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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 2 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 3 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: 4 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 ______________________________________________________ ______________________________________________________ ______________________________________________________ 6 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. 8 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 9 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. 10 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