and newspapers frequently remind
people of the need to maintain their calcium
intake.
Many advertisements for flavoured milks
are directed at young people, trying to
promote these products as belonging to a
select group or being able to enhance the
consumer’s lifestyle.
Since deregulation, retail promotion of milk
in some areas has also focused on consumer
loyalty. Cooperatives particularly have
developed ‘support local farmers’ or ‘local
milk = local jobs’ campaigns.
Figure 5.5: Milk advertisement.
Examine how promotional strategies are used in the marketing of your case
study product. Collect examples of advertisements, promotions and
publicity from as many sources as you can and use these to complete
Exercise 5.2.
Milk marketing
39
Evaluating market information
Evaluating market information
Market information provides businesses with data that they can evaluate
to make properly informed decisions.
In p
u t s u pp ly i n d u s t r y
d
f ib r e
p r o c es s o r s a n d
ma
rk
• planting, purchasing, marketing
• developing business plans for credit
• identifying potential markets
e
rs
• timing input purchases
• devising market strategies
te
F ar m e r s
F oo
• forecasting sales
d
an
N e ws m e d i a
• informing audiences
Fo od
s er vi c e i n d u s t r y
F ar m
• timing purchases
• planning production
• projecting costs and returns
Br o ke r s a
n d I n ve st o r s
a d v is o r y s e r v i c e
s
• creating farm budgets
• decisions about profitability
• timing of operations
G o ve r n m e n t s
• improving investment decisions
E x p or t e r s
• operation of commodity programs
• formulation of farm legislation
• anticipating and reacting to
developments
• timing purchases
• devising market strategies
Figure 5.6: Decisions that can be made using market information.
Market information is published in trade publications, associate
newsletters, sales reports (processors and agents) and on the internet.
40
Part 5: Markets
Market information includes:
• product statistics
• market situation
• marketing options
• government policies and regulations.
Product statistics
Product statistics include:
• area, yield and production of crops
• livestock numbers and production.
Product statistics enable the farmer to analyse the market situation in
terms of the quantity and quality of the commodity available for sale
now, and in the future.
In Part 3 you have already looked at how a farmer can collect product
statistics for a farm and compare them to those collected from other
farms.
Market situation
The market situation is a description of consumer needs and buying
trends in the past and present. This information can be qualitative
(descriptive) or quantitative (numerical) and includes:
• daily prices in different markets
• consumption trends
• import and export figures.
Daily prices in different markets
Farmgate prices are the payments made to farmers by manufacturers.
Some examples of farmgate prices for milk are shown in figure 5.7.
Notice that before deregulation the price farmers were receiving for
market milk (quota milk) in each state was significantly higher than that
received for manufacturing milk (surplus milk). Since the removal of
quotas dairy farmers receive one base price for their milk.
Milk marketing
41
NSW
VIC
QLD
SA
WA
TAS
AUS
Manufacturing milk
1997/98
25.1
22.7
24
21.8
25.6
20.4
22.9
1998/99
25.3
23.0
23.7
23.1
24.7
21.8
23.2
1999/00
21.8
20.7
21.9
22.2
24.6
18.9
20.9
Market milk
1997/98
49.6
43.1
55.3
43.8
45.1
45.0
47.9
1998/99
47.0
43.4
55.7
44.2
44.4
45.7
47.4
1999/00
47.7
42.7
54.9
44.6
45.5
44.3
47.2
After deregulation
2000/01
29.1
29.3
30.6
27.7
26.6
25.0
29.0
2001/02
32.5
33.3
34.5
31.5
28.8
32.7
33.0
2002/03
32.8
24.8
34.8
30.3
28.2
25.9
27.1
2003/04
30.9
26.7
33.8
28.2
27.4
27.2
27.9
2004/05
32.9
31.5
35.0
30.1
27.2
30.9
31.5
2005/06
34.3
32.9
36.6
32.0
29.0
33.6
33.1
2006/07
35.7
32.0
38.8
32.6
32.0
36.5
33.2
Figure 5.7:
Typical milk farm gate prices (cents per litre of whole milk)
Data source: Australian Dairy Industry In Focus 2003, 2007.
Dairy Australia Ltd.
42
Part 5: Markets
Consumption trends
Consumption trends indicate the quantity of product being sold and
fluctuations over time.
Figure 5.8 shows some consumption trends for different types of milk in
Australia.
Whole milk
Reduced fat
Low fat
Flavoured
UHT
Total
1989/90
1 257
244
79
111
40
1 730
1994/95
1 231
332
111
143
77
1 894
1195/96
1 215
336
113
146
94
1 905
1996/97
1 184
352
120
160
104
1 920
1997/98
1 144
359
130
163
122
1 919
1998/99
1 131
358
141
169
131
1 931
1999/00
1 099
354
144
173
164
1 933
2000/01
1 098
386
119
165
165
1 934
2001/02
1 088
400
126
172
138
1 924
2002/03
1 079
406
134
178
143
1 941
2003/04
1 067
433
140
191
150
1 981
2004/05
1 078
457
138
200
152
2 024
2005/06
1 088
478
140
204
156
2 065
2006/07
1 111
511
147
216
175
2 160
Figure 5.8:
Drinking milk sales (million litres)
Data source: Australian Dairy Industry In Focus 2007. Dairy Australia.
Milk marketing
43
Outline the changing trends in consumption of drinking milk in recent years,
using information from figure 5.8.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Check your answer.
Cooperatives and other processors have identified these changing
consumer needs and have developed new milk products and promotional
campaigns, such as the development of innovative milks with varying fat
contents, fortified with extra vitamins and minerals, lactose-free or extra
frothing milk for cappuccinos.
44
Part 5: Markets
Import and export figures
Figure 5.9 shows data on dairy imports to Australia. Australian farmers
need to compete with these imports on the domestic market.
New
Zealand
Other
Total
2001/02
New
Zealand
Other
Total
2006/07
Skim milk powder
1 918
18
1 936
2 745
2 876
5 621
Whole milk powder
874
16
890
4 266
6 818
11 084
Sweetened powder
2 404
168
2 572
1 570
382
1 952
Whey pwder & conc
1 166
279
1 445
2 243
1 713
3 956
Condensed milk
737
326
1 063
144
1 231
1 375
Liquid milk
2 012
0
2 012
764
48
812
Liquid skim milk
87
0
87
433
1
434
Cream
518
0
518
1 060
193
1 253
Yoghurt
690
545
1 235
706
104
810
Butter
6 583
42
6 625
10 222
606
10 828
Butter oil
572
59
631
1 547
347
1 894
Cheese
34 897
9 822
44 719
50 529
13 741
64 270
Casein
890
20
910
1 389
79
1 468
Caseinates
347
17
364
218
17
235
Lactose
1 574
3 628
5 202
2 494
6 377
8 871
Ice cream – ‘000
litre
4 807
1 938
6 745
5 323
12 343
17 666
Figure 5.9:
Australian Dairy product imports (tonnes).
Data source: Australian Dairy Industry In Focus 2003, 2007. Dairy Australia.
Milk marketing
45
Australia produces only about 2 per cent of the world’s milk but it
supplies 12 per cent of the world’s dairy products. Australia ranks third
in terms of world dairy trade.
Figure 5.10: Exporters’ share of world trade – 2006 (milk equivalents).
Australian Dairy Industry In Focus 2007. Dairy Australia.
Milk production in Australia continues to increase at a faster rate than
domestic consumption, so there is the capacity to increase exports.
Figure 5.11: Australian consumption and exports (milk equivalents).
Australian Dairy Industry In Focus 2007. Dairy Australia.
Currently Australia exports about 50 per cent of its annual milk
production.
46
Part 5: Markets
SE
Asia
Other
Asia
Europe
Middle
East
Africa
Americas
Other
Total
Aust.
market
Butter/AMF
46
30
34
20
18
28
3
168
268
Cheese
81
434
41
159
29
63
18
825
1 313
Milk
34
30
3
13
1
2
14
97
2 590
SMP/BMP
325
127
8
63
20
21
34
598
n/a
WMP
220
107
1
51
29
33
13
454
n/a
Other
98
149
38
5
1
61
38
390
1 722
Total
804
877
114
311
98
208
120
2 532
5 893
Figure 5.12: Australian exports by product by region 2006/07 ($A million).
Data source: Australian Dairy Industry In Focus 2007. Dairy Australia.
Australian exports are concentrated in Asia/East Asia. The top markets
for dairy products are Japan, Philippines, Saudi Arabia, Singapore,
Malaysia, Indonesia and the US.
These markets have come about due to Australia's natural geographic
advantage in Asia, and the fact that Australia is to some degree excluded
from certain markets due to:
•
tariffs on imports imposed by the Economic Union and US
•
export subsidies paid to farmers of some major competitor countries.
1
Identify the main source of dairy imports into Australia.
_____________________________________________________
2
Compare the New Zealand figures for 2001/02 and 2006/07.
_____________________________________________________
_____________________________________________________
_____________________________________________________
Milk marketing
47
3
Evaluate the ability of Australian dairy farmers to compete
effectively with New Zealand imports in an environment free from
government support.
______________________________________________________
______________________________________________________
______________________________________________________
4
Evaluate Australia’s success as an exporter of dairy products.
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
5
Construct a pie graph of the total exports for each region using data
from figure 5.12.
Check your answers.
Marketing options
The way in which products are placed, promoted and sold can be
evaluated by comparing farmgate prices of various options.
48
Part 5: Markets
Placement
In recent years, there has been a rapid increase in the volume of milk sold
through supermarkets – from 49 per cent of total drinking milk sales in
1999/00 to nearly 55 per cent in 2001/02.
Whole
milk
Reduced
fat
Low
fat
Flavoured
UHT
Total
2000/01
530
227
71
39
134
1 016
2001/02
547
246
74
43
123
1 046
2002/03
555
263
76
45
129
1 084
2003/04
568
299
74
50
132
1 123
2004/05
574
322
75
56
131
1 158
2005/06
575
341
73
59
132
1 181
2006/07
576
365
75
67
138
1 216
Figure 5.13: Supermarket milk sales (million litres).
Data source: Australian Dairy Industry In Focus 2003, 2007. Dairy Australia.
Supermarkets are the dominant force in retail sales, and have huge power
with the drinking milk processors. Contracts to supply Woolworths,
Coles, Franklins, IGA and other supermarket chains are worth millions of
dollars, so there is strong competition between the suppliers.
Promotion
The dairy industry’s peak body Dairy Australia is funded by a farmer-paid levy. The
levy collects about 3 cents per litre from farmers and about 11 cents per litre from
processors. Some of these funds are used to promote milk consumption.
Calculate how much a dairy farm producing about 2 000 000 litres per year
pays in levy to Dairy Australia. Suggest whether you think they are getting
value for money.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Check your answer.
Milk marketing
49
Government policies and regulations
Government regulations and policies can impact on local and export
marketing.
An evaluation of recent changes to milk regulations demonstrates the
effect on production. Until July 1st, 2000 the drinking milk sector was
controlled by state government legislation. Deregulation and the removal
of farmgate quotas meant that the only government control in marketing
of drinking milk is now in food safety assurance.
Read the transcript (back in the Additional resources section of Part 3) of the
dairy farmer interviews Part 3 – Milk quality assurance.
Evaluate the impact of HACCP regulations on the management of Barry
Paff’s farm.
_________________________________________________________
_________________________________________________________
_________________________________________________________
Check your answer.
Turn to Exercise 5.3. You need to prepare a report presenting and
evaluating market information about the farm product you have been
studying. Include tables, graphs and descriptions where appropriate.
Sources of market information include:
•
trade magazines
Agribusiness Association of
Australia at
http://www.agribusiness.asn.au
Phone: (08) 8232 3388
• Cotton: Cotton Catchment
Communities (CRC) at
http://www.mv.pi.csiro.au/content/
Industry/CRChome.aspx
•
• Eggs: Australian Egg
Corporation Limited at
http://www.aecl.org/
• Fruit, vegetables or flowers:
Horticulture Australia Limited
(HAL) at
http://www.horticulture.com.au/ or
Sydney Markets at
http://www.sydneymarkets.com/
50
• Rice: Ricegrowers Association
of Australia (RGA) at
http://www.rga.org.au/
• Sugar: Sugar Australia at
http://www.sugaraustralia.com.au/
• Meat and livestock: Meat and
Livestock Australia at
http://www.mla.com.au/
• Milk: Dairy Australia at
http://www.dairy.com.au/ or
Perfection Milk at
http://www.perfectionmilk.com.au/
• Wool: Australian Wool
Innovation Limited at
http://www.wool.com.au/
• Wheat: AWB at
http://www.awb.com.au
Part 5: Markets
Summary
Summary
•
A farmer cooperative is formed by individual farmers to achieve
common commercial objective(s) more successfully than they could
as individuals.
•
Marketing boards are a development from marketing cooperatives,
they are usually statutory organisations established by
Commonwealth or State legislation to market specific agricultural
commodities and have monopoly powers in controlling price within
the state or country.
•
Vertical integration occurs when farmers own or control aspects of
the value adding chain associated with their product and as a result
are able to increase their percentage of the final amount paid by the
consumer.
•
Direct marketing allows the farmer to get more of the dollar by
cutting out the ‘middle men’. The result is higher per unit profit
margins that allow family farms to regain a competitive edge,
instead of competing directly with large companies local growers are
able to carve out a local market niche.
•
Contract selling occurs when a contract is made for future delivery.
The buyer of the contract agrees to pay a specified amount at a
specified date in the future in order to receive a specified quality and
quantity of an agricultural commodity.
•
Past government policies have aimed at supporting Australian
agriculture within the country. Modern policies aim to promote
Australian agriculture overseas.
•
Past government policies have included:
•
regulating supply
•
stimulating demand
•
financial support
•
public works.
•
Current government policies are focused on deregulation and
privatisation. Australian industries have become more exposed to
international markets by the floating of the Australian dollar, the
introduction of financial reforms and deregulation.
•
In many agricultural industries the only remaining government
intervention is in the area of food safety.
Milk marketing
51
52
•
Advertising and promotion aims to achieve a win-win situation for
both seller and buyer. Successful communication will result in the
exchange of money and goods.
•
Aspects of advertising and promotion to consider are:
•
marketer
•
consumer
•
medium
•
feedback.
•
Market information helps farmers evaluate the performance of their
farms and so improve their economic sustainability.
•
Market information can include:
•
product statistics
•
current market situation
•
marketing options
•
government policies and regulations.
Part 5: Markets
Additional resources
Additional resources
Marketing proteas
Direct to
consumer
To florist
To wholesale
agent
Through export
agent
Farm
Farm
Farm
Farm
Sold for $3 - $4
each.
Sold for $2.50 $3.50 each.
Sold for $1.50 $2.50 each.
Sold for $4 - $8
each.
10 hours fuel in
car/truck
3 – 5 hours fuel in
car/truck
30 min fuel in
car/truck
4 hours fuel in
car/truck
Delivered in
buckets of
storage solution
Delivered in
buckets of
storage solution
Delivered in
buckets of
storage solution
Delivered in
cardboard cartons
Community
market
Florists
Paddington and
area
Agent’s farm cool
store
Sold for $3 - $4
each.
Florist cool room
Consumer
Sold for $10 each
Phytosanitary
certificate
indicating pest
management
Flemington
Markets floor or
cool room
Kingsford Smith
coolstore
Florist cool room
$ freight
Sold for $10 each
Jet cargo hold
Consumer
Overseas airport
quarantine
Consumer
Import agent
Overseas flower
markets
Florist
Sold for $30+
Consumer
Milk marketing
53
Suggested answers
Suggested answers
Marketing strategies
Disadvantages of cooperatives
1
Advantages
Shared capital outlay (less expensive for each farmer to buy initially)
Shared maintenance costs
Shared labour costs to operate machinery if an employed person is
required.
Disadvantages
Conflict between farmers if more than one person needs to use the
machinery at the same time
Conflict may arise if one farmer does not look after the machinery
when it is his or her turn to use it.
2
Each farmer does not need to invest in their own grading machinery.
Inputs such as cartons are cheaper per unit because they can be
bought in bulk.
Quality labour for grading and packing can be employed over a
longer period
Larger storage facilities mean that continuity of supply can be
assured.
3
The farmers must plan the varieties that they plant carefully so that
they do not all want to use the packing house at the same time when
they harvest their nuts. If they can manage to spread out the harvest
over as long a period as possible they will be able to make maximum
use of the facility.
Advantages of direct marketing
1
Marketing through an agent at Sydney Produce Markets
(Flemington)
Sale via export agent
Sales to a number of florists
54
Part 5: Markets
Direct sales to consumers at community markets
2
The farmer receives a much better price even though the volume of
sales is lower. The consumer is guaranteed a fresh product and is
able to confront the grower directly if they are not satisfied with the
product.
3
Exported king proteas attract the highest price, but have higher costs
associated with agents fees, storage and transport. Proteas sold
direct to the consumer at the community market are sold for the
lowest price, but also have lower associated costs.
Government intervention in marketing
Past support policies
Weather conditions that lead to oversupply will reduce price.
Large volumes of imports will reduce price.
Development of an alternative product may reduce price.
Removing subsidies
While support policies, whatever their objectives, have raised income
and reduced income variability to some extent, there are many drawbacks
to their use:
•
there has been a high cost to consumers and taxpayers
•
most of the support that actually reaches the farm sector goes to
larger farm households who do not usually need it
•
high levels of support have slowed adjustment to more viable and
sustainable types of farming
•
subsidies linked to production have significant international spill
over effects – production enhancing support contributes to lower
world prices, which in turn depresses farm income in other parts of
the world
Importantly, from Australia’s viewpoint, the policies that are most
efficient in supporting farm incomes are also the ones that distort
international trade least. The analysis confirms that policies de-coupled
from production cause much less distortion.
Milk marketing
55
Deregulation of the dairy industry
1
56
Farm 1
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
7 000
45
3 150
Surplus milk
used for
manufacturing
3 000
23
690
Total before
deregulation
10 000
Farm 2
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
3 000
45
1 350
Surplus milk
used for
manufacturing
7 000
23
1 610
Total before
deregulation
10 000
3 840
2 960
2
Farm 1
3
To guarantee continuity of supply of drinking milk to consumers.
4
Dairy Farmers, United Dairies, Pauls (Parmalat), Norco
5
To remove set prices paid to farmers.
6
New Zealand.
Part 5: Markets
7
Farm 1
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
7 000
45
3 150
Surplus milk
used for
manufacturing
3 000
23
690
Total before
deregulation
10 000
Total after
deregulation
10 000
33
3 333
Farm 2
Weekly milk
production
(litres)
Price per litre
(cents per litre)
Income/week ($)
Quota milk for
whole milk
market
3 000
45
1 350
Surplus milk
used for
manufacturing
7 000
23
1 610
Total before
deregulation
10 000
Total after
deregulation
10 000
8
Milk marketing
3 840
2 960
33
3 333
Before deregulation farm 1 had a better income, despite both farms
producing the same quantity of milk. After deregulation both farms
earn the same amount. Deregulation has therefore benefited farm 2
the most, while farm 1 has had a reduction in income.
57
9
Farm 1 may find it difficult to adjust production methods to remain
viable after a reduction in income. They will need to become more
efficient. Farm 2 will find the additional income improves the
viability of the farm.
Advertising and promotion
The consumer
1
Teens, possibly with an active lifestyle.
2
Some of the flavoured milks are targeted at older teens.
3
Television advertisements portray teens actively involved in sport or
leisure activities, for example at the beach, and usually involve
greater acceptance by the opposite sex if they are consuming the
milk product.
The message
1
Supplying alcohol to minors.
2
Responsible drinking ads.
3
A number of ad campaigns use variations of the same theme to
reinforce the product, for example breakfast cereals.
4
TV commercials for TV shows (particularly TV series) may simply
remind people that they are on at a particular time.
Personal selling
1
Direct selling.
2
The farmer is closely involved with the consumer and in getting the
product to the consumer.
Evaluating market information
Consumption trends
Since 1990 Australian consumption of drinking milk has been changing
from whole milk to more specialty milk types such as reduced and low
fat milks. UHT milks, flavoured milks and other specialty milks have
also been increasing their share of the market at the expense of fresh
white whole milk.
Import and export figures
1
58
New Zealand.
Part 5: Markets
2
Most milk product imports have increased, with a decline in
skim/buttermilk powder, sweetened powder, whole liquid milk,
butter oil and lactose.
3
An increase in dairy imports from New Zealand implies that the
Australian farmers are now less competitive than they were in the
past, as the domestic market is purchasing imported rather than local
product.
4
Australia appears to be a very successful exporter of dairy products.
Despite competing with countries that protect their dairy industries
with subsidies and trade barriers the Australian dairy industry is still
able to export approximately half of their production.
5
Australian exports by region – 2006/07 ($A million).
Australian Dairy Industry In Focus 2007 Dairy Australia.
Promotion
2 000 000 litres x $0.03 = $60 000 annual levy to Dairy Australia, some
of which will be spent on promotion. It is personal opinion as to whether
this is a reasonable amount to spend or not.
Government policies and regulations
Barry found that the introduction of the HACCP system created a lot of
additional paperwork, and meant an audit taking 4 to 5 hours every year.
Overall despite the extra time needed he found the system had a positive
impact on farm management by causing him to keep to a better standard
of record keeping.
Milk marketing
59
Exercises – Part 5
Ex
ercises – Part 5
Exercises 5.1 to 5.3
Name: _________________________________
Exercise 5.1
Report on the stall you visited that direct markets your case study
product.
Include information about:
•
the setting
•
the advantages to the producer of marketing this way
•
value adding that has taken place
•
how the produce is promoted.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
60
Part 5: Markets
Exercise 5.2
Examine how promotional strategies are used in the marketing of your
case study product. Collect examples of advertisements, promotions and
publicity from as many sources as you can.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
Milk marketing
61
Exercise 5.3
Prepare a report presenting and evaluating market information about your
case study product.
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
62
Part 5: Markets