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 1800‟s, 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

The perishable nature of most agricultural commodities meant that they were available only at harvest.make up the „„agricultural input sector‟‟. 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. a similar evolution was taking place as commodity processing and food manufacturing moved off the farm. Advance in food processing have made it possible to get those commodities all throughout the year. 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. The term agribusiness was first introduced by Davis and Goldberg in 1957. At the same time the agricultural input sector was evolving. During the same period technological advance were being made in food preservation methods. 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. The success of each part depends heavily on the proper functioning of the other two. Agricultural input sector Production sector Processingmanufacturing sector . 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.

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

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

and education help improve agribusiness. credit. and insurance. and people throughout the world also depend on agribusiness for their food. coordinate and lobby for their agricultural products. research. Many services are needed in agriculture.Scope of agribusiness Agribusiness companies provide input supplies to the producers as shown in fig 1. refrigeration.1. wool. promote. clothing and shelter. the farmers (producers) produces food and fibre (cotton. such as transportation. etc) and the output is taken by agribusiness companies that process. finance. Millions of people are employed in agribusiness throughout the world. engineering. committees and conferences educate. advertise. . Hundreds of agribusiness trade organisations. storage. Government agencies inspect and grade agricultural products for quality and safety. Science. market and distribute the agricultural products.

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

processor.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. transporter. Such activities cannot take place without the exchange of information and are often heavily dependent on the availability of suitable finance. 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. grading. transport. distribution and sale. On the one hand. The marketing system also makes it possible for consumers to find the variety of products they want at the lowest prices. This makes a conflict. Marketing has to be customer oriented and has to provide the farmer. there are producers who seek to maximise their long-run profits by selling large quantities of a few products at the highest possible prices. By solving the conflict of producers and consumers. e. It is a series of interconnected activities involving: planning production. The marketing system helps producers determine what products consumers most desire and which products can provide the greatest profits. . Conversely. Marketing systems are dynamic. but also to an efficient use of society‟s limited resources. This conflict of interests requires a marketing system that can solve the differences between the needs of buyers and sellers. They are competitive and involve continuous change and improvement. the marketing system can lead not only to an efficient meeting of producers and consumers needs. growing and harvesting. agro-and food processing. packing.c with a profit. trader. 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. storage.t.

When done well. More than 80 % of those involved in agribusiness are employed in marketing. To do this the . Agribusiness marketing is also clearly a major part of Zimbabwe‟s economy. Marketing plays a key role in the success of any economy by bridging the gap between the differing needs of producers and consumers. Marketing also helps consumers by letting them know what products are available at what price. agribusiness marketing activities generate more than 16% of the America‟s annual GNP. the marketing system must perform nine separate functions to raise the level of economic efficiency in the society. Marketing helps producers to decide what products to produce and when to produce them. Regardless of the type of economic system in a society. time. The role of marketing system is to overcome these separations by building a bridge between producers and consumers. These include separations of space. Agribusiness is the largest industry in most developed nations. 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. It does this by helping producers better understand consumer needs. information and ownership.Conflicting needs of producers and consumers that agrimarketing seeks to reconcile. it leads to greater satisfaction for consumers and higher profits for producers. 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. and marketing is its largest segment. For example.

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. time. Storage: An inherent characteristic of agricultural production is that it is seasonal whilst demand is generally continuous throughout the year. and ownership. They must occur in the marketing system if any product exchanges are going to occur. value. system must overcome separations of space. This gives rise to the need . 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.

but cooked and served in your neighbourhood. That service costs money and there are risks in the form of wastage and slumps in market demand. with a view to achieving timeliness. Changing green coffee beans into roasted beans. 2. For example. A farmer. In agriculture. The transport function is chiefly one of making the product available where it is needed. and as far as possible. The storage function overcomes the separation of time by keeping the product in good condition between production and the final sale. without adding unreasonably to the overall cost of the produce. cassava into garri or livestock feed.for storage to allow a smooth. 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. merchant. Both growers and consumers gain from a marketing system that can make produce available when it is needed. Processing: the processing function means changing the form of a commodity to a form that has greater value to the consumer. maintaining produce quality and minimising shipping costs. Facilitating functions Facilitating functions are not a direct part of either the exchange of title or the physical movement of produce. uninterrupted flow of product into the market. The storage function is one of balancing supply and demand. 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. 3. supply often exceeds demand in the immediate post-harvest period. an apple picked in September must be kept in controlled atmosphere storage so a buyer can have a fresh apple in January. For example. and especially in LDCs. the frozen hamburger patty is produced at a central location. marketing board or retailer who stores a product provides a service. Figure 1. For much of the reminder of the period before the next harvest. The form changing activity is one that adds value to the product. co-operative. 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. Adequate performance of this function requires consideration of alternative routes and types of transportation. The glut reduces producer prices and wastage rates can be extremely high. prices. so the provider of storage is entitled to a reward in the form of profit.3 The facilitating functions .

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

fertilizer. how best to promote products and what prices are acceptable to the market. Again. Those that process the raw potato into frozen French fries are also involved in the process of providing form utility. 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. but consumers want to eat them year-round. the farmer may begin the process by providing form utility by converting seed. how can the consumer gain happiness. As with other marketing functions. The alternative is to find out through sales. Products need to be transported to consumers. Through market intelligence the seller finds out what the customer needs and wants. Form utility: this means to process the product into a form desired or needed by the consumer. turning the potato into cooked French fries is only part of the job. Continuing with the French fries example. and other inputs into a full-grown potato that is ready for harvest. What is important is that it is carried out. without storage we could only enjoy French fries for a few weeks each year after the potato harvest. as are people who cook it at the fast-food restaurant. or the lack of them. This utility is very important in agribusiness because many commodities are harvested just once during the year. Time utility: this means storing the product until the time it is needed by the consumer. Four Utilities of Marketing 1. Place utility: this means transporting the product to a location desired by the consumer. The role of market intelligence is to reduce the level of risk in decision making. For example. which channels of distribution are most appropriate. back to the French fries. 3. intelligence gathering can be carried out by the seller or another party such as a government agency. 2. the ministry of agriculture and food.information relevant to marketing decisions is known as market intelligence. sizzling French fries. The marketing people recognise the . If the potato or frozen French fries is in Harare while the consumer is in Victoria Falls. 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. or some other specialist organisation. French fries at a 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. water. Marketing research helps establish what products are right for the market.

Possession utility: this allows consumers to gain ownership of the product so they can legally use it. A useful way to think about the utility process is to think of them as adding value to the product. Time utility comes from the storage function. form and possession utilities to products they buy. 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. time. and develop ways to store potatoes and French fries to meet this demand.profit potential in year-round consumer access to French fries. Each of these utilities is added to the product by performing one or more of the nine marketing functions. In this way the barriers of space. Place utility is created through the transportation function. and at the right time (time utility) to satisfy the consumer fully. place. 4. value and ownership are overcome for the producer and consumers. at the right price (possession utility). information. The purpose of marketing in any economic system is to make sure that consumers get the products they desire. Form utility is created by processing. Possession utility normally completes the utility process as ownership and physical control pass to the consumer of 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. . Possession utility is created by the buying and selling functions. This means making sure that the right product (form utility) is available at the right place (place utility).