Download Lecture __. The Agribusiness System

Lecture 10
The Agribusiness System
Objectives
• The “agribusiness system” approach to
marketing
• Size and scope of agribusiness
• Various sectors
• Marketing in the economy
• Functions of marketing
• Marketing in agribusiness firms
History
• What is agriculture to most people? Farming, ranching,
fishing??
• This was true until the early 1960s when “agribusiness”
evolved into a complex system reaching well beyond the
farm
• The big picture included all things needed to bring food to
the consumer.
• As it turned out aquaculture shares many similarities to
traditional agribusiness.
Agribusiness History
• The agribusiness system includes many facets:
• Not only production (e.g., farmers, hatchery
managers), also
• Organizations which provide inputs (e.g., fry,
chemicals, feed)
– Processors the output (e.g., processing plants)
– Manufacturers (e.g., shrimp  microwavable products)
– Transporters/Sellers/Brokers (e.g., retail grocery
stores, seafood wholesalers, etc.)
Agribusiness: Evolution
• 1870’s: self-sufficient farms!
• War was profitable even back then too! Increased produce
prices, stimulated production (Recall: demand and supply).
• Mechanization was developed largely due to labor
shortages.
• Crop production became a focus of farmers. (They started
purchasing inputs; this is where aquaculture is today!)
• Much of the manufacturing and processing was relocated off
the farm to become businesses themselves.
• Preservation of raw products was also improved.
• This made food more convenient to consumers.
The Agribusiness System
Aquaculture
Input Sector
Production
Sector
ProcessingManufactoring
Sector
Agribusiness System
Note: the success of each part depends upon the proper functioning
of the other two!
How large is it??
• Agribusiness is largest sector in the U.S. economy:
>11% of all goods, >16% employment
• Production systems occupy nearly half of all land,
valued at $1 trillion US.
• Aside from food production, why does this matter?
• Again, self-sufficiency: (science, government,
education); separates developed from developing
economies
• Point of interest: processing is the largest subsector! (Preservation of goods perfected??)
The Input Subsector
• Provides farmers with all things needed for production:
feed, fry, credit, equipment, fuel, chemicals
• Total level of inputs remains stagnant since WWII; but,
type of inputs has varied greatly. (examples?)
• If labor costs increase, you typically see a shift towards
increased purchase of inputs (Since 1960, farm labor has
decreased 50%!) (why?)
• Purchase of more inputs actually facilitates more production.
The Input Subsector
• Use/efficiency of energy usage has also
changed.
• Relatively few input businesses compared to
production or processing (look at feed
manufacturing vs. the number of farms!)
• Why is this trend observed??
The Production Subsector
• Larger farms in all areas (including aqua-)!
• Corporate farms
• New technologies have resulted in increased
specialization of production
– genetically altered animals
– specific pathogen-free stocks (big deal in aqua-)
• What does this mean? In a word...
• Stability in that aquaculture production is
becoming more diversified
The Production Subsector
• Specialization also allows for increased production
efficiency (telltale sign: increased production in face
of decreased or constant levels of input)
• Another blast from the past: production economics
– production costs increase every year due to increase input
cost
– but cost of inputs is not related to commodity prices (e.g.,
shrimp)
– when commodity prices drop, gross farm income falls,
but amount spent on inputs doesn’t (the great squeeze!)
The Production Subsector
• Two sizes of farms: Large (economies of scale*) and
small (no economy of scale)
• Large farms: new technologies (aeration, telemetry,
genetically-improved strains)
• Small farms can also, however: sell something that
commands a high price! ($34/lbs. pompano!)
• Who knows what we can get for pen-raised grouper off
Florida coast?? $10, $12/lbs, $34??
•
*The increase in efficiency of production as the number of goods being produced
increases. Typically, a company that achieves economies of scale lowers the average cost
per unit through increased production since fixed costs are shared over an increased
number of goods.
The Processing-Manufacturing
Subsector
• Includes all business that turn raw materials into finished (or
partially-finished) products
• In aquaculture, mostly done by processors
• Also includes packaging, distribution, and sales, places and
forms desired by consumers (Marketing bill?)
• Marketing bill represents 70% of total amount spent by
consumers on food!!!
The Processing-Manufacturing
Subsector
• Firms in this sector are
very large (again,
gathering economies of
scale); very responsive to
consumer tastes/
preferences
• Examples: ADM (grain
processing), ZapataHaynie (fish meal),
Tyson Foods (chicken or
animal feeds)
Packaging
Transportation
Before-tax profits
Fuel and power
Depreciation
Advertising
Rent
Net interest
Repairs
Other
Labor
The Marketing Bill: What
are you paying for?
Big Companies: How do they
work?
• Obviously, aquaculture depends flexibility and
diversification for success, not isolation.
• Many large companies have divisions in other
parts of the agribusiness system
• Example: Cargill, Inc., one of the largest grain
traders in the world, also largest soybean processor,
flour miller, feed manufacturer, seed producer, etc.!!!
Part 2: Role of Marketing in
the Agribusiness System
• Marketing mission revealed!: not to rip-off people (Hard to
believe, esp. after buying a new car!!!)
• Lowers prices/increase availability
1) bridge between producers and consumers
2) helps producers understand consumer needs
3) helps producers decide what to produce
4) helps consumers know what products are available and at what prices
• Bottom Line: Consumer satisfaction!!, higher profits for
producers! Everyone wins!!
• Extension of the business world?? Maybe!
Conflicting Needs of Producers
and Consumers
Producers seek to
Consumers seek to
Maximize long-term profits
Maximize the happiness they
receive from the products they
consume with their limited
incomes
Buy small quantities of many
products
Sell large quantities of a few
products
Nine Marketing Functions and
Barriers to Consumer Satisfaction
• buying/selling: required for product
exchange, exchange of legal title between
producer and consumer
• storage: keeps product fresh between
production and final sale
• transportation: overcomes separation of
space by moving product from site of
production to where it is sold (globalization)
Marketing Functions
• processing (value adding): changing the form of a
commodity or raw product to one that has more
convenience, better taste.)
• grades/standards: assures the consumer they are
getting what they think they’re purchasing
• financing: providing the funds necessary to pay for
the production and marketing of a product during
the time period the producer must wait to receive
payment for a sale
Marketing Functions
• risk-taking: assuming the risk of loss between the
time of purchase and sale
• market information: includes methods and
information which is communicated about markets,
market prices, etc.
• All of the above functions are usually
performed by “middlemen” (added step: has
a tendency to increase prices)
Four Utilities of Marketing
• Another way to describe marketing is to look
at the performance of the previous
marketing functions as a way of adding
value to products.
• Otherwise, we wouldn’t need “middlemen”?
• Adding value = increased consumer
happiness or “utility”
• Utilities: form, place, time, possession
Four Utilities of Marketing
• form: to process the product into a form
desired or needed by the consumer (fish in the
round vs. nuggets)
• place: transporting the product to a location
desired by the consumer (shipping,
convenience= big deal!!!)
• time: storage
• possession: gaining ownership so it can be
legally used
Evaluating Performance of the
Marketing System
• How well does the marketing system meet the needs of
consumers?: it has to be measured
• Two criteria:
 efficiency: how well goods and services flow from businesses to
consumers
 fairness: how the marketing system meets the needs of the
consumers
• When you buy something, you are saying that you like the
price, the goods/services, etc.?
• Rating of the system is indirect through voting and has led
to the rise of consumerism.
Market Performance Evaluation Criteria
• Market Structure
– number and size of firms in the market (no monopolies)
– barriers to market entry/exit (not prevented by other firms)
– degree of product and price competition (allows increased quality)
• Conduct of Firms in the Market
–
–
–
–
firms compete via price (sell at lower price)
no unlawful cooperation between firms (price fixing-this still happends)
truthful product claims (better? Show me the data!)
meaningful product differences (Are different models different?)
• Market Performance
– optimal output available at minimal price (appropriate tech, conserve resources)
– reasonable levels of profits (good firms deserve this)
– encouragement of innovation (products should be improved over time, how is
this possible with seafood??)
– reasonable levels of investment (firms support in industry, new tech, higher
efficiency, devleopment of company)
Role of Marketing in
Agribusiness Firms
• We’ve been talking about the role of the marketing
system in a free market economy.
• We’ll now bring this down to the “firm” level
• What is the role of marketing in the operation of
agribusiness firms?
• Introduce basic principles
Five Approaches to Marketing
• How should a firm approach its market?
• Approaches:
production
product
selling
marketing
societal marketing
• Each succeeding approach represents a higher level
of marketing and management skill
Production Approach
• Max production/lowest cost
– works in early stages of market development
REM: demand exceeds supply
– maximum output/unit input
– producers can become insensitive to needs of
consumers (uh oh!)
– only trying to find ways to lower the cost of
production and transport (feed industry)
Product Approach
• High-quality product; “Build it and they will come?
(Japanese car manufacturers.)
– Another inwardly-looking approach to marketing
– Hopefully consumers will recognize this “quality” and
pay a premium price (How do we do this with seafood?)
– Caveat: producer still making the product(s) he/she
wants, not consumer need-oriented
Selling Approach
• Products need a strong selling effort for
sales:
– if left alone, consumers won’t buy enough of the
product that’s already been produced
– result: producers try to convince consumers that
their products are really the best
– setting: supply is greater than demand
– Problem: assumes that with enough pressure, or
correct language, anything can be sold (selling an
eskimo ice cubes)
Marketing Approach
• Produce a product that fills a consumer need,
offer it at the correct price, make it available, and
promote it properly (What a concept!)
– major advance in strategy
– moves away from selling to meeting demands
– must truly understand users of products, not because
of superior technology
– appropriate for highly competitive markets where
production capacity exceeds demand
Societal Marketing Approach
• Includes same items as Marketing Approach,
but includes both consumers’ and society’s
well-being
– firms and their products often introduce societal
backlashes (e.g., increased garbage)
– not practiced by many, often not needed if
product is well thought out
– often good just from a PR standpoint
Final Thoughts...
The marketing idea is the driving force for the entire
firm and gives it direction and purpose.
The purpose is meeting the needs of consumers and
their satisfaction.
Meeting these goals = profit!