chapter3

Food Production and Marketing: 

Food Production and Marketing AGEC 220 Chapter 3

Chapter Preview: 

Chapter Preview How Does Agriculture Affect the Food Marketing System and Vice-Versa? What Marketing Decisions Do Farmers Make? Should They Make? What Are the Farm Marketing Problems? How Can Farmers Improve Their Marketing?

Farm Marketing Maxims: 

Farm Marketing Maxims Consumers Don’t Buy Farm Commodities, They Buy Food Market First, Then Produce the Product Food Marketing Doesn’t Begin at the Farm Gate

Agriculture Today: 

Agriculture Today 2% of Americans live on farms Agr. = 1.5% of GDP Farm household income=non-farm incomes 20% of farms produce 80% of output U.S. farmers compete in world markets

Farmers Markets: 

FARMER Input (Supply) Markets Output (Product) Markets BUYER SELLER Farmers Markets

Slide6: 

Factors Affecting Farmers’ Decisions FARMERS DECISIONS Consumer Preferences Technology Resources Government Policies Global Markets Competitive Marketing Strategies

The Two Food Markets: 

The Two Food Markets COMMODITY MARKETS Standardized Products Mass Marketing Lo/Med. Value-Added Price Competition Little Promotion Low Buyer Loyalty Sales Emphasis FINISHED PRODUCT MARKETS Differentiated Products Target Marketing High Value-Added Non-Price Competition Heavy Promotion Brand Loyalty Marketing Emphasis PROFITS?

The Farm Marketing Challenge: 

The Farm Marketing Challenge Farm Commodities Food Products Branded Foods

Farming and MarketingInterrelationships: 

Farming and Marketing Interrelationships Production Agriculture Food Marketing Firms Consumers and Global Markets

Changes In Farming andFarm Marketing (p. 59 Text): 

Changes In Farming and Farm Marketing (p. 59 Text) Old Concept Family Farm Tradition Art Staple Products Etc. New Concept Industrialized Farm Innovation Science Specialty Products Value-Added

How Does the MarketPlaceInfluence Farmers?: 

How Does the MarketPlace Influence Farmers? Demand for Farm Products Supply and Quality Control Market Stability Market Efficiency and Farm Prices Size of Farms

Structure of U.S. Agriculture: 

Structure of U.S. Agriculture Land-Based (47% of America farmed) 2 Million Farms Falling Numbers, Larger Sizes 27% of Largest Farms Produce 75% of Products (125,000 farms produce more than one-half of agr. Output) 90% Individual, 6% Partnerships, 4% Corporate (Family Farms?) Enterprise Specialization

Fig. 3-1Uses of U.S. Land: 

Fig. 3-1 Uses of U.S. Land Recreation, Roads Crops Grass, Range Urban, Desert, Swamp Forest Pasture Grass and Rangeland

How Farm Structure Affects Food Marketing: 

How Farm Structure Affects Food Marketing Large Numbers of Small Producers Have Limited Market Power Expensive to Collect and Market Products Family Farmer More Interested in Production Than Marketing (Changing) Small Farmers Need Different Markets Than Large Farmers Surplus Production

Agricultural ProductCharacteristics: 

Agricultural Product Characteristics Necessity of Life; Many Choices Biological, Perishable Raw Products: Need Value-Added Storable Bulky Variable Quality World Competition

Characteristics of Agricultural Production: 

Characteristics of Agricultural Production Geographic Specialization Seasonality, Variability of Output Capital Intensive, Mechanized Dependent on Off-Farm Supplies Technology-Driven

Slide21: 

Productivity Growth in the Food Industry, 1980-92 Annual Percent Change

An Efficiency Prediction: 

An Efficiency Prediction Someday We Will Produce The World’s Food Supply In a Flower Pot But, There Will Still Be a Marketing Problem

Is the Food Industry Different?: 

Is the Food Industry Different? Large Numbers of Small Producers? Essential Product? High Risk Industry, Perishable Products? Thesis: Farming is losing its distinctive characteristics and is more closely resembling the rest of the economy

Farmers’ Marketing Decisions and Strategies: 

Farmers’ Marketing Decisions and Strategies What to Produce and Sell? When, Where, How to Sell? Which Functions to Perform? How to Expand Markets? How to Improve Farm Prices? How to Form Strategic Alliances?

Evolution of Farm Marketing: 

Evolution of Farm Marketing Subsistence Farming Self Sufficiency Farming Marketable Surplus Produce First, Then Find Market Produce to Market Wants

Two Ways to ProfitIn Agriculture: 

Two Ways to Profit In Agriculture Low Value-Added commodities low-cost/high efficicieny price taking High Value-Added integration further processing high service high marketing involvement Branding

Farmer Marketing Alternatives Fig. 3-7: 

Farmer Marketing Alternatives Fig. 3-7 Sales Alternatives Storage Alternatives Processing Alternatives Transport Alternatives Pricing Alternatives

Factors Affecting Farmers’Marketing Choices: 

Factors Affecting Farmers’ Marketing Choices Availability of Alternatives Experience Knowledge Size Costs of Alternatives Attitudes Toward Risk

Should Farmers MoveInto Downstream Markets?: 

Should Farmers Move Into Downstream Markets? YES Increased Share of Consumer Food $ Greater Influence on Price Increases Competition Control of Own Destiny NO Lack Expertise Detracts from Farming Lack of Capital Lack Economies of Size (Coops?) Doesn’t Eliminate Functions

Why Don’t Farmers PerformMore Marketing Functions?: 

Why Don’t Farmers Perform More Marketing Functions? They lack the skills and knowledge? They are lazy? They lack the capital? They prefer to sell low value-added products? They like farming better? They would sacrifice gains from specialization?

Farmers’ Marketing Problems: 

Farmers’ Marketing Problems Difficult to Control Supply Price Takers (low bargaining power) Little Influence on Demand Difficult to Organize Farmers Cost-Price Squeeze Declining Pricing Efficiency

Two Approaches to Improving Farm Prices: 

Two Approaches to Improving Farm Prices Extract Value: Farmers attempt to improve prices and incomes through increased market power or government assistance Add Value: Farmers attempt to increase prices and returns through improved quality, service, innovation, efficiency

Solving the Farm Marketing Problem: 

Solving the Farm Marketing Problem Farm Marketing Problem Value-Adding: Branding Specialty Products Perform More Functions Quality Differentiation Supply Control: Govt. Programs Coops, Marketing Orders Restricted Entry Demand Expansion: Advert., Promotion Exports Public Food Programs Cost Reduction: Supply Control New Technology

Can Farmers Beat the Market?: 

Can Farmers Beat the Market? Can some farmers get a better price than others (due to savy, information, skill, not luck)? Yes, say some: Better information = Better Price Some say they do better than others No, say others: Markets are efficient and prices reflect all information at all times The market doesn’t leave easy money on the table Higher prices accompany higher risk

The Free Rider Problem: 

The Free Rider Problem Some Members of the Group Benefit from a Group Effort But Don’t Pay Their Fair Share of Costs Examples: Supply Control Programs Generic Advertising Programs Bargaining Associations

Free Riders: 

Free Riders Group Activity (e.g. promoting farm products) Supporters of Program Pay All Producers Benefit Free Riders Benefit Without Paying Everyone Wants to be a Free Rider Group Effort Fails

Solutions to Free Riders: 

Solutions to Free Riders Mandatory Participation (govt. enforced) Moral Persuasion (pay your share!) Deny Benefits to Free Riders (e.g. by branding)

Consumers vs. FarmersConsumer Sovereignty and GMOs: 

Consumers vs. Farmers Consumer Sovereignty and GMOs GMO: Genetically Modified Organisms Examples: bt Corn, Roundup Ready Soybeans Europeans first refused them. Now want segregation and labeling Science says “no difference” U.S. Sees this as trade barrier, unnecessary costs, and a bother Sept 1999, ADM agrees to segregate Is the consumer sovereign?