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Transcript
Market Forces AS91530 Level 3 Agricultural and Horticultural Science Market Forces A market force is something that affects the supply and demand of a product. Market forces are very varied. Customer preference Seasonality Quantity available Prices Market manipulations Producer organisations Market trends Supply There are many factors which can affect supply: Price of the product Length of production Perishability Climate Cost of inputs Number of producers Skill of the farmer Technology Seasonal effects Quantity supplied Storage and transport Government restrictions and incentives Length of production The production period is the time period between when a producer makes a decision on how much of a product to produce and when the product is ready to sell. Consequences of longer and shorter production cycles. In primary production, the time period is varied. The fastest growing vegetable crop takes several weeks to mature, a wheat crop many months to grow, an orchard many years. Some animals can be produced in a few months such as chickens, others take several years. If prices change during production period the quantity supplied will not vary very much. Production costs What are production costs? Fixed costs = predictable figure e.g. rates Variable costs = vary with production e.g. animal health. Profit – income minus expenses, return = price Cost of inputs Inputs are what the producer needs to produce a product, e.g. fertiliser, labour, land, seeds, machinery etc. If a change in the way the product is produced increases input costs, then supply decreases. Inputs can be difficult to change. So when prices fall, producers still supply the same products. Sometimes they may be able to wait out low prices. When prices rise, producers want to produce more quickly. Prices and costs Price of product must exceed the costs of production. To make a profit, the selling price the farmer gets for a product must be more than the cost to produce it (the price of the product must exceed the costs of production). If this does not happen over a period of time, the farmer will stop producing that product. Price of the product – as price increases profit increases but demand may decrease Prices of other products – the competition Best use of resources e.g. wool vs mutton Substitutes – what happens to prices of a product if the same market niche is filled Prices due to gluts and shortages Perishability Fresh fruit and vegetables only keep for a few days before they start to perish. Growers of perishable products have to sell them regardless of the price they will get. Even if they only get a low price for them, they must sell. Other products such as wool do not perish and can be stored until price rises. Seasonality Seasonality is the pattern shown in the life cycle of a plant or animal in relation to the time of the year. When there is abundance of produce the price is lower if all other conditions remain the same. E.g. strawberries. They are available from the end of October to March. The time of peak production is November, December and January. The price obtained for strawberries is related to their availability – low availability means higher price, high availability mean lower price. Seasonal effects (unseasonal conditions) Unseasonal conditions means weather conditions that are not normal for a particular season. Examples are drought, above or below normal temperatures, out of season frosts or heavy snowfalls. This can effect the timing of production, crop physiology, out of season production, both for local and overseas markets. Bad weather conditions are likely to reduce supply. Good weather conditions are likely to increase supply. Bad weather in a local area may affect individual farmers and reduce their supply without significantly affecting the total supply for the country. However, if unseasonal conditions are widespread total supply for the country will be affected. Seasonal effect are environmental factors that cause problems with the production of produce. E.g. winds flattening crops, hail damaging fruit, frost damage to plants at blossoming, cold, wet weather killing new born lambs, floods destroying crops and causing animal deaths. Climate The climate of an area determines the products that can be successfully grown. Climate includes temperature, rainfall, and sunshine hours found in an area. Some crops are dependent on certain climatic conditions to produce a good quality crop. Citrus need warm temperatures all year around. Pip fruit require a frost in winter to set fruit buds. Climate effects product choice and location. Environmental Products can only be supplied to meet the market if the environment is manipulated to provide optimum productivity of the product, i.e. optimum inputs to gain optimum outputs. E.g. (Horticulture) light, H2O, nutrients & CO2 need to be at an optimum, pests & diseases have to be controlled to reduce stress. E.g. (Agriculture) Plant productivity for feed & living conditions (shelter, H2O, pests & diseases control) have to be at an optimum. Quantity supplied Sufficient volume has to be supplied to meet market demand, especially for export markets. Retailers demand guaranteed volumes of high quality product over a specific period. Trends/patterns for a range of primary products Reliability of supply The need for consistent high quality production over a period of time and to overcome barriers to reliability. Growers must plan to meet this demand. New cultivars and breeds A new plant cultivar may be developed. This may be higher yielding or resistant to particular insect pests or diseases. This increases the amount of produce the grower can supply. A new sheep breed many be developed that produces more lambs than normal or is more resistant to diseases and pests. Pest and diseases Can cause a loss of production, and this reduces the amount of produce the farmer supplies. Competition Competition can be reduces in special circumstances. Some producer organisations can buy produce at a set price from many small growers. They can then resell the produce to a large market. Here they are acting as a single seller that controls supply and reduces the competition, so that many smaller growers are not trying to outdo each other. This usually happens when selling in the export markets rather than in the local markets, e.g. pip fruit. Within New Zealand apple and kiwifruit industries, competition can be reduced. The organisations buy up all the produce then sell it, on behalf of all the growers, as a single seller. Technological improvements Improvements in technology can increase productivity and supply. Can be used to increase supply without causing an increase in input costs. If a change in the way a product is produced reduces the costs of the inputs, or it enables more to be produced for the same inputs costs, then supply increases. E.g. a mechanical harvester may replace some of the labour previously required for the job. For the same cost a larger quantity of a product can be supplied. Producer organisations Producer or grower organisations are made up of representatives of the growers. These representatives make decisions on behalf of the growers for the benefit of the whole industry. Each major product is handled buy a group of producer organisations. Each of these organisations oversees some special product research, processing or marketing. The main aim is to obtain the best long term returns for producers. There are several ways in which grower organisations can influence the market supply. These include; Organising a marketing system Setting the price schedules and controlling the supply for market at a particular time Providing technical know how to improve production levels Advising the grower on when, how and what to plant. Special factors Special factors can be many things that do not fit in to the other categories. Examples are; transport strikes. A transport strike can prevent a product reaching its market. This has the effect of reducing supply. Planned e.g. a potato grower may want to grow early potatoes for high returns but must weight up risks of rot & frost. Unplanned e.g. hailstone damage on apples. Questions Explain how the length of the production period affects supply. Name 4 types of inputs a farmer needs to produce a product. Give 1 example for each; a highly perishable and a non-perishable product. What does “seasonal crop” mean, and what makes strawberries a seasonal crop? What market force determines where citrus fruit can be grown commercially? Describe 3 ways in which a farmer can increase the supply of a product. How can producer organisations help to prevent competition among growers? Explain what “seasonal effects” means. Give 3 examples of seasonal effects that can reduce the supply market. Name 2 ways producer organisations can influence the supply market. Supply and Demand The most successful farmers have an awareness of the market, that is who wants their produce, when and where. To do this they need to have an understanding of economics – the relationship between supply and demand. A simple way to start is to use graphs. The Supply Curve The supply curve is a graph showing the relationship between the price and supply of a produce. Normally there is direct relationship between the two variables which is as the price rises so to does the supply. The higher the price, the greater the quantity that a grower is willing to supply. Drawing supply curves Price is always on the vertical axis. Quantity always goes on the horizontal axis. The scales on each axis must increase by uniform intervals. Each axis needs to be clearly labelled. The graph needs a suitable title. Each point should be plotted with a small cross (x). Points join with a smooth line. In some graphs this will be a straight line, in others a curve. It will always have the same slope, that is, upwards from left to right. Drawing sketch graphs A sketch graph is a shorter way of showing a supply graph. Instead of giving actual figures for prices and quantities, a sketch to show what is expected to happen. Supply curves usually slope upwards from left to right. P stands for price Q stands for quantity S stands for supply Arrowheads show the direction of increase in price or quantity. The title includes the name of the product. S S Shift of the supply curve A price change of a product will result in a change in quantity supplied. This change in the price of a product causes a movement along the supply curve. With a shift of the supply curve, there is a change in supply and the whole curve shifts to a new position. When the curve shifts to the right this is an increase in supply, while a shift to the left is a decrease in supply. A supply curve will shift if there is a change in conditions (or determinants) of supply, other than the price, such as changes in costs of production, technology and the level of workers productivity, indirect tax changes, subsidies or the price of a related good. Supply – seasonal effects. The curve shifts to the left if supply reduces which could happen if there were a drought. The curve shifts to the right if the supply increases possibly due to a mild winter. Market Supply. Market (aggregate) supply is the quantity of a product supplied by all the growers or producers. To calculate market supply, add together the quantities supplied by each grower. The total supply from all the growers or producers is also called the aggregate supply. Demand There are many factors which can affect demand: Consumer preference Advertising Promotions Packaging Research and development Size of the market Seasonality Niche markets Quality Substitutes Price of the product Quantity available Consumer preferences Consumer preference is what the customer wants to buy. The products the consumer wants have changed over the last 20 years. Consumers now prefer healthy, easy to use, fresh produce. Eating out has become more. Each year the number and range of products available for consumers increases, e.g. a major supermarket chain in the USA is offered 250 new products each week. If any of these new products are to be sold in their supermarkets, slower moving products must be removed from their shelves. With so many new products on offer for consumers, primary producers must be aware of, and be able to sell what is wanted when it is wanted. Because markets change so rapidly producers can not assume that what is being sold successfully this year will be demanded next year. Manipulating consumer preference / demand is one way that marketers can determine what produce will be bought. Consumer preference for a product can be changed / influenced by: Telling the consumers about the product (advertising) Telling them how to use it (in-store promotions, cooking programmes) Repackaging the basic product Changing the basic product (Research and development) Using the product in different ways (woollen oil booms) Making a new product altogether by processing the basic product (value added products such as Hash Browns) Technological changes have allowed products to altered to change The appearance of the product (grading machines) How the product is used (kiwifruit juice) How the product is presented (chilled meat) Altering products by breeding for specific characteristics is another method that can be used to satisfy consumer demand. Farmers can breed for resistance by culling susceptible stock. This allows them to sell the animals as organic when chemicals are not required to combat parasites. The affect of trends and fashions Demand for a product changes with fashions e.g. wood floors preferred to carpet - demand for wool goes down. Careful planning has to be made when trends or fashions are followed in long term production crops e.g. building up a dairy herd, planting an apple orchard. INPUTS have to be balanced against OUTPUTS over a period of time, e.g. lettuce production has a short production time – quick if low returns. Apples take longer – therefore careful research into consumer demand for varieties has to be considered. Exercises 1. Potatoes are sold fresh or processed. Name at least 5 ways that potatoes are processed. 2. For milk, identify at least 3 value added products. 3. Explain why these products are worth more money than the basic milk. 4. Identify how milk is sold i.e. how is the product advertised? 5. Describe the overall trend in consumer preference for milk over the last 5 years, 10 years and 20 years? Explain why there is that trend. Advertising Advertising is the main method of telling consumers about a product. If consumers want that product then demand increases. Advertising needs to have information and impact so that consumers’ interest is aroused. It needs to give details about the product or service, such as what it is, what it does, what it costs, where and when it is available, what back up services are available and how it compares with similar products. It must attract attention and hold that attention long enough for the message to sink in. Ways to do this are; size, colour, position on page or time on television, layout and emotive content. Promotions Promotions make the consumer aware of a product such as free sampling at the supermarket. This also creates demand for the product. Other examples are; Recipes and cooking demonstrations Price reductions to get consumers to try the product Free samples in the mail Free sampling in the supermarket Packaging Customers are demanding packaging that is strong, attractive and recyclable. However, the cost must be reasonable. The packaging must be well designed and present the product attractively to the wholesaler, retailer and the customer. Fruit has special needs, as the packaging must maintain fruit quality and extend the shelf life. It should; Protect the product from bruising and squashing Protect it from water loss Allow enough air movement to aid cooling, fumigation and gas exchange during respiration Reduce or prevent fruit to fruit contact to slow down the spread of fungi from infected fruit to clean ones Be easy to handle Packaging also must meet the requirements of the market and the standards that they set e.g. where it is produced. Research and development R and D focuses on other ways of using the product and this is turn leads to increase in demand. For example, wool has increased in demand due to; Developing a fine fibre to be used in garments e.g. Icebreaker For insulating houses instead of fibreglass Blending of wool and synthetic fibres to make covers for bus and car seats. This fibre wears longer than just wool, doesn’t ill and is more fire resistant than synthetic fibres. Spraying woollen upholstery fabrics with Scotchguard to make the fabric stain resistant. Size of market The bigger the market is, the bigger the demand. The New Zealand market is very small in world terms. New Zealand growers often aim to export to increase the size of their market, as the country has such a small population. Quality Closing the technology gaps New Zealand producers are required to guarantee the shelf life of their products and to consistently deliver fresh quality produce to markets. Continuing research into the development of disease resistant plants. Developing and accepting the idea of total quality management Producer organisations are recognising the need to develop and demand professionalism and competence by setting high standards for growers and exporters. Export requires very high quality products. Fresh products need to be of high quality. Processed product e.g. juicing apples, may be of second grade. Seasonality Seasonality is determined by; Seasons in New Zealand. In winter people eat fewer salad vegetables such as lettuce and tomatoes. They eat more cooked vegetables such as pumpkin and peas. Seasons in other countries. The northern hemisphere has the opposite seasons. When it is winter in New Zealand, it is summer over there. This influences the demand for seasonal products grown in New Zealand. Seasonal demands – e.g. poinsettias for Christmas, African violets for Mothers day, Roses for Valentines day. Niche Marketing A niche market is a very small market for highly specialised, highly priced products. Niche markets aim towards Finding a product that customers want Developing it precisely to their requirements maintaining a very high standard Customers in wealthy countries ask for a much wider range of goods. These customers are moving away from mass produced food and going for luxury, ready to eat natural products. Producer organisations Producer organisations can affect demand for a product in a number of ways. Establishment of new markets Improving market awareness Closing the technology gaps Developing the idea of total quality management Setting acceptable standards for growers and exporters Improving market awareness. Understanding the markets and market trends Knowing the distribution requirements Recognising the effects of established brands Products changed before sale Ensuring the product is what consumers want may mean it is changed before sale; Processed to form other products e.g. whey was a waste product, now used in protein concentrates, baby food, alcohol, and as a food ingredient. Have their size changed to fit niche market e.g. cabbages cut in half for people who are living alone. Changing the basic product to make a new range of products, called diversification. Usually done by further processing. E.g. sausages, pates, special cuts. Using the basic product as part of different products e.g. casein is used in ice cream. Making a new product. New technology provides opportunity for low grades of produce to be used. E.g. kiwifruit juice. Complements Complements are products that are used together, e.g. strawberries and cream. If the price for strawberries rises, the quantity demanded will fall. The effect of this on the demand for cream is a fall in the demand in cream. If the demand for a product increase, then the demand for its complement (if it has one) will also increase. Substitutes Substitutes are products that can be used in place of one another. For example, margarine instead of butter, marmite instead on vegemite. When the price of one of a pair of substitutes rises, people may change to the other substitute product. Problems in establishing new markets (increasing demand) New Zealand has 4 main problems when setting up new markets. Distance from markets due to geographical position. New Zealand is a long way from its markets so costly airfreight is needed to get fresh produce there quickly. Shipping by sea may take longer than the shelf life of the product even with controlled atmosphere. Lack of critical mass (supply volume). A lot of our producers are small scale businesses and so in a user pay environment, it is difficult for them to find money to fund research. Lack of market information. Due to many small scale businesses, very little market research is carried out, especially in consumer preference. This leads to products on the market that do not achieve customer acceptance. Market access. The quarantine requirements of importing countries often require the development of detailed, expensive disinfection programmes e.g. Japan and USA. Questions. Name 2 methods by which producer organisations can affect the demand of a product. Explain each one. Name 3 ways products can be changed to meet consumer demand. Why will the demand for cream go down if the price of strawberries rises? Explain 3 problems New Zealand has in establishing new markets. The Demand Curve The demand curve is a graph showing the relationship between the price and demand for a product. Normally there is an inverse relationship between the two variables which is the higher the price the lower the demand. Market (aggregate) demand is when everyone’s individual demands for a product are added together. Demand Curve 12 10 Price 8 6 4 2 0 1 2 3 4 5 6 Quantity 7 8 9 10 Drawing demand curves Price is always on the vertical axis. Quantity always goes on the horizontal axis. The scales on each axis must increase by uniform intervals. Each axis needs to be clearly labelled. The graph needs a suitable title. Each point should be plotted with a small cross (x). Points join with a smooth line. In some graphs this will be a straight line, in others a curve. It will always have the same slope, that is, downwards from left to right. Demand Curve 12 10 Price 8 6 4 2 0 1 2 3 4 5 6 Quantity 7 8 9 10 Drawing sketch graphs A sketch graph is a shorter way of showing a demand graph. Instead of giving actual figures for prices and quantities, a sketch to show what is expected to happen. Demand curves usually slope downwards from left to right. P stands for price Q stands for quantity D stands for demand Arrowheads show the direction of increase in price or quantity. The title includes the name of the product. D D Shift of the demand curve An advertising campaign will result in a change in demand. This change in demand causes a movement along the demand curve. If demand increases the shift is to the right, if demand decreases the shift is to the left. A demand curve will shift if there is a change in factors of demand such as changes in promotion, consumer preference, complements, substitutes, and size of the market. Demand The curve shifts to the left if the demand reduces which could happen if there were a disease scare. The curve shifts to the right if the demand increases possibly due to a seasonal effect. Demand Curve 12 10 Price 8 6 4 2 0 1 2 3 4 5 6 Quantity 7 8 9 10 Questions Name 3 situations that would cause the demand curve to move to the left. Does the move of the demand curve to the left, show an increase or a decrease in demand? Equilibrium or market price To understand the market place the two curves most be fitted together. This is the link between supply and the demand of a product and the price that it fetches. This is the reason why producers must know what product the consumer wants so they can supply it and therefore make a profit. In the market, buyers and sellers meet. Sellers come with the product they hope to sell at the best price they can get. Buyers come hoping to buy the product at the lowest price. Market or equilibrium price is the point at which both supply and demand for a product meet. There is a point on the graph of supply and demand where the supply and demand curves cross over. This is the market price. When this is achieved, trade takes place. The market price is derived from the point where the supply and demand curves for a product intersect. The market price may suit some buyers and seller, others may be disappointed. The Equilibrium Market Price 12 10 Price 8 6 4 2 0 1 2 3 4 5 6 Quantity 7 8 9 10 Market price changes Market prices change frequently due to changes in demand and supply. Both early season and increased demand after advertising, raise the market price so; Some growers try to grow products for the early season market Producer organisations promote and advertise their products. Seasonality – the price of seasonal fresh products are affected by supply. When these products are: In abundant supply prices are lower In scarce supply, prices are higher. Quality and price – many consumers will pay extra money for a better quality product. Since consumer demand is for better quality, more of a better quality product is bought than poorer quality. An increase in demand for a better quality products shifts the demand curve to the right and raises the market price. A higher price can increase growers’ returns. The actual return will depend on the amount sold multiplied by this high price. Consumer income level High income level = high demand of high quality Low income level = high demand lower quality Recession reduced overall income - reduced demand The quantity available: The smaller the quantity available the higher the price if the product is preferred by the consumer e.g. avocados in midwinter. This demand will be controlled by the size of the price. Returns Returns are the total income the producer receives from selling a product before any costs are deducted. Returns equal price paid multiplied by the amount of the supply. Returns = Price X Supply. Exchange Rates Every country has its own exchange rate – or in the case of the European Union a common currency. New Zealand, Australia and the United States have the $. Britain has the pound. Japan has the yen. Each currency has its own value. These values affect: The prices producers received for their product. The price producers will pay for items bought overseas that are used on the production process. Some countries have stronger currencies than others. Currencies are compared against other currencies to measure their worth to another country. Some countries may have their exchange rate fixed – this means that no matter what happens in the global market their currency will be at a set rate. Most industrial countries, including New Zealand have a floating exchange rate – the market of buyers and sellers sets the currency price. The value of the New Zealand dollar overseas affects the prices of New Zealand exports. A high New Zealand dollar. When the New Zealand dollar is valued highly against the US dollar then: Imports are cheaper into the country. This is because we can get more for our money. Exporters don’t get as much money as the people who buy their products can not buy as much, so they don’t. A low New Zealand Dollar When the New Zealand dollar is valued low against the US dollar then: Imports are more expensive to get into the country. This is because we get less for our money. Exporters earn more as the people who buy their products can buy more, so they do. What this means for farmers Fertiliser, tractors and other machinery imported into the country cost less so they could buy more. They don’t make as much money as their products (wool etc.) aren’t worth as much. Overall farmers prefer to have a low NZ dollar. Foreign Exchange Market The buying and selling of a particular currency is carried out through the foreign exchange market. This market operates the same as any other market with a demand and supply for currency determining the price e.g. 1NZD = 0.92AUD. This means that $1 New Zealand will cost 92 cents Australian to buy OR $1 will buy 92 cents Australian. There is a need for a foreign exchange market because different countries have different currencies and in order to make trade between countries easier it is necessary to establish the value of each currency in comparison to another. Basics of Currency Conversion If $1NZ = US0.50 Converting a foreign price e.g. $20,000 US to New Zealand dollar value requires the foreign price to be divided by the exchange rate. $20 000US / 0.5 = $40,000 New Zealand Converting a New Zealand price e.g. $40,000 NZ to a foreign dollar value requires the NZ price to be multiplied by the exchange rate. $40 000NZ x 0.5 = $20,000 US Floating (flexible) exchange rate New Zealand has a floating (flexible) exchange rate, thus the price of New Zealand currency fluctuates on a day to day basis as determined by the forces of demand and supply. A change in demand or a change in supply will change the exchange rate i.e. the price of New Zealand currency will change. Exchange Rate Appreciation and Depreciation Appreciation When the exchange rate in New Zealand appreciates it means the price of one New Zealand dollar just got more expensive in terms of the overseas currency that will be required to buy it (not good for exporters). It also means one New Zealand dollar will buy more foreign currency (good for importers). Depreciation of the Exchange Rate When the exchange rate in New Zealand depreciates it means the price of one New Zealand dollar just got less expensive/ cheaper in terms of the overseas currency that will be required to buy it (good for exporters). It also means one New Zealand dollar will buy less foreign currency (NOT good for importers). Supply and Market Trends A trend is a change that has occurred over time. Supply trends Producers and producer organisations keep records of the supply of various products. They can use this information to try and predict what will happen in the future. Examples are; price received and quantity supplied. Graphs of this information often show trends or patterns. The trend may show prices or supply decreasing for one product, or prices or supply increasing for another product. Long term trends Trends shown in price, volume of consumption or production etc. over a period of at least five years. Factors affecting long term trends = attributes, seasonality, quantity available, quality supplied / required, consumer preference, reliability of supply, price, trends, fashions, market regulation / manipulation. Zespri Global Supply (ZGS). Italy • France • Japan • South Korea • Australia Short term trends Trends shown in price, volume of consumption, or production etc. over a period of one year or season. Factors affecting short term trends = climate, attributes, production practices, timing of production, timing of supply to export markets, specific windows of supply & price. Market Trends Market trends = is a historical change in demand for a product that allows market forecasts to be made to allow suppliers to plan ahead. Market trends are useful for predicting possible changes in demand for primary products. If there has been a change in demand for a product it may be useful to try and identify why the change has occurred. This can be particularly helpful if there has been a decrease in the demand for a product, as it may indicate possible future trends for other end products or for new products. Identifying possible reasons for market trends. Changes in demand may be the result of a wide variety of reasons such as; New products on the market. Advertising and promotions Changes in technology e.g. production of synthetic fibres replacing wool. Changes in income distribution e.g. if income increases people may spend more money on more expensive foods. Substitute products available e.g. potatoes can be replaced with rice and pasta. Changes in fashion or taste e.g. people eating more healthy foods. Changes in lifestyle e.g. busy people eat more fast foods.