Lecture 7

Marketing of Agricultural Commodities

Required Text: Chapters 3 and 13
Agribusiness marketing can be categorized into two
broad categories
Marketing of Agricultural Commodities
Production, handling and sales of farm products
Marketing of Food Products
Commodity procurement
Processing
Wholesaling
Retailing

Marketing of Agricultural Commodities
Marketing of Agricultural Commodities
Much of the U.S. agricultural production fits relatively
well with the perfect competition model
There are many relatively small producers (price takers in
the market)
Homogeneous commodities (not much product
differentiation) cannot be promoted by individual producers
free entry and exit (easy to begin or cease production)
Thus marketing of agricultural commodities involves
decision on what and how much to produce and how
to market the production.
Marketing of Agricultural Commodities
Producer Decisions: Producers must decide what and
how much to produce and how to market the production.
Which commodity to produce and how much
A particular farmers choice of which commodity to produce is
related to factors such as available land and soil quality,
production technology, climate, variable inputs (seeds, fertilizer,
water, and labor), investment capital, economies of size,
government programs, expected input and output prices, and
risks (price, production, and financial risks)
Special consideration: Biological constraints - biological lags
and perishability of the output, distance to the market, and
available marketing channels.

Marketing of Agricultural Commodities
Which commodity to produce and how much
A particular farmers choice of which commodity to produce is
related to factors such as available land and soil quality,
production technology, climate, variable inputs (seeds, fertilizer,
water, and labor), investment capital, economies of size,
government programs, expected input and output prices, and
risks (price, production, and financial risks)
Special consideration: Biological constraints - biological lags
and perishability of the output, distance to the market, and
available marketing channels.

Marketing of Agricultural Commodities
When and how to market the agricultural commodity
Storage available storage facility, storage costs
Identifying the location of the market distance, marketing
channels
Transportation truck lines, railroads, barges, and ocean freight
Marketing alternatives are limited for agricultural
commodities
Marketing by farmer groups
Risk management plays a greater role in the overall
profitability of agricultural commodities
Marketing of Agricultural Commodities
Marketing by Farmer Groups
By acting jointly, farmers can often benefit economically by
working together in groups
Generally, groups of producers seek one or more of the following
objectives
To improve commodity demand
To regulate supplies and qualities more in line with demand
To improve competitiveness and efficiency in the marketing
channel
To gain more channel control and leadership for farmers
Generic promotion, marketing cooperatives, and bargaining
associations

Marketing of Agricultural Commodities
Marketing by Farmer Groups
Group promotion of agricultural commodities
Generic promotion is the promotion of a particular commodity
(rather than a brand-name product) financed collectively by
producers of the commodity.
Promotion includes advertising and numerous other activities
designed to increase the demand of the commodity.
The purpose of generic promotion is to
increase demand to raise the price of the commodity, or
increase the volume that will clear the market at a given price
No single producer can afford to go it alone in commodity
promotion because the individual benefits will certainly be less
than costs.

Marketing of Agricultural Commodities
Marketing by Farmer Groups
Assume that D
1
and S
1
are the
current demand for and short run
supply of a commodity.
Generic promotion increases
demand to D
2
raising price.
If the position of D
2
is maintained in
the long-run through promotion, the
producers will increase supply to S
2
.
Thus, in the long-run, price declines
to the level determined by the
intersection of D
2,
S
2,
and LRS
.
The long-run price may still be
higher than the initial price.
Price
Quantity
D
1
D
2
LRS

S
1
S
2
Marketing of Agricultural Commodities
Marketing by Farmer Groups
An effective program for generic promotion should do the following
Adopt clear, measurable objectives
The turkey industry set out to promote year-round consumption
Develop a strategy that fits the commodity, the marketing system,
and buyers attitude
The turkey industry developed and promoted new products parts and
boneless portions for non-holiday seasons.
The grain sorghum industry contacted feed grain purchasers abroad
and convinced them to try U.S. sorghum
To offset the negative image, the pork industry promoted the other
white meat and invested in education, research, and legal actions
The Florida citrus industry developed an aggressive promotion program
and distributed nearly 2 billion consumer coupons for frozen
concentrated orange juice.

Marketing of Agricultural Commodities
Marketing by Farmer Groups
When advertising is a part of the adopted strategy, use a good
professional advertising agency
The Got milk campaign has been an effective campaign of the milk
industry
Obtain and spend sufficient money to achieve a high probability of
obtaining the objectives
Small expenditures are often a total waste too little to capture the
attention of potential buyers
Set up a program to evaluate results (economic evaluation)
The costs of a promotional campaign are easily measurable.
The benefits are not so easily measurable requires sophistication
Did the demand curve move to the right or become less elastic due
to promotion?



Marketing of Agricultural Commodities
Marketing Cooperatives
Marketing Cooperatives
A cooperative (coop) is a special type of business firm a
user-owned and controlled business from which benefits
are derived and distributed equitably on the basis of use.
The following three principles are currently the most
important for agricultural coops:
User ownership ownership by coop member-patrons
User control democratic member control
User benefits distribute benefits to its users equitably
on the basis of use

Marketing of Agricultural Commodities
Marketing Cooperatives
Goals of Marketing Cooperatives
To provide the most efficient marketing outlet
To expand demand for their members commodities
To provide better coordination between production and
consumption
To provide more dependable market outlets, including
sometimes the only remaining outlet
To achieve channel leadership, including vertical integration, and
even market power for the members
Marketing of Agricultural Commodities
Marketing Cooperatives
Traditional coop principles
Open membership
No supply controls
Member profit retained as growth capital
No secondary market for equity
Criteria for successful marketing coops
Increased demand at the farm level for the marketed
commodity
Increased assurance of dependable and efficient market
access with some power and influence in the marketing
channel

Marketing of Agricultural Commodities
Marketing Cooperatives
Virtually all agricultural coops were organized as small local
businesses grain elevator, farm supplies store, packing shed for
shipping fresh fruits, etc.
Over time many coops have failed while others have grown.
Currently, the large coops are known as federated, centralized, and
a hybrid mixture of the two.
Federated Cooperative cooperative or cooperatives local coops
formed a second level coop to perform various marketing functions
such as processing distribution, advertising, and merchandising.
Local coops are members of the federated coop
Farmers exercise their control of the federation through a board
of directors elected through the local coops
Example: Floridas Natural Growers (part of Citrus World, Inc.)



Marketing of Agricultural Commodities
Marketing Cooperatives
Centralized cooperative formed as a merger of numerous local
cooperatives into one regional cooperative the coops total
operations are owned and controlled as a unit
Farmer members vote directly to elect directors
Farmer control seems to be more direct and democratic
Appear to have been more successful than federated coops
Example: Dairy Farmers of America (DFA) founded in 1998
Hybrid Cooperative combination of the previous two organizational
types a federated coop may rescue some local units that are in
financial trouble by purchasing their assets, thus moving from a
federated toward a centralized organization.
The degree of farmers democratic control may depend more on
how committed the top management is to farmers objectives

Marketing of Agricultural Commodities
Marketing Cooperatives
Special problems of marketing cooperatives
Raising capital the biggest problem of marketing cooperatives
Responsibility to patron-owners conflict of interests
Directors vs. managers directors direct but not manage
Competition with other coops at both local and regional levels
Organizational variation and innovations
Midwestern/Great Plains Grain and Livestock
Performs a simple assembly-and-sales function and does little or no
processing
Capital requirements are low relative to sales
Membership is open and may be obtained automatically by selling
crops or livestock to the coop
Returns from coop savings provide the equity capital

Marketing of Agricultural Commodities
Marketing Cooperatives
Organizational variation and innovations
American Crystal Sugar
Started in 1973 with 1400 members, an investment of $86 million in
six sugar bit factories, $ 20 million of equity capital, and a market
share of 13% of the U.S. sugar beet market
The coop acquired the American Crystal Sugar Company
Grower-member provided initial capital equal to $100 per acre of
beets grown and signed five-year contract with the coop to market
all of their beets through it
West Coast Fruit and Vegetable Processing Coops
High fixed costs in orchards and harvesting machinery - typically
have high capital requirements relative to sales
Raise capital through sales retains compared to Midwestern grain
producers, the financial commitment is much higher for the fruit and
vegetable growers


Marketing of Agricultural Commodities
Marketing by Farmer Groups
New generation coop principles
Closed membership
Upfront equity position by members
Delivery rights in proportion to equity positions
Transferability of delivery rights and the existence of a
secondary market for delivery rights
The possibility of immediate returns of profits to members
Examples ethanol plants built in the late 1990s and early
twenty-first century.
Marketing of Agricultural Commodities
Bargaining Associations
A farmers bargaining association is a coop that represents its
members by collectively negotiating terms of trade but does not
engage in the physical aspects of marketing such as assembly,
processing, and distributions.
It is not a cartel that controls supply of a commodity and raises farm
price to a revenue maximizing level free rider problem.
Generally, bargaining associations operate in contractual markets,
engaging in both marketing and production contracts.
The function of a bargaining association to bargain price and non-
price terms of trade can be performed only when a buyer is willing to
negotiate with it.
Buyers usually consent to bargain when they are faced by a united
group representing a large segment of their supplies the bargaining
association has more clout when it clearly has control of the commodity

Marketing of Agricultural Commodities
Bargaining Associations
Structure of Bargaining Associations
Membership in bargaining associations, like other coops, is voluntary,
but once undertaken it involves definite rights and duties.
Capital requirements and operating expenses are small.
Bargaining associations are generally financed by deductions from crop
receipts, although some groups receive dues from growers.
Most bargaining associations pool their marketing so that each member
receives the average price of a particular grade of the crop.
Bargaining associations have been most active in dairy, fruits,
vegetables, sugar beets, and other specialty crops.
Functions of Bargaining Associations
Discovering price and other non-price terms of trade
Non-price terms of trade may include harvest scheduling, harvesting
techniques, determination of grades (quality), delivery quotas, the
provision of shipping containers, hauling allowances, and costs.

Marketing of Agricultural Commodities
Bargaining Associations
Bargaining Accomplishments
Group bargaining involves the strategic use of maneuvers, offers
and counter offers, and threats and counter threats.
Net prices are a little higher on the average than they would
have been without bargaining.
Prices are likely to be more stable from year to year.
Prices may be more equitable among producers within the
group.
Significant gains in efficiency may be obtained through group
negotiations
Individual growers gain security and confidence that they will be
treated like all other growers.
Marketing of Agricultural Commodities
Bargaining Associations
Fruits and Vegetable Bargaining
The California Canning Peach Association (1922) is one of the
oldest bargaining association - canning peaches are a highly
perishable commodity with only one market canneries.
It takes ownership of the commodity and then pools returns to
members.
The entire peach canning industry is in California, and the
association handles a slight majority of the states production.
The association seeks to negotiate all contract terms before
harvest but, negotiations are sometimes prolonged to a much
later date.