CHAPTER ONE Basic principles of agribusiness marketing

Introduction The word agriculture indicates ploughing, a field, and planting seeds, harvesting a crop, milking cows, or feeding livestock. Until recently, this was a fairly accurate picture. But today, agriculture is radically different. Agriculture has evolved into agribusiness and has become a vast and a complex system that reaches far beyond the farm to include all those who are involved in bringing food and fibre to consumers. Agribusiness system has undergone a rapid transformation as new industries evolved and traditional farming operations grew larger and more specialised. Agribusiness includes not only those that farm the land, but also the people and firms that provide the inputs (e.g. seeds, chemicals, and credit); process the output (e.g. milk, grain, and meat); manufacture the food products (e.g. ice cream, bread, and breakfast cereals); and transport and sell the food products (e.g. restaurants and supermarkets) to consumers. Agribusiness system has undergone a rapid transformation as new industries evolved and traditional farming operations grew larger and more specialised. The transformation did not happen overnight, but came slowly as a response to a variety of forces. Knowing something about how agribusiness came about makes it easier to understand how this system operates today and how it is likely to change in the future. Evolution of Agribusiness In the late 1800s, agriculture being the major venture, it was easy to become a farmer, but productivity was low. As a consequence most farmers were nearly totally self sufficient. They produced most of the inputs they needed for production, such as seed, draft animals, feed and simple farm equipment. Farm families processed the commodities they grew to make their own food and clothing. They consumed or used just about everything they produced. A few agricultural products made their way into the export market and were sold to buyers in other countries. Overtime, farmers found it increasingly profitable to concentrate on production and began to purchase inputs they formerly made themselves. This trend enabled others to build business that focused on meeting the need for inputs used in production agriculture such as seeds, fencing, machinery, and chemicals and so on. These farms evolved into the industries that

make up the agricultural input sector. Input farms are a major part of agribusiness and produce variety of technologically based products that account for approximately 75% of all the inputs used in agricultural production. At the same time the agricultural input sector was evolving, a similar evolution was taking place as commodity processing and food manufacturing moved off the farm. The form of most commodities were changed to make them more useful and convenient for consumers who are willing to pay extra for the convenience of buying the processed commodity instead of the raw agricultural commodity. During the same period technological advance were being made in food preservation methods. The perishable nature of most agricultural commodities meant that they were available only at harvest. Advance in food processing have made it possible to get those commodities all throughout the year. These farms that meet the consumers demand for greater processing and convenience also constitute a major part of agribusiness and are referred to as the processing manufacturing sector. The term agribusiness was first introduced by Davis and Goldberg in 1957. It represents the three part system made up of The agricultural input sector The production sector The processing-manufacturing sector

To capture the full meaning of the term agribusiness it is important to visualise these three sectors as interrelated. The success of each part depends heavily on the proper functioning of the other two.

Agricultural input sector

Production sector

Processingmanufacturing sector

Input sector This sector is a large part of agribusiness. It provides farmers and ranchers with the feed, seed, credit, machinery, fuel, chemicals, and so forth they need to operate. Improvements in the quality of purchased inputs have been a large source of efficiency gains for the entire system. This sector provides 75% of the input used in production agriculture. The trend towards the use of more purchased input will probably continue and should be an ongoing source of productivity gains for production agriculture. Production sector The middle part of agribusiness is the production sector. In the recent years, producers have specialised into one or a few crops or types of livestock in order to be able to increase the efficiency of their operations and become production experts. The agricultural production sector has been the cause of much of the change in agribusiness. They, in turn, have been changed by development in other areas of agribusiness, particularly in technology. Processing-manufacturing sector The sector includes all the individuals and firms that process agricultural commodities (e.g. turn wheat into flour), manufacture food products (e.g. turn eggs, and other inputs into bread) and distribute and retail food products to the consumer. This sector employs millions of people in a variety of businesses ranging from grain elevators to fruit and vegetableprocessing plants to supermarkets to fast food restaurants. Some of the nations largest businesses are included in this section of agribusiness. The businesses in this sector acquire raw agricultural commodities from farmers and ranchers, and then process them into food products that are sold at times, at places, and in forms that are desired by consumers. The cost of these activities is called the marketing bill. The firms in this sector have grown to capture the economic advantages available from large-scale operations. Although the sector has a few large firms, they compete fiercely among themselves and are very responsive to the needs of the markets. Definitions of agribusiness There are many different definitions of agribusiness. According to Merriam- Websters collegiate dictionary, agribusiness agribusiness is an industry engaged in the production operations of a farm, the manufacture and distribution of farm commodities

John Davis and Ray Goldberg (1957), in their early research on agribusiness, defined it as all operations involved in the manufacture and distribution of farm suppliers; processing, and distribution of the resulting commodities and items. A similar definition of agribusiness describes it as any profit-motivated enterprise that involves providing agricultural supplies and/or the processing, marketing, transporting and distributing of agricultural materials and consumer products. Ewell Roy (1980) defined agribusiness as the coordinating science of supplying agricultural production inputs and subsequently producing, processing and distributing food and fibre. An inclusive definition of agribusiness was provided by the Australian Department of Agriculture, Fisheries and forestry. The DAFF called the agribusiness sector a chain of industries directly or indirectly involved in the production, transformation, or provision of food, fibre, chemical and pharmaceutical substrates. All these definitions agree that agribusiness includes all the activities that take place in the production, manufacturing, distribution, and wholesale and retail sales of agricultural commodities. Modern agribusiness is a dynamic and growing industrial complex that provides the nations with the highest-quality, lowest-cost food supply in the world. Agribusiness can therefore be said to be a generic term for the various businesses involved in food production, including farming and contract farming, seed supply, agrichemicals, farm machinery, wholesale and distribution, processing, marketing, and retail sales. Agribusiness is the coordination of all activities that contribute to the production, processing, marketing, distribution, financing and development of agricultural commodities and resources. This includes food, fibre, wood products, natural resources, horticulture, and other plant and animal products and services. It is a high-tech industry that uses satellite systems, computer databases and spreadsheets, biotechnology and many other innovations to increase efficiency and profitability. Several things characterise agribusiness, differentiating it very distinctly from family farming: the first is the scale, which is typically quite large; the second is considerable vertical and horizontal integration. Agribusiness is also distinguished by being run like a true business, with administrators rather than farmers at the helm of companies in the agriculture business.

Scope of agribusiness Agribusiness companies provide input supplies to the producers as shown in fig 1.1. the farmers (producers) produces food and fibre (cotton, wool, etc) and the output is taken by agribusiness companies that process, market and distribute the agricultural products. Many services are needed in agriculture, such as transportation, storage, refrigeration, credit, finance, and insurance. Government agencies inspect and grade agricultural products for quality and safety. Hundreds of agribusiness trade organisations, committees and conferences educate, promote, advertise, coordinate and lobby for their agricultural products. Science, research, engineering, and education help improve agribusiness. Millions of people are employed in agribusiness throughout the world, and people throughout the world also depend on agribusiness for their food, clothing and shelter.

AGRICULTURAL INDUSTRY

AGRIBUSINESS INPUT SUPPLIES

AGRIBUSINESS OUTPUT COMPANIES

Feed Seed Machinery and equipment Financial/credit Transportation Fertilizers Animal health Pesticides Wholesalers Energy Containers Chemicals Insurance Research Science Engineering Education Many others

Imports

Agricultural byproducts, oil, bran, dried grain

Marketing Transportation Processed foods Non processed foods

PRODUCTION AGRICULTURIST (FARMERS)

Processing

Beverages Textiles

Dairy Livestock Poultry Alternative animal Crops Forestry Nursery Fruit and vegetable Alternative crops

Exports

Wood and paper Wholesalers and retailers

Small animal care

Food brokers Groceries Fast and other restaurant

Many others

Energiser: Agribusiness affects us daily. Consider one of the best -selling fast- food items, the cheeseburger. To get an idea of how agribusiness affects our daily lives, imagine what is involved in assembling a cheeseburger with all the trimmings. List at least 10 businesses or services that are needed to get a cheeseburger ready for consumption.

Agribusiness marketing Agribusiness marketing can best be defined as series of services involved in moving a product from the point of production to the point of consumption. It is a series of interconnected activities involving: planning production, growing and harvesting, grading, packing, transport, storage, agro-and food processing, distribution and sale. Such activities cannot take place without the exchange of information and are often heavily dependent on the availability of suitable finance. Marketing systems are dynamic. They are competitive and involve continuous change and improvement. Marketing has to be customer oriented and has to provide the farmer, transporter, trader, processor, e.t.c with a profit. Conflicting Needs of Producers and Consumers Regardless of how an economic system is organized it must have a marketing system to bridge the gap between the needs of producers and consumers. On the one hand, there are producers who seek to maximise their long-run profits by selling large quantities of a few products at the highest possible prices. Conversely, there are consumers who seek to maximise their total satisfaction by consuming small quantities of many products by purchasing these items at the lowest possible prices. This makes a conflict.

This conflict of interests requires a marketing system that can solve the differences between the needs of buyers and sellers. The marketing system helps producers determine what products consumers most desire and which products can provide the greatest profits. The marketing system also makes it possible for consumers to find the variety of products they want at the lowest prices. By solving the conflict of producers and consumers, the marketing system can lead not only to an efficient meeting of producers and consumers needs, but also to an efficient use of societys limited resources.

Conflicting needs of producers and consumers that agrimarketing seeks to reconcile.

Producers try to Maximize profit over the long term

consumers try to Maximize the satisfaction they receive from the products they buy With their limited incomes Buy small quantities of many products Obtain the lowest prices

Sell large quantities of fewer products Obtain the highest prices

The Role of Marketing in the Agribusiness System Marketing plays an important role in giving consumers a large variety of food and fibre products at the lowest prices found anywhere. Marketing plays a key role in the success of any economy by bridging the gap between the differing needs of producers and consumers. It does this by helping producers better understand consumer needs. Marketing helps producers to decide what products to produce and when to produce them. Marketing also helps consumers by letting them know what products are available at what price. When done well, it leads to greater satisfaction for consumers and higher profits for producers. Agribusiness is the largest industry in most developed nations, and marketing is its largest segment. More than 80 % of those involved in agribusiness are employed in marketing. For example, agribusiness marketing activities generate more than 16% of the Americas annual GNP. Agribusiness marketing is also clearly a major part of Zimbabwes economy.

Nine Functions of Marketing in the agribusiness system In any economic system there are always barriers between producers and consumers that prevent producers from efficiently meeting consumer needs. These include separations of space, time, information and ownership. The role of marketing system is to overcome these separations by building a bridge between producers and consumers. Regardless of the type of economic system in a society, the marketing system must perform nine separate functions to raise the level of economic efficiency in the society. To do this the

marketing system must overcome separations of space, time, information, value, and ownership. The nine functions of marketing and the barriers they pass over are listed subsequently.

Exchange functions Buying Selling Physical functions Storage Transportation Processing Facilitating functions Grades/standards Financing Risk taking Market information information separation value separation time separation information separation time separation space separation value separation ownership separation ownership separation

Exchange functions: buying and selling are the most familiar marketing function to most of us. They must occur in the marketing system if any product exchanges are going to occur. These functions involve overcoming separations of ownership by exchanging legal title of the product for money between the buyer and seller. Figure 1.2: The exchange function

Physical functions 1. Storage: An inherent characteristic of agricultural production is that it is seasonal whilst demand is generally continuous throughout the year. This gives rise to the need

for storage to allow a smooth, and as far as possible, uninterrupted flow of product into the market. The storage function overcomes the separation of time by keeping the product in good condition between production and the final sale. For example, an apple picked in September must be kept in controlled atmosphere storage so a buyer can have a fresh apple in January. In agriculture, and especially in LDCs, supply often exceeds demand in the immediate post-harvest period. The glut reduces producer prices and wastage rates can be extremely high. For much of the reminder of the period before the next harvest, the product can be in short supply with traders and consumers having to pay premium prices to secure whatever scarce supplies are to be had. The storage function is one of balancing supply and demand. Both growers and consumers gain from a marketing system that can make produce available when it is needed. A farmer, merchant, co-operative, marketing board or retailer who stores a product provides a service. That service costs money and there are risks in the form of wastage and slumps in market demand, prices, so the provider of storage is entitled to a reward in the form of profit. 2. Transportation: the transportation function overcomes the separation of space by moving the product from where it is produced to where the consumer is willing to purchase it. For example, the frozen hamburger patty is produced at a central location, but cooked and served in your neighbourhood. The transport function is chiefly one of making the product available where it is needed, without adding unreasonably to the overall cost of the produce. Adequate performance of this function requires consideration of alternative routes and types of transportation, with a view to achieving timeliness, maintaining produce quality and minimising shipping costs. 3. Processing: the processing function means changing the form of a commodity to a form that has greater value to the consumer. The form changing activity is one that adds value to the product. Changing green coffee beans into roasted beans, cassava into garri or livestock feed, full fruit bunches into palm oil or sugarcane into gur increases the value of the product because the converted product has greater utility to the buyer.

Facilitating functions Facilitating functions are not a direct part of either the exchange of title or the physical movement of produce. Figure 1.3 The facilitating functions

1. Standardisation: Standardisation is concerned with the establishment and maintenance of uniform measurements of produce quality and/or quantity. This function simplifies buying and selling as well as reducing marketing costs by enabling buyers to specify precisely what they want and suppliers to communicate what they are able and willing to supply with respect to both quantity and quality of product. In the absence of standard weights and measures trade either becomes more expensive to conduct or impossible altogether. 2. Financing: In almost any production system there are inevitable lags between investing in the necessary raw materials (e.g. machinery, seeds, fertilizers, packaging, flavourings, stocks etc.) and receiving the payment for the sale of produce. During these lag periods some individual or institution must finance the investment. The question of where the funding of the investment is to come from, at all points between production and consumption, is one that marketing must address. Consider the problem of a food manufacturer who wishes to launch a range of chilled products in a developing country where few retail outlets have the necessary refrigeration equipment. This is a marketing problem. It might be solved by the food manufacturer buying refrigerators and leading these to retailers (or arriving at a hire-purchase arrangement with retailers). 3. Risk bearing: the risk function involves assuming the risk of loss between the time of purchase and sale. In both the production and marketing of produce the possibility of incurring losses is always present. Physical risks include the destruction or deterioration of the produce through fire, excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of adverse changes in the value of the produce between the processes of production and consumption. A change in consumer tastes can reduce the attractiveness of the produce and is, therefore, also a risk. 4. Market intelligence: As far as is possible marketing decisions should be based on sound information. The process of collecting, interpreting, and disseminating

information relevant to marketing decisions is known as market intelligence. The role of market intelligence is to reduce the level of risk in decision making. Through market intelligence the seller finds out what the customer needs and wants. The alternative is to find out through sales, or the lack of them. Marketing research helps establish what products are right for the market, which channels of distribution are most appropriate, how best to promote products and what prices are acceptable to the market. As with other marketing functions, intelligence gathering can be carried out by the seller or another party such as a government agency, the ministry of agriculture and food, or some other specialist organisation. What is important is that it is carried out.

Four Utilities of Marketing 1. Form utility: this means to process the product into a form desired or needed by the consumer. For example, French fries at a fast food restaurant, the farmer may begin the process by providing form utility by converting seed, water, fertilizer, and other inputs into a full-grown potato that is ready for harvest. Those that process the raw potato into frozen French fries are also involved in the process of providing form utility; as are people who cook it at the fast-food restaurant. Merely handing consumers a raw potato would probably do very little to provide them with any personal happiness when what they really want is hot, sizzling French fries. Marketing people recognise the profit potential in this desire of consumers for cooked French fries and transform the raw potato to cooked French fries through processing. 2. Place utility: this means transporting the product to a location desired by the consumer. Continuing with the French fries example, turning the potato into cooked French fries is only part of the job. If the potato or frozen French fries is in Harare while the consumer is in Victoria Falls, how can the consumer gain happiness. Products need to be transported to consumers, because eating the French fries at their favourite restaurant in Victoria Falls will give them more utility than if they have to drive all the way to Harare to get them. 3. Time utility: this means storing the product until the time it is needed by the consumer. This utility is very important in agribusiness because many commodities are harvested just once during the year, but consumers want to eat them year-round. Again, back to the French fries, without storage we could only enjoy French fries for a few weeks each year after the potato harvest. The marketing people recognise the

profit potential in year-round consumer access to French fries, and develop ways to store potatoes and French fries to meet this demand. 4. Possession utility: this allows consumers to gain ownership of the product so they can legally use it. This is why the marketing system must provide a simple way for changing title of the potatoes or the French fries that does not put the buyer in trouble. Possession utility normally completes the utility process as ownership and physical control pass to the consumer of the product. A useful way to think about the utility process is to think of them as adding value to the product. Consumers must feel the process has increased the value of a product because they must be willing to pay the market price for the addition of time, place, form and possession utilities to products they buy. The purpose of marketing in any economic system is to make sure that consumers get the products they desire. This means making sure that the right product (form utility) is available at the right place (place utility), at the right price (possession utility), and at the right time (time utility) to satisfy the consumer fully. Each of these utilities is added to the product by performing one or more of the nine marketing functions. Form utility is created by processing. Place utility is created through the transportation function. Time utility comes from the storage function. Possession utility is created by the buying and selling functions. In this way the barriers of space, time, information, value and ownership are overcome for the producer and consumers.