SHANTO-MARIAM UNIVERSITY OF

CREATIVE TECHNOLOGY

FACULTY OF MANAGEMENT AND GENERAL STUDIES

DEPARTMENT OF BUSINESS ADMINISTRATION

Course/Module Name:
Agricultural Marketing
Course Code: MKT- 413

Course Teacher : Md. Shariful Islam

Updated on: 13/06/2017

1
 Module Specifications
Module Title : Agricultural Marketing
Module Code : MKT- 413
Pre-requisite : Not Applicable
Batchers : 37th & 38th
Contact hours : Lecture 3:00 Hours (Per week), Total 36 Hours
No. of Lectures : 24
Credit : 3.00
Assessment method :

Mode of Assessment Marks

Attendance 10
Class test 20
Home Task/ Class Report/ Presentation 10
Midterm 20
Final 40
Total 100
Aim: The belief is often expressed that the aim of agricultural marketing research is to
reduce the costs of marketing. Farm management research, for example, can promote the
maximum satisfaction of consumers' demands if its aim is to reduce the costs of
production.

Objectives: Agricultural marketing covers the services involved in moving an

agricultural product from the farm to the consumer. It is also the planning, organizing,
directing and handling of agricultural produce in such a way as to satisfy the farmer,
producer and the consumer. Numerous interconnected activities are involved in doing
this, such as planning production, growing and harvesting, grading, packing and
packaging, transport, storage, agro- and food processing, distribution, advertising and
sale.

2
 Syllabus Outline and Teaching Plan

Week No. Subject Matter

1 Introduction to Agricultural Marketing
2 Basics of Supply and Demand
3 Introduction to Food Processing Marketing
4 National Agricultural Policys Strategies
5 Marketing of Agricultural Commodities
6 Food Supply Chain Management and Logistics
Midterm examination
7 Marketing Efficiency
8 Price Determination & Pricing Strategies
9 Pricing Methods
10 Marketing Research
11
Marketing Institutions and Government
Intervention
12 Report submission & Presentation

3
 Lecture Schedule

Week Lecture Hour Lecture/Assessment Schedule

1 1:30 Introduction to Agricultural Marketing
1
2 1:30 Features of Agricultural Marketing
3 1:30 Basics of Demand
2
4 1:30 Basics of Supply
5 1:30 Agricultural marketing circle
3
6 1:30 Characteristics of agro-Product & Production
7 1:30 National Agricultural Policys Strategies
4
8 1:30 Class test
9 1:30 Agricultural Marketing Process
5
10 1:30 Marketing Margin
11 1:30 Supply Chain Management
6
12 1:30 Functions of Agricultural marketing
1:30 Midterm examination
13 1:30 Marketing Costs
7
14 1:30 Market Structure
15 1:30 Price Determination
8
16 1:30 Pricing Strategies
17 1:30 Calculate Prices
9
18 1:30 Price Setters and Price Takers
19 1:30 Marketing Research
10
20 1:30 Class Test
21 1:30 Regulated Markets
11
22 1:30 Forward Trading / Future Trading
23 1:30 Presentation
12
24 1:30 Presentation / Review Class

4
 MODULE CONTINUOUS ASSESSMENT TIMETABLE
Department : Bachelor of Business Administration
Bacthes & Semesters : 37th & 38th; 9th & 11th
Course Code : MKT-413
Course Title : Agricultural Marketing
Assessment Mode : 40% Class assessment + 60% Written Exam

Assessmen 1 2 3 4 5 6 Mid-Term 7 8 9 10 11 12 Final

t Examinatio Examinatio
Descriptio n n
n Weeks
Class Test 10 20% 40%
(written/
%
Viva) Written Written
Examinatio Examinatio
n n

Assignmen 5% 5%
t On

Class Test 10% 10

(written/ %
Viva)

Assignmen
t On

All the above assignments/class tests must be carried out in class unless otherwise stated
on the written assignment brief.

Course Teacher : Md. Shariful Islam

Course Name : Agricultural Marketing
Course Code : MKT - 413

5
Week : 01
Lecture : 01 & 02
Lecture Topic : Introduction to Agricultural Marketing

What is Agricultural marketing?

Change of ownership of agricultural and food products.
Link between agricultural production and food consumption.
Three aspects of market transactions:
Spatial - transactions occur across space
Temporal - transactions occur across time
Form - transactions occur in a certain form

Facets of marketing
Coordination and process of exchange.
How does the supply of food become available to those who demand it?
Both suppliers and consumers are part of markets and marketing.
Geographical aspects.
Locations where buyers and sellers meet (Billings wheat market).
Broader context: U.S. wheat market; World wheat market.
Value-adding activities.
Transformation
Transportation
Storage

Facilitating functions of a market

Unlike the ownership transfer and value-adding functions of marketing, facilitating functions help
the marketing process operate.
Business climate
Conducive business environment.
Clear understanding of ownership privileges and legal code.
Standardization of measures
Inspection of merchandise quality.
Economic information
Current and prospective market conditions (e.g., local and futures prices).

Financial services
Provide liquidity for day-to-day operations.
Minimize costs of transferring goods.

6
What's special about agricultural markets?
Biological characteristics
Fixed periods of production and seasonality - growing seasons are established;
seasonality affects demand.
Risk of perishability - risk that good will become unusable.
Weather and other unpredictable events - frost, hail, drought.
Invasive species - karnal bunt; grasshoppers; wheat stem rust; BSE.
Potential for high price volatility.
Product homogeneity
Competitive markets (price taking environment) - supply and demand determine
prices; producers accept these prices when they sell, and consumers accept these
prices when they buy.
Large involvement by government
Price augmentation - price augmentation; subsidized insurance.
Trade policies - tariffs; quotas.
Bulkiness (low initial value-per-unit weight)
Transportation and processing are crucial.
Economies of scale (few processing facilities for large geographic areas).

Role of prices
The role of price is integral in agricultural markets.
Price is a signal for production and consumption.
Government can play a large role in affecting prices in agricultural markets.
Knowing and predicting future prices is very important (but extremely hard to do).

7
Week : 02
Lecture : 03 & 04
Lecture Topic : Basics of Supply and Demand

Properties of a demand curve

Constrained by income (or wealth).
Demand curve is steeper (less elastic, more inelastic) if:
There are no close substitutes.
Quantity demanded rises very little as income increases (would you buy 5
times as much food if your income increased five-fold?)
There is a short time considered.
If there is a price change, your consumption of the good will change very
little.
Movements along and shifts of the demand curve:
Change in price movement along demand curve.
Change in external variable (e.g., income, price of other goods) shift of
the demand curve.

Numerically solving for quantity demanded and price

Suppose Sarah consumes beef according to the following consumption function:
QSarah = 60 - 0.5Pbeef
Perform the following:
1. Calculate the inverse demand function (i.e., solve for P).
2. Calculate Sarah's beef demand if the price of beef is $10. What if it's $18?
3. Calculate the price of beef if Sarah consumes 25 pounds of beef. What if she consumes
60 pounds?

Steps to solve:
1. Add Pbeef to both sides; subtract Qsarah from both sides; divide through by 0.5
Pbeef = 120 - 2Qsarah

8
2. Beef demand:
If Pbeef = $10 Qsarah = 55
If Pbeef = $18 Qsarah = 51
3. Price of beef:
If Qsarah = 25 Pbeef = $70
If Qsarah = 60 Pbeef = $0

Aggregate Demand
There are millions of consumers who consume agricultural commodities. How do we
determine the demand functions for the entire population?
We aggregate all individual demand functions - horizontal aggregation.

Numerically aggregating demand

9
Properties of aggregate demand
As more consumers are added to the aggregate demand curve, the more elastic the
curve becomes (i.e., flatter).
What can shift/rotate the demand curve?
Structure and competition among packing and retail sectors.
Population in the BD.
Demographics of the BD. population.

Consumer surplus
Consumer surplus (CS) is the amount of value that is derived by the consumer above the
price that was paid for the good.

Typically, consumer surplus is the area below the demand curve and above the price
(frequently, we will model CS is a triangle).

Properties of supply
Firms must be able to cover their long-run (average) variable costs If P < AVC,
then firms no longer continues produce.
Fixed costs exist only in the short run
In the long run, any fixed cost can be eliminated.
In general: AVC < ATC

Remember: All costs are opportunity costs. This is important when thinking about costs
in the agricultural sector.

10
What changes supply?
Change in price will result in a movement along the supply curve.
Change to an external factor will shift the supply curve.
Relative price of inputs.
Creation and adoption of technology (e.g., GM crops, farming equipment).
Price of other related products (e.g., ethanol demand caused acreage to be
turned over to corn at the expense of soybeans).
Risk levels and crop insurance policies.
Government acreage controls (CRP).
Weather.

Aggregate Supply
Just as with aggregate demand, horizontal aggregation is used to derive the market supply
curve.

Consider: Three farms supplying wheat have these supply functions

11
Producer surplus and Producer cost
Producer cost (PC) is the total cost that is incurred by the supplier for making and selling
a certain number of goods. It is measured as the area below the supply curve, bounded by
the quantity supplied.

Producer surplus (PS) is the amount of value the firm receives above the marginal cost
incurred to produce and sell the good. It is measured as the area above the supply curve,
bounded by the sales price.

Equilibrium
Under perfect competition, rationing and resource allocation will cause prices to adjust
until supply equals demand.

Market Equilibrium is Characterized by the Crossing of the Supply and Demand Curves.

12
What do S and D models tell us?
Here are some examples of what supply and demand curves can be used to determine and
analyze:
Price and quantity sold increase / decrease.
Price increases but quantity sold decreases.
Price decreases but quantity sold increases.
A new tax is imposed.
A new policy is legislated.

What do prices indicate?

Prices convey an immense amount of information to consumers and producers:
Signal the demand for products.
Signal the supply of goods.
Allow for the coordination of demands for and supplies of goods.
Provide an incentive to act on the available information.

13
Week : 03
Lecture : 05 & 06
Lecture Topic : Introduction to Food Processing Marketing

Agricultural marketing. Agricultural marketing generally means the marketing of

agricultural products to the first handler. In macro (social) perspective, is the
performance of all business activities involved in the forward flow of food and fiber
from farm producers to consumers. It includes all the activities associated with
agricultural production and with food, feed, and fiber assembly, processing, and
distribution to final consumers, including analyses of consumers needs,
motivations, and purchasing and consumption behavior.

Agricultural marketing circle. It consists of;

First circle. Refers to the final consumer or targeted customer.

Second circle. Factors that can be controlled known as marketing mix
(product, price, place, and promotion).
Third circle. Environmental factors that cannot be controlled (political and
legal, economic, law and regulation, social & culture, technologies, &
demographic).

Agribusiness marketing. Agribusiness marketing has come to mean the marketing

operations from the first handler to the final consumer-beginning with suppliers to
farmers and covering producing, processing, and marketing to the final consumer.

Marketing utility. Utility will refers to the value of marketing which adds to goods
and services. The marketing function will allow to create utility. There are five types
of utilities, namely;

Form utility. To change the raw materials to a finished products. Example,

palm oil bunch to edible cooking oil.

Time utility. Making the products be available during the convenient hours.

Place utility. Making the products and services available in convenience

location and place.

Possession utility. Making the exchange of goods and services between the
buyers and sellers.

Information utility. To informs the buyers that the products exists, how to
use it, the price and other related information of the products availability.

The importance and interdependence of the food and fiber system. The various
foods and fibers are the commodities included in agricultural marketing texts
although food usually receives the most attention. It may be helpful to think of food
and fibers as moving to the world consumers through three sectors;

14
 Food and fiber originate in a farm sector where livestock, poultry, fruits,
vegetables, cotton, tobacco, flax, corn, wheat, other grains, and specialty crops
are produced.

More than 80% of the gross farm income is typically spent in the input sector
on items such as feed, fuel, and fertilizer. These production expenses have
risen from time to time.

Food and fiber than move through a marketing sector involving many
marketing functions, such as transportation, processing, and storage, which
are more expensive than the production costs in the farm sector.

The development of agricultural marketing. Marketing is related to the business

activities for the purposes of the consumer satisfaction in exchanges of goods and
monetary value between the producer and the consumer. Scope of marketing is not
only focused to the buying and selling but it also includes activities such as
transportation, storage, grading, financing, risks involvements, products design,
price determination, promotions, distribution and developing the marketing
channels. A brief history of agricultural marketing begins with;

Trade among tribes. Marketing begin in tribal nomadic cultures. Different

tribes lived in areas that held different fruits, game, and fish; from these
differences came products that could be traded. Supplies beyond a tribes own
needs had a low marginal value but were of higher value when traded for
other goods.

Appearance of market squares. With the advent of village life, following the
development of agriculture, specialized village craftspeople appeared.
Eventually a block of land in each village came to be designed as the market
square. Here farmers brought products for display and sale to the villagers,
and craftspeople showed their wares for farmers or others to buy.

Regional and national market centers. The modern counterpart of the

market square is the regional mall shopping center, housing a wide array of
dealers and products under one vast roof. At a wholesale market, suppliers
gather so that retailers may see, in one place, the kinds of merchandise
offered and their prices.

The role of marketing in the economy. In any economic system there are always
barriers that prevent producers from efficiently satisfying consumer needs. These
barriers include separations of space, time, information, value, and ownership. The
role of the marketing system is to bridge this gap between producers and
consumers needs and increase the efficiency of the marketing system.

The most familiar marketing functions to most of us are the buying

function and the selling function. They must be performed in the
marketing system if any product exchanges are going to occur. They involve
overcoming separations of ownership by transferring legal title of the
product from the seller to the buyer.

15
 The storage function overcomes the separation of time by maintaining the
product in good condition between production and final sale.

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.

The processing function involves the transformation of a commodity to a

form that has greater value to consumer. Processing is included since what
is produced in a free market economy should be determined by the needs of
consumers. One of the purposes of the marketing system is to transmit
consumer desires to producers so they can provide the products that
consumers want. How the products are produced is a technical matter, but
what to produce is a function of marketing.

The grades and standards function involves the development of uniform

descriptions of commodities and products. It means that buyers do not have
to physically inspect each shipment of product before they purchase it. A
buyer can be assured that when he orders a certain quantity of a Grade A
product over the telephone, he knows exactly the physical specifications of
the product he will receive.

The financing function involves providing the funds necessary to pay for
the production and marketing of a product before the money is received
from its sale.

The risk taking function involves assuming the risk of loss between the
time of purchase and sale. Various forms of insurance are available to guard
against adverse changes in price as well as physical losses arising from such
things as fire, flood, theft, and spoilage. The efficiency of the marketing
system is also greatly enhanced if there is wide dissemination of
information on prices, inventory levels, embargoes, or anything else that
could influence the buying and selling of products.

The market information function involves the development of any means

to disseminate this type of information.

The structure of product in agricultural production. The traditional structure of

farm production and farm market can each be described in terms of a single
identifying characteristic; product and production.

Characteristics of the products.

A raw material. The output of agriculture is largely a raw material that will
be used for further processing. This processing may be limited, as in
converting livestock into meat. It may be highly complex, as in converting
wheat into wheaties. Regardless of the complexity, however, the product sold
by the farmer soon loses its identity as a farm product becomes simply food.

16
 Bulky and perishable products. Compared to most other products,
agricultural products are both bulkier and more perishable. Bulk affects the
marketing functions concerned with physical handling. Products that occupy
a lot of space in relation to their value almost automatically raise unit
transportation and storage costs. A truckload of drugs would be considerably
more valuable than a truckload of wheat. In this sense, fruits, vegetables,
grain, and meats are all quite bulky. Perishable, too, can be measured only in
relation to other products. All products ultimately deteriorate. Some
agricultural products, like fresh strawberries or fresh peaches, must move
into consumption very quickly or they completely lose their value. Such
products as cattle or poultry continue to grow and change if storage in the
form of withholding them from market is attempted. Wheat, on the other
hand, can be stored for a considerable length of time without much
deterioration. Even the most storable agricultural products, however, are
usually more perishable than other industrial products. Perishable products
require speedy handling and often special refrigeration. Quality control often
becomes a real and costly problem. Quality control often becomes a real and
costly problem. From the farmers viewpoint, withholding from the market is
extremely difficult; when the products are ready, they must move.

Quality variation. The general quality as well as the total production of

agricultural commodities varies from year to year and from season to season.
During some years the growing conditions are such that the crop in general is
of high quality. In other years, unfavorable conditions prevail and the crop is
of much lower quality. Such variations in the quantity of production make it
very hard to apply uniform standards for grades from year to year. If the
quality of the apple crop is uniformly high, the standards for top-grade
apples may be strictly adhered to. On the other hand, if the quality of the
apple crop is poor, grading standards may be relaxed somewhat to permit
some apples to be marketed as top quality. Variations in the quality may also
change marketing patterns. For example, during a year in which corn does
not mature properly, large amounts of soft corn are harvested. The corn will
spoil if it is not used before the following years. Farmers may then buy
additional feeder stock in order to utilize this corn. The marketing pattern of
these feeders, however, will be different from the usual pattern because the
feeding period is adjusted to the condition of the corn.

Characteristics of production.

Total output. The long run trend in food production is upward. The rising
food supply per capita has been a mixed blessing for farmers. On the one
hand, it is dramatic proof of the efficiency of agriculture and its contribution
to the rising standard of living. On the other hand, this tremendous
productive capacity of agriculture has frequently depressed farm prices and
incomes. Maintaining an acceptable balance of rising food supplies and fair
farm prices has been a difficult task for food policy.

17
 Annual variability in production. There are years where the situation of
increasing, decreasing, and stable farm output. These are caused by farmer
responses to prices and other uncontrollable factors such as weather and
disease. Such changes in farm output influence the food marketing process
and the use of the food marketing systems capacity. Year to year changes in
farm supplies have a significant impact on the purchase prices, need for
storage facilities, and plant utilization rates of food marketing firms. The
desire to reduce the risks and uncertainties of fluctuating farm supplies is
one of the forces creating closer contractual ties between marketing agencies
and farmers.

Seasonal variability in production. In addition to the annual production

variability, much of agricultural production is highly seasonal. Livestock
receipts may vary substantially throughout the year. The harvest of such
crops as paddy, fruits, and vegetables is crowded into a relatively short
period. Egg and poultry production is larger in seasonal fest and remain
stable after the period. To the extent that the product is storable, storage
facilities must be furnished to hold the product until it is consumed. This
means that during part of the year, storage will be used at near capacity, at
other times it will be almost empty. If the product cannot be stored it must
either be processed or consumed immediately. This may result in processing
plants running at capacity for some periods and well below capacity, or even
shut down, for other periods. If the product must move directly into
consumption, transportation and refrigeration facilities must be available
immediately. These situations affect the costs of the marketing process.

Geographic concentration of production. Although a variety of farm

products is produced in all states, there is increasing geographic
specialization of farm production. For example in Malaysia, north area tends
to specialize in the production of commodities for which its resource base is
best suited: paddy, fruits, e.t.c. The marketing system, of course, must adjust
to these changing geographic production patterns.

Varying costs of production. There is no single cost of production for all

farmers. Farmers cost of production are affected by climate, technology, farm
size, and individual managerial skills. Consequently, the cost of producing a
farm commodity varies widely by regions and among farmers. Most studies
have found that the average cost of farm production falls as small farms grow
larger, but there is a point at which average cost do not fall further as farm
size increase.

The farm supply industry. The farm supply industry provides such
agricultural inputs as chemicals, seeds, machinery, feeds, capital, labor, land,
and so on. These may be supplied by the farm or purchased from the
industrial or farm supply sectors. The growth and importance of the farm
input sector affects farmers in several ways. It has added another market for
the farmer to operate in. The farm input markets have also been responsible
for much of the dramatic gain in agricultural efficiency in recent years,
especially the chemical and machinery markets.

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Strategies of National Agricultural Policy 1992-2010. In 1984, NAP introduced
by Malaysian government because of recession, but agriculture still plays an
important role in the GNP growth of the country even-though it has decline in its
production due to industrialization and urbanization.

Problems faced by agriculture;

Gross domestic product has declined in the contribution even-though the

value-added has increased.

Land expansion has been hindrance because some of the arable land has
been allocated for industrialization, urbanization and housing projects.

Market protection less has been taken into consideration as compared to

automobile industries.

Fiscal incentives did not favor in agriculture so thats why large companies
did not enjoy as compared to manufacturing industries.

Objectives of the NAP (1992-2010);

To achieved a balanced development between agriculture and other sectors

such hunting & forestry, fishing, mining & quarrying, electricity, gas & water
supply, construction, wholesale & retail trade, hotel and restaurants,
transport, communication, education, financial, public administration, health
and social work in the country.

To enhance the economics sectors and structural integration in particular

with the manufacturing sectors.

To achieve a higher level of expansion and development of the food industry

sectors.

To achieve a wider and effective participation of the Bumiputra participation

in support services in the fields of commercial agricultural, agribusiness,
trade, distribution, selling, extension, institutional development and
marketing.

To ensure a sustainable development in agriculture.

To maximize income through efficient utilization of resources and

revitalization of sectors for economic development.

To developed new land and to enable for farm unit development, efficient
managerial practices for new crops growing.

To enable development of in-situ land will be carried out to resolve

unproductive, inefficient and low level of productivity of land to be
developed. Example; FELCRA, RISDA, KESEDAR e.t.c.

19
Week : 04
Lecture : 07
Lecture Topic : National Agricultural Policys Strategies

Strategies for achieving the NAP objectives;

Optimizing the resources uses. Land, labor, capital and management has to
be use effectively. Idle land should be develop, division of labor should be
analyzed and given the priority for development and usage, managing farm
management through skills, and increased farm sizes and mechanism while
capital such land owned by farmers has to bring together and fully utilized,
thus will reduced the cost of maintenance.

Human resources development. The use of technologies in the agricultural

sector such as mechanism in planting and harvesting will improved efficiency
in used of labor. Manpower training is required to handle such cases, efficient
agribusiness in marketing, and agro-based processing should also be
included in the development of human resources.

Enhancement of research & development, and technological diffusion.

This would maintain the competitiveness of the agricultural sectors
especially in research and development. For example; rubber, palm oil and
rice, and other product. It must be market driven, commercially oriented and
environment friendly.

Greater role of the private sectors. The greater role of the private sectors
in the land development for agricultural purposes, support by financial
strength and investment, incentives, promotion and packages will enhance
the sale of products for export purposes.

Reformed marketing strategies. The need of reformed in the marketing

strategies of the producers. Now the products should be view as commodity
and plays it role in the export of the products to various countries like Middle
East, African, Latin America and China and other countries. New product
development should be venture into the market and credit facilities can be
extended and provided to the buyers.

Expanded food production. Producer will look into the expansion of food
products to the needs of the locals and for export purposes. The finished
products should be first caters for the demand of the domestic populations.
The products produced must be competitive in nature.

Development of viable and self-reliant farmer institution. The

development of institution which caters into the needs of the farmers
especially when supplying the products to the consumers is considers. Some
farmers are unable of doing so because lack of facilities such as financial
strength, marketing, storage and transportation purposes. The need of this
institution is highly required so as to less the burden of the farmers.

20
3rd National Agricultural Policy ( NAP 3 ). The new NAP3 will focus on new policy
trust, strategies, and implementing mechanisms will be emphasized to national
concern on agricultural development an economy as a whole.

Objective of the policy;

Enhance food security.

Increase productivity and competitiveness of the agricultural sector.
Linkages with other sectors.
Create new sources of growth for the sector.
Conserve and utilized natural resources on a sustainable basis.

Strategies of the NAP3. This strategy will be focused on the upstream primary
agriculture to enhance the production and marketing of the agricultural and forestry
products. The strategies are;

Agro-forestry approached. Agriculture and forestry are mutually compatible

and complementary for joint development. This approached will addressed the
increasing scare resources and raw material availability.

Product based approach. Product based approach address on key products

and market identified based on demand and supply, preferences, and potential
consumers.

21
Week : 04
Lecture : 08
Lecture Topic : Class Test

Class Test
& Assignment topic
Discussion

22
Week : 05
Lecture : 09 & 10
Lecture Topic : Marketing of Agricultural Commodities

Agric Marketing is the connecting link between farm producers and consumers. The link involves
two activities:
Physical distribution: Concerned with physical handling, processing, transfer of raw and
semi finished or finished goods from the point of production to the point of consumption.
Economic exchange: Concerned with the exchange and price setting processes during
the marketing stage or system.

What is a market?
A market can be defined as an area for organizing and facilitating business activities and for
answering the following basic economic questions:
What to produce?
How much to produce?
How to produce?
How to distribute production?

Therefore, marketing or a market may be defined by:

A location (e.g. Windhoek market)
A product (e.g. The grain market)
A time (e.g. August peanut market)

The marketing process

The Agric Marketing system starts with the farmer and his production and ends with the
consumer. But between these two, is the marketing system composed of:
Business firms: Engaged in physical and technological activities and run by people who
make decisions.
Exchange organizations: Whose activities establish the selling prices, the various
arrangements, the contracts etc.

The marketing system operates within the social capital on one hand and social rules and norms
on the other hand.
Social capital: Resources created by society. Large and efficient marketing system will
not be possible without a well developed transport and communication system.
Social rules and norms: Marketing system is influenced by the norms and rules that
exist in society. E.g. Firms cannot hire children.

23
Approaches to the Study of Agricultural Marketing
There are three main ways to study agricultural marketing. These are:
The Functional approach
The Institutional approach
The Behavioral approach

The Functional Approach

The marketing process can be broken down into functions.
Marketing functions can be defined as major activity performed in accomplishing the marketing
process.

There are three major functions in this process listed below.

(a) Exchange functions
(b) Physical functions
(c) Facilitating functions

The Functional Approach

Exchange Functions Buying (procurement, finding source of supply) and selling
(merchandising, promotion packaging and advertising).
Physical Functions involves handling, movement and physical change of the product
Storage( making good available at desired time), processing (manufacturing activities) and
transportation
Facilitating functions Financing (to carry out the marketing) , risk bearing (accepting
possibility of loss in Mkting of product e.g. physical and market risks)- insurance provision,
standardization (measurement and maintenance of quality)
Market intelligence: Is the function of collecting, interpreting and dissemination of market
information.

Advantages of Functional Approach

This approach is useful in analyzing marketing costs and studying the differences in costs
between commodities.
Three characteristics of the functional approach
Functions are costly but add value
Cant eliminate the functions, thus the costs
Functions can be performed anywhere in the marketing systems

Institutional Approach
Institutional Approach: Emphasizes the Who does what of marketing.
Middlemen of marketing assemblers, wholesalers, brokers, retailers, order buyers,
information providers, etc.

24
Uses of institutional approach help to look at specialization due to efficiencies such as:
division of labor and specialization
economies of scale and size
reduced market search and transaction costs due to middlemen

Behavioral Approach
Studies agricultural marketing from a systems approach such as:
I /O system
power system
communications system, etc.

Consumer and Food Marketing

The economic doctrine that the consumer is Queen or King in the marketplace that is driven by
consumer demand is known as Consumer Sovereignty.

This is the concept that each consumer decides independently what to buy and that the combined
individual decisions directs all production and marketing activities in the economy.
But consumer demand is influenced by effective Advertising and Promotions.

Marketing Margin
Marketing Margin is the portion of the consumers food dollar that goes to marketing firms;
difference in what the consumer pays for food and what the farmer receives.
Price of all utility added by marketing firms and includes all expenses and profits.

Marketing Margin Myths (Misconception)

Small marketing margins denotes efficiency
If this were true, then, direct sales from farmers to consumers or roadside sales by
farmers where the market margin is zero, will denote high marketing efficiency. But the
fact is, efficiency cannot be judged solely by the size of the marketing margin.

25
 Large marketing margins reflect too many middlemen
too many middlemen in the marketing chain causing high margins, and that margins
can be reduced by eliminating middlemen. The fact is, middlemen can be eliminated but
not their marketing functions which are the direct cause of high margins.

Large marketing margins cause low farm prices

The fact is , marketing functions add both value and cost to the farm products. Thus an increase
in marketing margins can increase retail value and prices of food as a result of cost of marketing
functions. But of course, some ads, and promotions obviously increase retail prices which may
not be necessary

Marketing margin reflects profits to marketing firms

Both farmers and consumers cooperatives have been established in anticipation of
reducing margins and profits. But the fact is, marketing margins consist of both cost and
profits, and there is no guarantee that farmers or consumer cooperatives will perform
without cost or perform marketing functions as efficiently as marketing firms.

Marketing Bill
Marketing Bill: difference between consumer expenditures for all domestically produced food
products and what producers receive for equivalent farm products. It is calculated p/a and serve
as a measure of marketing margin.

Reasons For High and Rising Food Marketing Bill

Increased population growth: As a result of population growth, the quantity of food that is
marketed has increased, raising the total expenses of food.
Increased income which increases Demand for marketing services (packaging, convenience,
etc.)
Rising costs of marketing: Rising labor and energy costs in food marketing have added to
the rising cost of marketing food.

Cost Component of Marketing Bill

LABOUR COST !!!
Packaging
Interest & repairs
Transportation
Advertising
Depreciation
Taxes
Energy

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Profits in Food Marketing
Increasing over time Differentiated products
Diversified companies
Plant operation efficiencies

How Can We Reduce Food Marketing Costs?

Reduce Food Marketing Services??
Advertising
Packaging Etc.
Increase Competition, Reduce Profits
Reduce Inflation
Improve Efficiency

27
Week : 06
Lecture : 11 & 12
Lecture Topic : Food Supply Chain Management and Logistics

Food supply chains are the lifeline for human existence on the planet. Whether these
chains are local or international, the availability of food at the right time, right quality and
right quantity is paramount.
The recent United Nations report World Population Prospects: the 2012 Revision 1
projects that the population of the world will be 9.6 billion by 2050, and one of the
biggest challenges to mankind will be to feed this growing population. Another school of
thought insists that although the challenge is great and food production needs to be
ramped up, we are currently producing a sufficient amount of food to sustain the
population. If this momentum continues, there will be sufficient production for the future.
If this is the case, why does half of the worlds population go hungry every day, or have
only one meal a day? Food poverty is rampant in the developing world and this has led
not only to covert supply chains in food fraud and food crime, but also to a change in
social environments where individuals move towards a life of crime to bank the
necessary food rations for the day. International agencies such as the United Nations and
the World Health Organization promote programmes to combat child poverty.

The actors in a food supply chain

The series of processes, operations and entities that help to take the food from its raw
material state to our plates is known as the food supply chain. It is not a singular chain of
certain entities but a complicated web of interconnected entities working to make food
available. The food supply chain starts with the producer (an agriculture focused
organization) and the food sourced at this stage moves through various methods of
processing. The movement is facilitated by a host of logistics and transportation
companies. These companies make sure that the food reaches us on time and at the right
quality. The role of these actors is discussed briefly below.

Producers
As the worlds population continues to grow, there is increased pressure on the food
system to double food production by 2050.2 To add to the population challenges, the
rapid industrialization of developing countries has increased lifestyle and consumption
patterns in these countries. As populations in the developing world receive a higher wage
through employment, their food consumption preferences move from grain to meat and
other protein-based diets. This provides additional challenges to the meat supply chains.
The food supply chain starts at the producer end, which supplies food in its raw form
grains, fruits, vegetables, meat, fish, and poultry and so on. The producers are farmers
who are a part of the agriculture industry. Farming businesses range from small firms to
very large corporate. Some are new to the business while others may be family farms that
have been producing food for generations. Every country requires a strong food
production sector as it affects both food availability for the population and economic
sustainability for the food sector. There are entities in the supply chain that supply raw
material (seeds, farming machinery, pesticides, fertilizers and so on) to the producers.

28
These input suppliers are generally large global companies with a lot of power in the
chain. The producers also have to deal with increasingly uncertain climatic weather
patterns, scarcity of water, land grabbing by unscrupulous agents in developing countries
and soil degradation caused by industrialization and urbanization. As margins for
producers within the food supply chain are getting smaller and smaller, an increasing
number of farmers are now growing what they can sell at a good price in order to have
economic sustainability. Although this is fair, as long-term economic sustainability is
needed for the sector, it has an impact on the availability of core food products.

Processors
Processors are the entities in the food supply chain that transform the food products
supplied by the food producers into products that meet consumer requirements. This
process is also known as food manufacturing. This stage in the food supply chain will
either prepare fresh food from the producer in a ready-to-eat format for consumers, or use
it as a raw material to create other food products demanded by consumers. Food-
processing companies are diverse in nature and will process products at different stages:
for example, meat slaughtering and processing; preservation of fresh fruits and vegetables
either by freezing, pureing or juicing; milling of grains; making confectionery and
bakery products; and other types of food manufacturing. Food processing is an extremely
important process, as it not only sustains the food sector economy by catering to the
demands and requirements of consumers, but also helps to reduce waste and increase
food availability by increasing the shelf life of raw food products that cannot be
immediately consumed. Food processors need to work very closely with the downstream
supply chain, which comprises the entities that take the processed food to the consumer.
Food processors will need technology insertion, changes to distribution channels and
innovation in order to keep pace with environmental changes and changing consumer
demands. Another set of challenges that food processors are facing now and will face

29
increasingly in the future is scarcity of resources such as water and energy and the
availability of raw fresh food from the producers.

Retailers and distributors

This stage comprises two entities in the food supply chain: distributors and retailers.
Distributors are companies that act as the link between producers, processors and
markets. The distributors source either fresh produce or processed food from the
processors and then distribute it through various channels to reach the final consumer.
These channels are either retailing companies or other processing companies (for
example, restaurants) which provide the product to the consumer. Distributors will
generally buy in bulk and use an infrastructure of warehouses and distribution centers to
deliver the products as and when required downstream in the food supply chain.
Distribution companies are very important entities, especially when the supply chains are
global and have to cross international boundaries, as distributors have to deal with local
regulations.

Retailing is a process that showcases the product for the consumer. This can be in the
form of local corner shops or large hypermarkets and supermarkets that deal with
hundreds of thousands of stock keeping units (SKUs). The retailer stage in the chain
provides the consumer with the variety of core and innovative products that the food
sector has to offer. It is a highly competitive industry where food processors compete for
shelf space in the retailer environments and the retailers compete among themselves to
attract more consumers through their doors. Consumers have a wide choice of retailers,
retail channels and formats. Retailers try to differentiate themselves from their
competitors and are increasingly creating innovative business models that provide a
good-value proposition to consumers based on price, quality and service. Retailers are
experimenting with a variety of fulfillment channels and formats, ranging from physical
infrastructure (shops) to e-retailing. As large global retailers prospect for markets in the
developing world, the food supply chains in developing countries are undergoing a
transformation. As the retail environment in developing countries moves from an
unorganized sector (corner shops) to a more organized sector (supermarkets), the food
supply chains and distribution channels have to innovate and change their processes to
respond to retailer requirements. There is an ongoing debate within developing countries
regarding the introduction of large-scale retailers and the impact on small shops.

Hospitality sector
The hospitality sector is a key entity within the food supply chain. Although it is not
directly a retailer or distributor as such, it is an important link between the
producer/processor and the consumer. Food service agencies, hotels, restaurants and
takeaway places will source raw material from the producers or processors and transform
the food to suit the requirements of the final consumer. These entities provide a made to
order service function and are an important entity within the food sector, as they
comprise millions of small and medium enterprises, sometimes one-person organizations
delivering a very high value within the food system.

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Consumers
The consumer is the final entity in the food supply chain. The economic sustainability of
the chain depends upon the consumers buying the products and providing the necessary
cash to travel upstream through the supply chain. Food is a staple necessity for every
person on this planet and hence competition within the food supply chain concentrates on
variety and value addition and not on core produce. Recently, in the UK, food supply
chains have been subjected to a tussle between regular grocery supermarket chains and
discount grocery retailers. This has led to squeezing of margins and prices upstream as
the retailers try to outdo each other to offer the lowest-priced food products (for example,
most large supermarket chains in the UK are offering four pints of milk for 1, which is
greatly affecting the returns to dairy farmers and hence their sustainability).3, 4 Although
this is good for consumers, it leads to another debate about food sustainability and food
wastage, as food is looked upon as a very cheap resource. Ironically, as the competition
to sell more within the organized sector increases, the excessive variety of food products
(with little or no demand) and cheap food available in large quantities creates more food
wastage at the consumer end. Reducing food wastage at the consumer end has been a
major focus among governments and food-sector organizations in Europe. Food safety is
a major concern for consumers and all food supply chain entities have to take the
necessary steps to avoid food contamination. This can range from an excess of pesticides
in produced food to microbial contamination in processing to improper food handling
within the distribution and retail environment.

Types of food chain

Food supply chains can be broadly discussed as those serving markets (as industrial
products) and as those serving the final consumer. The first type works through the
trading of agriculture produce in bulk or as a commodity. The second type works towards
the fulfillment of the consumers needs.

Commodity- and producer-focused chains

The output from farms moves downstream in two formats, either directly as fresh
produce to the consumer (fresh fruit and vegetables, milk, grain and so on) or in bulk as a
raw material within food processing plants. The bulk purchase of raw food material can
be done through strategic partnerships with the producers, through traders or by buying it
as a commodity item. A commodity is an item that is subject to futures contracts. In a
futures contract the two parties in the deal sign a contract to buy or sell an item (in this
case food, for example cocoa) for a (future) price agreed today, with delivery and
payment happening in the future. The buyer speculates whether the price of the food item
will go up or down in the future and hedges the risk by signing a contract in the present
for a future price. This process is conducted at the futures exchanges. The commodity
chains deal in products such as palm oil, cocoa, coffee, sugar, cereals, grains and so on.
The supply chain model works with few buyers and many sellers. The process works as a
spot market, and price determines the movement of the product. Commodity systems
keep information flow between trading partners to a minimum. The processors, when
buying in bulk, utilize this to buy quickly, reduce costs by hedging and maintain
flexibility in product availability. Since the purchasing between the processor and
producer does not happen directly but through the futures contract, the demand signals

31
from consumers cannot be sent to the producers as there is a disconnect in the
relationship. The prices of major commodities are influenced by climate change and
uncertain weather patterns, variations in global demand and supply, and political
processes such as trade agreements. Demand and supply volatility provides the required
incentive to the futures trading environment. Traders tend to use flexibility in having
diverse sources of the products to gain some profit, as profit margins are low. Volumes in
bulk will tend to provide the returns rather than the actual trading price.

Consumer-driven value chains

Food traceability and identity are very important within consumer driven chains, as this is
the last stage of the food supply chain and has a direct impact on the well-being of the
consumer. Food products within the retail environment are processed, branded and work
effectively on the basis of uniformity in processing and high quality. Products traded in
the commodity market, for example coffee, are now moving into the retail environment
as branded, gourmet coffee, with close cooperative relations between processors and
suppliers. Unlike the commodity chain, the consumer-driven chain is more regulated,
sometimes vertically integrated, and works more on the principle of cooperation and
collaboration. The consumer-driven chain has barriers to entry, such as voluntary
standards, codes and benchmarks, international regulations and phytosanitary
certification, which can affect the entry to markets. There is a need for consistency,
which is achieved through processing and on-time delivery. The application of
management systems for quality (for example, ISO 9000) or environment (ISO 14000) or
production system (for example, organic) helps to maintain the credibility of the food
supply chain. Tracking and tracing are very important, and technology insertion is
required in the chain for this to be effective. Stringent traceability and intense scrutiny by
retailers are conducted through production site visits. It is necessary to check compliance
with buyer codes and standards and especially sustainability performance.

Factors influencing food supply chains

The food sector is a very complex environment influenced by industrial, technological,
economic, social and political factors that shape the availability of food, the nature of the
food product and the delivery of the food to our plates. Entities within the food supply
chain aim to improve the functioning of the chain, from the perspective of quality,
competitiveness and pricing along with the necessary requirements for absolute food
safety. These complexities in the food supply chain are derived from within a number of
areas:
agriculture production;
involvement of various governmental/non-governmental actors;
processing and maintaining quality;
consumer and market choices;
local authorities;
logistics companies; and
a host of other small companies actively involved in this food supply chain and
providing secondary value.

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The world around us is constantly changing. Technological innovations, new business
models, globalization and the movement of people have made food supply chains rethink
fulfillment and effectiveness parameters. Innovations in processing and transport have
made products more suitable for global distribution, and innovations in management and
information and communication technologies (ICT) have allowed supply chains to
become more responsive to the increasingly sophisticated food demands of consumers.
Some other factors that influence and affect the food supply chain are as follows.

Consideration as value chains

Food supply chains should be viewed as value chain systems in which the raw material
(from an agro-based source) is transformed for final consumption as it moves through the
chain and increases in value. Considering the food supply chain as a value chain also
means that entities along the chain can aspire to move up the value chain, thereby
increasing their share of the return. In some cases, operators across the supply chain
integrate vertically to appropriate a larger share of the total revenue, though at the cost of
lower flexibility in supplier selection. Transformation of food systems can influence
market power along the chain. The food value chain is the network of stakeholders
involved in growing, processing and selling the food that consumers eat from farm to
table. The stakeholders include:
the input suppliers to the food production process;
the producers involved in growing food;
the processors, both primary and value-added, involved in processing,
manufacturing and marketing food products;
the distributors, including wholesalers and retailers, involved in distributing,
marketing and selling food;
the consumers involved in shopping for and consuming food;
government and non-governmental organizations (NGOs) involved in creating
policies and programmes for food sustainability and security;
regulators involved in monitoring and regulating the entire food value chain from
producer to consumer;
logistics companies involved in moving, storing and managing food throughout
the value chain;
financial organizations involved in providing funding to the entities within the
food value chain.

The food value chain is also an important vehicle to address global poverty. The value
chain provides opportunity to alleviate poverty and increase food security by investment
and employment within the food sector. Increased trade within the sector allows people in
developing countries to improve their livelihoods and get access to essential services. The
value chain, when focusing on food production and food processing with the aim of
reducing food wastage and increasing food security, should also pay attention to food
accessibility, food safety and food nutrition.

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Legislation
The movement of food across international borders is subject to an agreement on the
application of the Sanitary and Phytosanitary Measures (SPS Agreement) of the World
Trade Organization (WTO). Other international standards will focus on varied topics
related to food hygiene, labelling requirements and so on. These agreements and laws
create a greater transparency when dealing in international trade. The EU food law
focuses on risks and traceability in the farm to fork supply chain, placing equal
importance on human health, animal and plant health, and the environment. The principle
is to have a precautionary approach and hence the European Commission, through
general food regulation, established the one step backward one step forward approach,
which requires operators to identify by whom and to whom a product has been supplied.
Food labeling is a key focus within EU food regulation.

Consumer choice
Global food consumption patterns have shown two diverse scenarios. The developed
world has seen an increased propensity towards consuming processed food, led by
demand from a time-starved working population. The preference for ready-to-eat or
microwaveable food products has led to innovations within the retail and packaging
environments to service this demand. However, this produces a strange phenomenon in
which fresh fruits and vegetables are more expensive than value-added processed food.
One of the reasons for this is the economies of scale that the food industry achieves when
processing food for the retail environment. Consumers in the developing world are
moving from a cereal, grain-based diet to a protein- and meat based diet. However, an
increase in meat production requires increased animal feed and more input raw materials.
To increase the availability of animal feed, food production has taken over intensive
farming. With a focus on growing animal-feed-based crops rather than crops required for
human consumption, this will have an impact on food security.

Sustainability
The global food chain is a significant contributor to global greenhouse gas (GHG)
emissions. GHGs are produced at all stages in the chain, from food production (and its
inputs) through food processing, food distribution and consumption to the disposal of
waste. Sustainability within the food supply chain must be considered on a number of
fronts. These include:
energy consumption;
carbon emissions;
water usage;
food availability;
ethical behavior;
economic sustainability.
The food supply chain should be mapped with a systems perspective in order to
understand the links and the locations that are non-sustainable. Mapping the chain also
provides a map of energy usage across the chain and an opportunity to reduce energy
consumption. This can be utilized for other resources too.

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Collaboration
Collaboration among the various stakeholders along the food value chain is extremely
important. The interdependencies between stakeholders in the chain and the wider
network should be considered as potential locations of collaboration. The recent global
cases of food recalls, food safety and traceability have become a major concern within
the food sector. Collaboration between the entities in the chain provides the entities with
confidence in the sourcing, handling and quality control of food. Collaborative platforms
help supply chain partners to have an end-to-end view of the chain. Collaboration
between producers and processors (with the use of appropriate technology) can help
reduce post-harvest food losses.

Functions of Agricultural marketing

Marketing functions are classified into three groups:

1. Exchange functions

Buying and Selling: They are directly associated with negotiating an

exchange of ownership or flow of title between a seller and a
prospective buyer. Buying activities include searching for, gathering
information about, evaluating alternative products and suppliers, and
negotiating a purchase agreement. The selling function involves
identifying and seeking out potential buyers, determining an asking price,
negotiating terms of sale, and similar activities. The ultimate aim for any
seller is to meet its consumer (buyers) needs. Thus, a farmer can be said
to be market oriented when production is purposely planned to meet
specific demands or market opportunities. For example, a contract farmer,
who wishes to meet the needs of a food processor producing sorghum-
based malted drinks will only grow improved sorghum seed. It will avoid
any inputs likely to adversely affect the storage and/or processing
properties of the sorghum and will continually seek new and better inputs
which will add further value to its product in the eyes of the customer
(food processor).

2. Physical functions

Storage: Balances supply of and demand for agricultural and food

products. Agricultural production in developing countries is usually
seasonal whilst demand is generally continuous throughout the year.
Hence the need for storage to allow a smooth, and as far as possible,
uninterrupted flow of product into the market.

35
 Transportation: 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 minimizing shipping costs.

Processing: Most agricultural produce is not in a form suitable for direct

delivery to the consumer when it is first harvested. Rather it needs to be
changed in some way before it can be used. The form changing activity is
one that adds value to the product. Changing green coffee beans into
roasted beans, cassava into gari or livestock feed, full fruit bunches into
palm oil increases the value of the product because the converted product
has greater utility to the buyer.

3. Facilitating functions

Standardization: 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.

Quality differences in agricultural products may be due to

production methods and/or because of the quality of inputs used.
Technological innovation can also give rise to quality differences.
In addition, a buyers assessment of a products quality is often an
expression of personal preference. Thus, for example, in some
markets a small banana is judged to be in some sense better than a
large banana; white sugar is considered superior to yellow sugar;
long stemmed carnations are of higher quality than short
stemmed carnations; and white maize is easier to digest than
yellow maize.

Financing: In almost any production system there are inevitable lags

between investing in the necessary raw materials (e.g. machinery, seeds,
fertilizers, packaging, flavorings, stocks etc.) and receiving the payment
for the sale of produce. During these lag periods some individual or
institution must finance the investment.

36
 Risk bearing: 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. All of these risks
are borne by those organizations, companies and individuals.

Market intelligence: It is the process of collecting, interpreting, and

disseminating information relevant to marketing decisions. 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 organization.

Note: Each of these functions adds value to the product and they require inputs,
so they incur costs. As long as the value added to the product is positive, most
firms or entrepreneurs will find it profitable to compete to supply the service.

The marketing mix

The marketing mix comprises the product, price, place (distribution) and
promotion decisions and is often called the 4 Ps. The mix is the right
combination of marketing activities to ensure customer satisfaction. Think about
your own experience of marketing approaches used by a firm. What marketing
approaches encourage or discourage you to want to buy a product from that
firm? The answer to the above question lies with the firms marketing mix. The
elements of the marketing mix are introduced below but will be treated
separately and in greater detail in the latter topics. They are:

Product: The product offering can be manipulated to create different market

effects at three levels: the core product, the tangible product and the augmented
product. At its core, a product is not a physical entity but rather the benefits that
it offers customers. Those benefits may be physical or psychological in nature.
The consumption of imported foods, in a developing country, sometimes has as

37
much to do with the status of being seen to buy sophisticated, and perhaps
expensive, products as it has with any superior physical qualities compared to
domestic equivalents. The tangible product refers to its features, quality, styling,
packaging, branding and labeling. A third level is that of the augmented product,
that is, additional service elements which are attached to the product. Examples
include after-sales service, extended guarantees, credit facilities, technical advice
and product trials.

Price: Prices should be set in relation to specific pricing objectives. Pricing

decisions include payments, terms, discounts, contract and pricing structures.
Non-price competition may come through packaging, labeling and advertising.
Prices have to reflect the costs of production and marketing and target profit
margins. A variety of approaches may be taken to pricing including cost based,
demand based, competitor based and market based.

Promotion: Promotion includes advertising, public relations, selling, exhibitions,

brochures, data sheets and free gifts. Possibly the most important decision about
promotion is the message to be communicated. The message(s) has to
differentiate the products and/or its supplier. To this end, an organization will
seek to convey a unique selling proposition, that is, to find some aspect of the
product, service or organization which others cannot, or simply do not, promote
to customers and which is perceived to be important or attractive to those
consumers.

Place: Produce distribution elements include physical distribution like storage

handling, transportation and warehousing, both on and off farm, and functional
distribution e.g. wholesaling and retailing. The decision as to which distribution
channel the organization should seek to use falls into the realm of strategic
marketing but actions within the chosen channels are operational in nature.
Input stockists, growers, processors and manufacturers have to market their
products to, and not through, channel members. To the extent that channel
members see themselves as anyones agent, they are more likely to see
themselves as agents of their customers rather than agents of product suppliers.

Importance of agricultural and food marketing

Effective agricultural and food marketing is important to developing countries

for the following reasons:
Agriculture is the biggest single industry in developing countries
o Largest employer
o Source of raw materials
o Market for manufactured goods

38
 Economic growth and development in developing countries
o Increasing urbanization
o Increasing incomes
o Increasing employment of women

Improvement of rural incomes in developing countries

o Income inequality between the rural and urban areas
o Rural-urban migration

Adoption of market liberalization and privatization policies

o Decreased participation of the public sector in marketing
o Increased participation of the private sector in marketing

What is the link between agriculture and the food industry?

The link between agriculture and food continually evolves. In primitive societies,
the farmer and consumer were either from the same family or close neighbors
who bartered their products and services, but as societies developed other
linkages were added. Commodity traders, processors who converted produce
into food items and retailers, among others, were introduced between the
producer and consumer. A more recently introduced link into the chain is the
scientist. Scientists such as breeders, biologists, nutritionists and chemists have
made an immeasurable contribution to the development of agricultural
production and food processing over the past 50 years. Thus, it would appear
that we have passed through the age of machines in agriculture, and the age of
chemicals, on to the age of biotechnology in agriculture. As the link between
food and agriculture continues to evolve, we see the emergence of an
agribusiness where agriculture and food have become a continuum. For
example, multinational companies are vertically integrated organizations with
links all the way through from agricultural production to retailing.

As disposable incomes increase and consumers become more sophisticated, the

food industry will increase the quality and diversity of the products it produces.
What expectations will food processors then have of their suppliers? Food
processors will have the following expectations of agriculture as a supplier of
their raw materials:

Quality: To build a profitable business, food processors seek to establish a

preference for their products by differentiating those products in some way
which is meaningful to consumers. Then, in order to enable consumers to

39
 recognize the differentiated product, processors brand that product. Food
processors can then work on building consumer loyalty to these brands.
Brand loyalty is normally only established by delivering high quality
consistently. As disposable incomes rise, the market tends to develop more
sophisticated needs and the quality of the raw material becomes even more
critical. Where agriculture is seeking to serve a food industry, that itself is
seeking to meet these more sophisticated needs and wants, it can expect to
face increasing emphasis on quality. Equally well, agriculture can expect to
share in the better return for innovative improvements in quality.

Cost: With an increased capability to source raw materials globally, the food
industry is able to find the lowest cost source for any given level of quality.
This has been made possible by improved transportation and
communications technologies, liberal global trade policies etc. This is a new
and significant change in the competitive environment of agriculture which
the farmers in developing countries have to realize; otherwise they will be
crowded-out by foreign competition.

Non-seasonality: Agricultural products are traditionally seasonal in their

production and supply. However, modern technology and husbandry
practices mean that food processors need not have their production schedules
dictated by the seasons. Indeed, capital intensive food industries cannot
afford to incur high costs of under utilizing their capacities. This means that
farmers will have to compete in terms of reducing seasonality of their
production.

Reliability: A food processor who has invested heavily in building up its

brand will be very keen to get reliable supplies in terms of quality, timing and
cost. Producers of agricultural produce will be increasingly judged on their
reliability in all of these respects.

Processing: Ease of processing will become an increasingly important

expectation of the food industry. Like all industries, reductions in the costs of
capital equipment, wages and inventories are important objectives. For
example, farmers who can deliver on the just-in-time principle will
contribute towards reducing a processors working capital and space
requirements. Farmers who can do part of the secondary processing and/or
performing functions such as the post harvest treatment of the crop or
transporting will be adding another advantage. Crops and animals that are
specially bred or designed to facilitate processing (e.g. seedless fruits,
featherless chickens, coffee beans without caffeine, low cholesterol meats)
provide another source of advantage that the food industry could expect from
agriculture. In short, the competitive advantage will rest with those able to

40
 add most value and can differentiate what they are offering from that of other
suppliers.

Product differentiation: In competitive brand marketing, the food industry

has to innovate continuously to create new products that are different from
and superior to existing ones of their own or competitors. The scope of
innovation has traditionally been at the processing stage. Whilst this will
continue to be an important area for innovation, food processors will
increasingly tend to look for innovative changes in the agricultural produce
itself. This may be in terms of novel tastes, improved texture, more attractive
shapes etc.

Health aspects: Faced with increasingly sophisticated food markets, farmers

will have to consider the health implications of what they choose to grow.
There are currently two aspects of health to be taken into account. First,
consumers are increasingly getting concerned about the health status of the
food itself i.e. low fat/cholesterol, low/no sugar, low/no salt, or its
nutritional value. Second, consumers are concerned about the food
production methods i.e. the avoidance of chemicals like herbicides, pesticides,
veterinary drugs etc. This may mean a change to the farmers husbandry
practices with implications for the costs of production.

41
Week : 07
Lecture : 13 & 14
Lecture Topic : Marketing Efficiency

Marketing Costs
The cost involved in moving the product from the point of production to the point of
consumption i.e. the cost of performing the various marketing functions and of operating
various agencies is called marketing cost.

The market functionaries involved in moving the produce from the initial point of
production till it reaches the ultimate consumer, charge profit margin for the service
rendered.
The cost involved in marketing plus the profit margin changed by the market
functionaries for the service rendered constitute market margin.

Price Spread
The difference between the price paid by the consumer and the price received by the
producer for an equivalent commodity is known as price spread, some times this is
termed as marketing margin.
'Three methods are used in the estimation of price spread

1) Lot Method
A specific lot or consignment is selected and chased through the marketing system until it
reaches the ultimate consumer. The cost and margin involved at each stage are assessed
and added to get the price spread.

Limitations of this method

1. It is difficult to chase the movement of a lot from the producer to the ultimate
consumer .
2. Most of the lots lose their identity because either the product gets processed or lot
gets mixed up with other lots.

42
 3. There is no assurance that the lot selected is representative of the whole product.
This method is appropriate for perishable commodities like vegetables, fruits and
milk.

2. Sum-of-Average Gross Margin Method

The average gross margins of all the intermediaries are added to obtain the total
marketing margin as well as the breakup of the consumer's rupee.

Where,
MT = Total marketing margin
th
Si = Sale value of a product for i intermediary
th
Pi = Purchase value paid by the i intermediary
th
Qi = Quantity of the product handled by the i intermediary
i = 1, 2 ..N {number of intermediaries involved in the marketing channel

Difficulties in using this method are

1. Traders may not allow access to their account books because they may make false
entries to evade sales and income tax.
2. This method necessitates adjustment for the difference between the quantities
purchased and sold because a part of the product is wasted during handling.

3. Comparison of Prices at Successive Levels of Marketing

Under this method prices at successive stages of marketing at the producer,
wholesaler and retailer level are compared. The margin of an intermediary is
worked out by deducting the ascertainable costs incurred by that intermediary.

The difficulties in the use of the this method are

1. Representative and comparable series of prices for the same quality at successive
stages of marketing are not readily available for all the products.

43
 2. Adjustment for loss in the quality of the product at various stages of marketing due
to wastage and spoilage in processing and handling is difficult.
3. The time lag between the performance of various marketing operations is not
properly accounted for .

Marketing efficiency

The term marketing efficiency refers to the effectiveness or competence with which a
market structure performs its designated function.

Efficient marketing

A reduction in marketing cost without reduction in consumer satisfaction indicates

improvement in efficiency. A higher level of consumer satisfaction at higher marketing
cost may mean increased efficiency if the additional satisfaction derived by consumer out
weighs the additional cost incurred on the marketing process. But a change that reduces
cost but also reduces consumer satisfaction need not indicate increase in marketing
efficiency. .Efficiency of marketing system could be looked at two angles.
1. Technical or physical or operational efficiency
2. Pricing or allocative efficiency.

Technical Efficiency

Efficiency is said to have increased when cost is reduced for performing a function for
each unit of output. This can be brought out by reducing physical losses or through
change in technology of the function viz storage, transportation, handling and processing.
A change in the technique may result in the reduction of per unit cost.

44
Pricing Efficiency

Pricing efficiency means that the system is able to allocate farm products either over
time, across the space or among the traders, processors and consumers in such a way that
no other allocation would make producers and consumers better off. This is achieved via
pricing of the product at different stages at different places, at different time and among
different users.
The above two types of efficiencies are mutually reinforcing in the long run, one without
the other is not enough.

Market integration

Integration shows the relationship of firms in a market. The extent of integration

influences the market conduct of the firms and consequently their marketing efficiency.
Markets differ in the extent of integration and, therefore, there is a variation in their
degree of efficiency.

Market integration is a process which refers to the expansion of firms by consolidating

additional marketing functions and activities under a single management.

Types of market integration

There are three basic kinds of market integration.

1) Horizontal Integration
In this type of integration, some marketing agencies (say, sellers) combine to form a
union to reduce their effective number and the extent of actual competition in the market.
e.g. Primary milk producers cooperative society.

45
2) Vertical integration
Vertical integration occurs when a firm performs more than one activity in the sequence
of the marketing process. It is linking together of two or more functions in the marketing
process with in a single firm or under a single ownership. For e.g. if a firm assumes
wholesale as well as retailing, it is a vertical integration or rice processor under taking
retailing.

3) Conglomeration
A combination of agencies or activities not directly related to each other may operate
under a unified management. Examples of conglomeration are Hindustan Lever Ltd.
{Hima peas and soaps) and Delhi Cloth and General Mills {cloth and vanaspathi).

Market Structure
It refers to those organizational characteristics of a market which influence the nature of
competition and pricing and affect the conduct of business firms.

Components of a Market Structure which together determine the conduct and

performance of the market are concentration of market power, degree of product
differentiation, conditions of entry of firms in the market, flow of market information and
degree of integration. The market structure determines the market conduct and
performance.

Market Conduct refers to the patterns of behaviour of firms, specially in relation to

pricing and their practices in adopting and adjusting to the market in which they function.
Market conduct includes Market sharing and Price setting policies, polices aimed at
coercing rivals and policies towards setting the quality of products.

Market performance refers to the economic results that flow from the industry as each
firm pursues its particular line of conduct.

46
Defects of Agricultural Marketing Systems
1. Lack of organization among farmers.
2. Forced sales by farmers.
3. Superfluous middlemen: more middlemen are engaged in marketing than it can
actually engage in.
4. Multiplicity of Market charges
5. Malpractices in weights and measures adopted by middlemen in the markets.
6. Multiplicity of weights and measures.
7. Adulteration
8. Inadequate storage facilities.
9. Inadequate transport facilities from villages to taluks or district head quarters.
10. Lack of financial facilities at .Cheaper interest rates.

Needed Strategies to improve the Agricultural Marketing System

1. Improvement of facilities ,available at Regulated markets and attraction of farmers
to use the facilities.
2. Use of metric system of weights and measures.
3. Increased provision of storage facilities at the village level. Encouraging farmers to
make use of Rural godown, SWC and CWC godown.
4. Improvement in Transport facilities between taluk/district head quarters and
villages. Provision of bus facilities to all villages.
5. Provision of market news through mass media in vernacular language.
6. Restructuring the functioning of co-operative marketing societies by periodically
conducting elections.
7. Announcement of remunerative support prices before the commencement of
season.

47
 Market Conduct
1. Firm objectives
2. Pricing, product differentiation policies
3. Inter firm co-ordination,
competition/collusion

Market performance
Market structure
1. Technical efficiency
1. Degree of seller or buyer
2. Distribution efficiency
concentration
3. Allocative efficiency
2. Product character/
4. Technological
Homogenous/ differentiated
progressiveness
3. Condition of entry
5. Product performance
4. Vertical integration
5. Diversification

Public policy

1. Monopolicy
2. Industrial policy

Fig : Influence of Market Structure on Market Conduct and Performance

Price Determination
Characteristics of different markets

48
1. Price Determination under Perfect Competition Market price is determined by the
equilibrium between demand and supply in a market period of short run (Short run
production period is one in which at least one factor of production is fixed). The demand
and supply equilibrium is shown in Fig 3. 3. Given the supply the shifts in demand curve
and its intersection with supply curve determine the equilibrium price. When demand is
D1D1 the equilibrium price is P1 at that market determined price the individual firm is a
price taker and equates P1 (which is also the Marginal revenue and Average Revenue for
the firm )with its Marginal Cost . Then the firm produces q1 quantity of output and sells
it at P1 price and earns super normal profit (Fig 3.4.) When the demand curve shifts to
D2D2 the market equilibrium price is P2 and firm equates this price to MC and produces
q2 quantity. But P2 is less than AC And above AVC hence it covers AVC but not AFC(
AFC= AC-AVC) and hence it is incurring loss at the short run but will continue
production since it covers a part of AFC. As the Demand further shifts down to D3D3
the new equilibrium price is P3. At that price , P3 =MC=AVC which is just sufficient to
cover Average Variable Cost. If the price falls below P3 the firm will pull down its
shutters since the price does not cover AVC.

49
Week : 08
Lecture : 15
Lecture Topic : Price Determination

Price Determination under Monopoly

Monopoly is a market form in which a single producer controls the whole supply of
single commodity and which has no substitute. The price determination under monopoly
is depicted in following Fig.

Fig: Price determination under monopoly

A firm under monopoly faces a downward sloping demand curve or average revenue
curve (AR). This means that as the monopolist lowers price demand for his product
and vice versa. Monopolist also equates Marginal Cost with Marginal Revenue ,
produces Qm quantity of output and sells at price P. Under monopoly the firm MR is
less than AR (Price). Thus the condition states that MC = MR < AR (Price). Where as
under perfect competition MC = MR = AR.

50
3. Price determination under monopolistic competition
An industry ( a group firms producing identical product) may consist of many firms
each making a product which differs only in detail from that of its rivals . Each firm,
since its product is not homogenous with that of other firms, enjoys some monopoly
power. On the other hand, because there is no real gap in the chain of substitution,
there is competition from other firms. What we really have is a number of small
monopolists competing with one another monopolistic competition.

a) The short period

In the short period existing firms can not increase production by employing additional
fixed factors, nor can new firms enter. Each firm, therefore, is little monopolist
having a down-sloping demand curve for its product and producing where MC equals
MR. Because there are many firms, each firm can set its price without having to
consider the reaction of competitors. The price will be greater than MR, and
supernormal profits are made (Fig 3.6a).

b) The long period

In monopolistic competition the full long period equilibrium position is possible only
when both firms and industry are in equilibrium. Whereas for each firm the condition
of equilibrium (MR = MC) will apply whatever the output, for the industry we must
allow , as with perfect competition, for entry of new firms and for increased
production by existing firms. This is where monopolistic competition differs
essentially from monopoly; with the latter, one firm is the industry.
The increase in supply in the long period will lead to a fall in the price of good, and
the demand curve facing each producer shifts its position downwards to the left, for
more producers are dividing up the total market. At the same time, it is likely that the
demand curve will become more elastic, for all products of the group will tend to
become more similar to that of the most successful. In other words each brand
becomes a better substitute for other brands.

51
 This will continue until supernormal profits have disappeared. Each firm will be
earning only normal profits. A comparison of the equilibrium position of the firm in
the short period and long period under monopolistic competition is shown in Fig 3.6.

A comparison of the equilibrium position of the firm in the short period and the long
period under monopolistic competition is shown in Fig 3.6. In the short period output is
OM, where MR = MC. But the inability to add to fixed factors means that supernormal
profits exist, equal to ABCD. In the long period, the entry of close substitutes causes the
AR curve to fall supernormal profits disappear, and the equilibrium output is OM1,
where MC = MR and AC = AR(Fig 3.6b).

Fig 3.6 Monopolistic competition : Equilibrium of the firm in Short run and
Long run
A comparison of the equilibrium position of the firm in the short period and the long
period under monopolistic competition is shown in Fig 3.6. In the short period output is
OM, where MR = MC. But the inability to add to fixed factors means that supernormal
profits exist, equal to ABCD. In the long period, the entry of close substitutes causes the
AR curve to fall supernormal profits disappear, and the equilibrium output is OM1,
where MC = MR and AC = AR(Fig 3.6b).

52
Week : 08
Lecture : 16
Lecture Topic : Pricing

What is Price?
Price is the amount asked for a sales unit of your product or service. It should be a
function of your input costs, operating expenses, desired profit, level of service provided,
price of competing products and the overall product demand. Your firms income is the
result of your sales volume and your product(s)/service(s) price(s), hence the importance
of setting competitive prices. Competitive prices will allow you to sustain business
operations and make a profit, while at the same time attracting customers and building
sales.

Three key aspects you need to keep in mind when considering pricing are:
1) The customer is the focal point for your business, so you need to know:
Who the customers in your target market are
What they want from your product/service
Their willingness to pay for your product/service

2) You operate in a competitive market, therefore, it is very important to establish:

Who your competitors are
What they are offering and how much they are charging for their product/service
If you have, or if you can develop, a competitive advantage over your competition
If you will be able to charge a higher price than your competition (i.e. be a price
setter) or if you will need to be a price-taker in this market

3) Your prices reflect your product/service position in the market so you must decide:
How do you want your product/service to be perceived in the market
Whether or not your price correctly positions your product/service in the minds of
your current/prospective customers
Your product/service position in the market is the overall perception your customers have
of your firm and your product/service versus their perception of competitors and their
products/services, in the same category. As part of the marketing strategy marketers
develop positioning statements to create the desired image of their company and
product/service in the mind of their customers.

53
How to Set (and Get) the Right Prices
It is your job to thoroughly understand what the price and attributes/benefits of your
product/service are and to be knowledgeable about those attributes/benefits that are
valued by your customers. This knowledge will allow you to determine how high you can
set your prices and still attract customers in your target market. Always keep in mind that
your ability to deliver value to your customers over and above your competitors has a
direct impact on the pricing strategy.

Using the Market Price as a Benchmark

A good starting point in defining your prices is to identify the market price for your
product/service, determine how this price compares with your costs and whether or not it
fits your business plan. To determine what is selling, to whom and for what price, you
need to do some market research. You can do it by talking to your vendors, by gathering
information from your competitors, checking publications and competitors advertising,
going to trade shows, etc.
Once you have a good idea of what the going or market price for your product/service is,
you need to determine the difference between that price and your costs. Evaluating
those differences needs to be nuanced enough to consider the quality, any added services
and other features of your product/service. Ask yourself:
Can I charge a higher price for my product/service (i.e. be a price setter) or will I have
to go with the market price? (i.e. be a price-taker)
Will I be able to make a profit at this price or will I most likely incur ongoing operating
losses?

Prices and Your Marketing Mix

When considering prices for your product(s)/service(s), a very important aspect to keep
in mind is that they need to be consistent with the other elements of your marketing mix
(Product, Placement/Distribution, and Promotion.)

You need to constantly be asking yourself:

Product: is my price in line with my customers perceptions of the quality and service
of my product/service? If this is not the case, you need to consider either lowering or
raising your prices accordingly or re-educating your customers about your
product/service.
Placement/Distribution: is the price of my product/service consistent with the
distribution channels that I am using? If not, you need to identify a better suited channel
for your product/service.
Promotion: is my advertising message consistent with my products price and the
image/position I want to convey? If not, you need to adjust the message accordingly.

54
 Common Pricing Strategies

Pricing strategies commonly used by firms can be classified as skimming, penetration,

premium or economy pricing. Which of these would be appropriate for your firms
product/service?
Skimming Pricing is often used when there is no competitor in the market, allowing one
to charge a fairly high price for a new or innovative product. Price can be reduced over
time, as those customers who are early adopters have tried the product or as competition
starts moving in.

Penetration Pricing is used when a firm wants to increase its presence in a given market.
It consists in setting a low initial price to gain market share, stimulate sales and/or to
defend market share of products that are in a later stage of their life cycle.

Premium Pricing consists in asking a high price for a product that is unique in some
way. This is a strategy commonly used by those firms that have a substantial competitive
advantage (e.g. organic fruits and vegetables, locally grown fruits and vegetables, Godiva
chocolates.)

Economy Pricing consists of setting a low no frills price. It is a strategy in which

production and marketing costs are kept as low as possible (e.g. CostCo, ALDI, etc.)

Common Pricing Mistakes

First worst pricing mistake: lowering prices to compete on price alone - it makes it
difficult for businesses to cover costs and make a profit and conveys an image of lower
quality. Having the lowest price IS NOT a strong position for small businesses as large
competitors with lots of money (and the ability to reduce their direct/variable costs) can
easily drive them out of business.

Second worst pricing mistake: lowering prices without reducing the benefits/services - it
conveys the image of over-inflated prices
Smart pricing is good marketing and the key to avoiding mistakes from the beginning!

55
Week : 09
Lecture : 17 & 18
Lecture Topic : Pricing Methods

What You Need to Know to Calculate your Prices

Either a forward or a backward analytical process can be used to calculate your
prices. The forward approach starts by considering your costs of production,
distribution and promotion as well as the margins of those involved in the supply chain,
to arrive at a retail price. The backward approach starts with the retail price and
subtracts the margins typically taken by participants in the supply chain to arrive at the
price you will need to be competitive. Your price should cover your costs and allow for a
profit:

Price = Costs + Profits

To calculate your prices you need to know:

Your Total Costs

To determine your costs, take into consideration everything that it takes you to get your
product/service to the market. Include purchases of supplies and materials, packaging,
production, labeling, marketing and sales expenses, overhead, administration, salaries,
benefits, etc. Your production costs are the sum of your direct/variable costs (also called
costs of goods sold) and your indirect/fixed costs.

What are Your Direct/Variable Costs?

Direct/variable costs are the checkbook or out of pocket expenses incurred each time
you sell a product/service. They are directly related to your sales volume and include
costs of materials, labor costs, commissions, shipping, packaging, delivery charges, etc..

What are Your Indirect/Fixed Costs?

These are the costs incurred regardless of sales volume. They include rent, administrative
costs, real estate taxes, insurance, depreciation, etc.

What are Your Production Costs per Unit?

Unit Costs ($) = Direct/ Variable Costs ($) + Indirect/Fixed Costs($)

Units produced (lbs, dozens, bags, etc.)

What is The Contribution Margin Per Unit?

The Contribution Margin per Unit is the amount of money that you have left after
covering your direct/variable costs/unit. It is based on the idea that each unit sold

56
provides a return that goes toward covering fixed expenses. In a profitable business it
should be enough to cover your indirect/fixed costs and your profit:

Contribution Margin per Unit = Price/unit Direct/Variable Costs/unit

What is the Break Even Point?

The Break Even Point represents the number of unit sales you need to cover costs. In
other words, it is the price at which you just cover both direct/variable costs and
indirect/fixed costs. Always ask yourself whether you will be able to sell the number of
units required to break-even at the price you set. If you cant sell this number of units you
will be operating at a loss!

Break Even Point = ___Indirect/Fixed Costs____

Contribution Margin per Unit

What Would Your Profit Be?

Profits are the income you generate after covering your costs (direct/variable and
indirect/fixed/operating/administrative costs). You can calculate your profits as the
difference between your price and total costs per unit multiplied by your sales volume:
Profit = Sales Volume* (Price Total Cost)/unit
Supplement No. 2, at the end of this module, provides an example and opportunities to
calculate these parameters for your product(s)/service(s).

Calculating your Prices

To calculate your prices, you can use either a Cost and Profit approach or a Planning
for Profits approach.

The Cost & Profit Pricing Methods

Three commonly used Cost & Profit pricing methods are Gross Margin Pricing,
Markup Pricing and Break-Even Point Pricing. As illustrated below, your Cost of
Goods Sold constitutes the basis for calculating your selling prices when using these
methods. Cost of Goods Sold corresponds to the direct/variable costs per unit of
product produced.

The Gross Margin Method

In this case, the Selling Price is calculated based on the Cost of Goods Sold and the
desired Gross Margin (GM):

57
 Selling Price = Cost of Goods Sold
1 Desired GM

Example: Cost of Goods Sold = $2.50

Desired GM = 40%
Selling Price = $2.50/ (1 0.40)
Selling Price = $2.50/0.60
Selling Price = $4.17

Conversely, the Gross Margin (GM) for a particular selling price can be calculated as the
difference between the direct/variable costs of your product/service and its selling price,
weighted by the selling price:
Gross Margin (%) = Selling Price Cost of Goods Sold x 100
Selling Price

GM = $4.17 - $2.50 x100 = 40%

$4.17

The Markup Method

A markup (typically expressed in percentage terms) is an increase applied to the

direct/variable costs (or cost of goods sold) of a product/service to determine a selling
price. Markup pricing may be more appropriate when reselling a product. In fact, many
retailers and middlemen prefer to use markups rather than gross margins in their price
calculations.

Selling Price = Cost of Goods Sold + (% Markup x Cost of Goods Sold)

Example: Cost of Goods Sold = $2.50

Markup = 40%
Selling Price = $2.50 + (0.4 x $2.50)
Selling Price = $3.50

The Break- Even Point Method

The Break-Even Price is the lowest price you can charge while still covering your
product/services costs/expenses. At this Selling Price, no profits are accrued.

Break-even Price = (Direct/Variable costs + Indirect/Fixed Costs)

Number of units produced

58
Supplement No. 3, at the end of this module, provides an example and the opportunity for
you to calculate the price of your product(s)/service(s) through the Gross Margin and
Markup Methods.

Planning for Profits Pricing Methods

You can also calculate your prices on the basis of a specific profit goal or sales volume
goal.

Setting a Profit Goal

This method is based on setting a specific profit goal ($) and then determining the
number of units you need to sell, at a certain price, in order to meet that goal. For that
purpose, you calculate your sales volume at the Profit Break Even Point.

Profit Break Even Point = ___Profit Goal_____

Contribution Margin per Unit

Where Contribution Margin per Unit = Price/unit Direct/Variable Costs/unit

Setting a Sales Volume Goal

Alternatively, you can set a sales volume goal and then calculate the expected profit at
the price you have set.

Profit = (Sales Volume x Contribution Margin per Unit) Total Costs (Direct+
Indirect Costs)

A good practice is to try several different methods to calculate the prices for your
product(s)/service(s). But, keep in mind that, regardless of the method you choose to
determine your prices, as a smart marketer, you want to ensure that they match the other
components of your marketing mix (product, placement/distribution and promotion).

Price Setters and Price Takers

Whenever a firm sets a price, it needs to strive for a balance between what it wants to
charge and what the buyer (middlemen/consumers) will accept.

Price Setters
Price setters determine the prices they charge for their product(s)/service(s). Examples of
price setters include retailers, direct marketers and firms selling products/services to

59
niche markets. A farmer doing direct marketing is a price setter but, at the same time,
needs to carefully observe prices at retail and wholesale markets before setting his/her
own prices.

Price Takers
Price takers in the market have to settle for what the market dictates. Price takers are
usually firms that produce an identical product/service in a market where there are few
barriers to entry or exit and where there are a large number of participating firms, each
supplying only a small portion of the total market volume. As a result, these firms have
no control over the prices they charge for their product(s)/service(s) in such markets.
Price takers face a totally elastic demand for their product(s)/service(s) which means that
they can sell into that market in any quantity at the market price.

How Can Price Takers Change their Fate?

Strategies that price takers can implement to change their fate include:

Developing alternative products/markets: moving out of commodity products and getting

into more niche markets will provide an opportunity to become a price setter rather
than a price taker. Example: ethnic foods, baby vegetables, fresh herbs, edible flowers,
etc.

Differentiating products: differentiation can bring about higher prices and increased
product demand. Strategies include branding, pre-packaging and new uses for a
commodity product. Example:

Locally-grown produce
Adding value: many customers are looking for a combination of quality, convenience and
price. Incorporating value added features that customers recognize and appreciate will
have a positive impact on the price they will be willing to pay. Example: Pre-cut
vegetables ready to cook/grill.

60
Week : 10
Lecture : 19
Lecture Topic : Marketing Research

Marketing Research is defined as gathering, recording and analyzing of all the facts
about problems relating to the transfer and sale of goods and services from producer to
consumer.

Marketing Information System is defined as a set of procedures and methods for the
regular and planned analysis and presentation of information for the use of marketing
decisions.

Marketing Information System (MIS) Marketing Research

It presents the problems pertaining to a
1. It suggests methods to prevent and solve the particular field of activity
problems for the whole organization under
different perspectives e.g. sales advertising,
cost of distribution etc.

It is only a post mortem of what had

2. The past experiences form the basis for taken place already, in most cases.
future and the results are future oriented.

It remains as a source for contributing

3. It is fairly a wide concept and includes necessary information to the MIS.
marketing research as one element.

It operates more often on specific

4. It is a continuous process problems

It is concerned with finding out

5. It anticipates, prevents as well as solves solutions for marketing problems.
problems related, to marketing

Elements of Marketing Research

Market Research
Sales Research
Product Research
Packaging Research
Advertising Research
Business Economics Research
Export Marketing Research

61
Scope and uses of Marketing Research
It helps in a) production of marketable goods b) distribution of marketable goods c) size,
nature and organization of sales and d) demand creation activities.

Forms of Research : Marketing research may be classified a) Ad hoc Research b)

Continuous Research c) Exploratory Research and 4) Conclusive Research

Steps in Marketing Research

a) Problem formulation
b) Decision on Fact-gathering Procedure Data Collection
c) The Marketing Sample Data Evaluation
d) Interpreting the data Report preparation
e) Executive Report
f) Technical Report
g) Data Report
h) Popular Report

Agricultural Marketing Finance

Finance required for agricultural marketing represent funds required for moving the
crops from the farm to the consumer or the manufacturer for further processing. Thus
there exists close relationship between agricultural production, and consumption and
industrial production. The growth of agriculture is a precondition for industrial
development.

Special features of Agricultural Marketing Finance

The agricultural marketing finance assumes importance because of certain special
characteristics of farming. For instance, the farmer's credit worthiness is invariably
not sound for obtaining necessary finance. They are often isolated and remote from
the normal opportunities of obtaining credit.
The other special features are
a) The need for finance is recurring in nature.
b) Lack of commercial knowledge make it difficult to anticipate production prospects.
c) Sharing or shifting of risk in production is not possible
d) Small units of production
e) Changing climatic conditions are beyond the control of agriculturists and very
often their expectations go wrong.
f) Organized marketing procedure is not adopted because of which forced sales take
place in villages.

62
Kinds of Finance Requirement
Some of the finance requirements in agricultural marketing are

Farmer: Production -consumption -transport of produce to market is finance

requirements

Middlemen : Working expenses, storage, transport finance requirement

Marketing Institutions : For building storage godowns, transport vehicle loan, working
capital, to grant advance against pledge of produce.

Sources of Finance
1. Indigenous money lenders
2. Cooperative societies
3. Commercial Agencies
a) NABARD (refinance facility)
b) Agricultural Finance Corporation Limited
c) Agricultural Refinance Corporation
d) Regional Rural banks
e) Commercial banks
4) Other sources: These include Nidhis, chit funds, and private financing agencies

Marketing Risk
Risk is defined as uncertainty about cost, loss or damage. Risk is inherent in all
marketing transactions. The risks associated with marketing process are of three basic
types.

i) Physical Risk
This includes a loss in the quantity and quality of the product during the
marketing process. It may be due to fire, flood, earthquake, rodents, insects, pests,
fungus, excessive moisture or temperature, careless handling and unscientific storage,
improper packing, looting or arson. These together account for a large part of the loss of
the produce at the individual as well as at the macro level. Such losses are loss to the
society also and must be prevented to the extent possible.

ii) Price Risk

The prices of agricultural products fluctuate not only from year to year, but during the
year from month to month, day-to-day and even on the same day. The changes in
prices may be upward or downward. Price variation cannot be ruled out as the factors
affecting demand for and the supply of agricultural products re changing
continuously. A price fall may cause a loss to the trader or farmer who stocks the
produce. Some times the risks are so great that it may result in a total failure of the
business, and the person who owns it may become bankrupt.

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iii) Institutional risk
These risks include the risk arising out of a change in Government's budget policy, in
tariffs and tax laws, in the movement restrictions, statutory price controls and the
imposition of levies.

Minimization of Risks
'The agencies engaged in marketing activities worry about the risks associated at every
stage; and they continually try to minimize the effects of these risks. A risk cannot be
eliminated because it also carries profit. The risk can be minimized by adoption of some
of the measures given below.

1. Reduction of Physical Loss

The physical loss of a product may be reduced by use of fireproof materials in the storage
structures to prevent accidents due to fire;
1. Use of improved storage structures and giving necessary pre-storage treatment to
the product to prevent losses in quality arising out of excessive moisture,
temperature, attacks by insects and pests, fungus and rodents;.
2. Use of better and quicker transportation methods and proper handling during
transit; and
3. Use of proper packaging material.

2. Transfer of physical losses to insurance companies

3. Minimization of price risks
a. Fixation of minimum and maximum prices for commodities by the government and
allowing movement of prices only within the defined range.
b. Making arrangements for the dissemination of accurate and scientific price
information to all sections of society over space and time.
c. Operation of speculation and hedging. The prices associated with commodities for
which the facility of forward trading is available may be transferred to
professional speculation through the operation of hedging.

64
Week : 10
Lecture : 20
Lecture Topic : Class Test

Class Test
&
Presentation Topic
Discussion

65
Week : 11
Lecture : 21 & 22
Lecture Topic : Marketing Institutions and Government Intervention

Regulated Markets
Markets in which business is done in accordance with the rules and regulations framed by
the statutory market organization and represent different sections involved in markets.
The marketing costs in such markets are standardized and practices are regulated. As on
1995-96 there are 6968 regulated markets in India.

It is not compulsory for the farmer to sell his produce. in the regulated market yard.
Instead voluntary action on the part of the farmers to take advantage of such a market is
assumed. It acts as an alternative marketing system. The basic philosophy of the
establishment of regulated market is elimination of malpractices in the system and
assignment of dominating power to farmers or their representatives in the functioning of
markets. The specific objectives of the regulated markets are :
1) to prevent the exploitation of farmers by overcoming the handicaps in the
marketing of their products.
2) to make the marketing systems most effective and efficient so that farmers may get
better prices for :their products and goods are made available to consumers at
reasonable prices;
3) to provide incentive prices to farmers for a better production programme both in
quantitative and qualitative terms; and
4) to promote an orderly marketing of agricultural produce by improving the
infrastructure facilities.

Methods of Sale: Either open auction or by the closed tender method is followed.

Weighment of Produce: It is done by licensed weigh-man with standard weights and

platform scale.
Grading of Produce: The produce is sold only after grading, but only 13 percent of
regulated markets have grading facilities.

66
Market News Service: Arrangements are made for proper and correct dissemination of
market prices through various media such as loud speakers and notice boards.
Market Charges : the buyers of agricultural produce pay the market charges Payment
of the Value without deduction. The buyers should make prompt payments for the
produce

State Agricultural Marketing Boards

They were established to supervise and provide guidance to market committees. The
main functions of the board are
1) To carry out the training of officers and staff, create facilities for grading and
standardization, construct market road and approach roads to the markets,
construct market yard and sub- yard, establish and maintain the Board office and
others as specified;
2) To tender advice to the government on the functioning of market committee and on
improvement in agricultural marketing as and when referred to, and
3) To frame byelaws, help in the functioning of market committees and supervise
their operations.

Co-operative Markets
The efforts of the government to improve the marketing system of agricultural
commodities have been only partially successful. The progress of regulated markets is
hot uniform in all areas. So the establishment of co-operative marketing societies is
another step taken to overcome the problems arising out of the present system of
marketing agricultural produce.

Meaning
A cooperative sales association is a voluntary business organization established by its
member patrons to market farm products collectively for their direct benefit. It is
governed by democratic principles, and savings are apportioned among members on the
basis of their patronage.

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Functions
The main functions of co-operative marketing societies are :
1) To market the produce of the members of the society at fair prices;
2) T o safeguard the members from excessive marketing costs and malpractices.
3) To make credit facilities available to the members against the security of the
produce brought for sale.
4) To make arrangements for the scientific storage of the member's produce. T o
provide the facilities of grading and market information which may help them to
get a good price for their produce;
5) To introduce the system of pooling so as to acquire a better bargaining power than
the individual members having a small quantity of produce for marketing
purposes.
6) To arrange for the export of the produce of the members so that they may get better
returns
7) To act as an agent of the government for the procurement of food grains and for
the implementation of the price support policies.

Types of Cooperative Marketing Societies

On the basis of the commodities dealt in by them, the cooperative marketing societies
may be grouped as
i) Single commodity marketing societies e.g. Sugar cane Cooperative Marketing
Society, Cotton Cooperative Marketing Society, Milk Cooperative Marketing
Society
ii) Multi -commodity cooperative marketing societies.
iii) Multi-purpose, Multi- commodity cooperative marketing societies.

Progress
The value of agricultural produce marketed through the cooperative marketing societies
increased from Rs.53 Crores in 1955-56 to Rs.6274 Crores in 1989-90. The produce
marketed through these societies account for 8 to 10 percent of the marketed surplus. The
progress of marketing societies varied from state to state and within each state from

68
commodity to commodity. Food grain, cotton, sugar cane, oil seeds, fruits, vegetables and
plantation crops were important commodities marketed ~ these societies. Maharashtra,
U.P, Gujarat, Punjab, Karnataka, Tamil Nadu and Haryana together account for more
than 80 percent of the total agricultural produce marketed through cooperatives in the
country.

Over 70,000 retail outlets of these societies deal in agricultural inputs. The value of
agricultural inputs marketed by marketing societies has increased from Rs.36 Crores in
1960-61 to Rs. 2117 crores in 1989-90. During the last 30 years (1960-61 to 1989-90) the
number of Primary Agricultural Co-operative Marketing Societies increased from 3108 to
6908.

Reasons for Slow Progress of Co-operative Marketing Societies

The main reasons for slow progress are
i) Fanners do not make use of cooperative societies since they are situated at distant
taluk levels, fanners need cash after harvest to meet personal obligations and
also they are indebted to local moneylenders.
ii) In some cases rivalries among fanner members result in indecision, which retards
the progress of societies.
iii) Societies do not provide facilities of food and shelter to fanners when they visit
the market for the sale of the produce.
iv) Managers of societies do not offer business advice to fanners, and they often get
linked with local traders and become impersonal to the needs of the majority
of small and marginal fanners.
v) Lack of funds with societies to meet the credit needs of the fanners against
pledging of the produce brought for sale. They also do not have storage
facilities.
vi) They are not capable of carrying on their business in competition with traders and
commission agents because of absence of adequate business expertise among
their employees.

69
Suggestions for strengthening of Cooperative Marketing Societies
i) The area of operation of societies should be large enough so that they may have
sufficient business and become viable.
ii) Storage facilities, transport facilities, accommodation and drinking facilities should
be strengthened in the societies.
iii) Cooperative feeling among members should be inculcated by proper education
and adequate representation should be given to small and marginal farmers in
their organizational set up.
iv) In selection of officials of cooperative marketing societies weight age should be
given to business experience and qualification. After selection proper thinking
should be given.

Forward Trading / Future Trading

Forward Trading is a device for protection against the price fluctuations, which
normally arise in the course of the marketing of commodities. Stockiest, processors or
manufacturers utilize the futures or contracts to transfer the price risk faced by them.

Speculation involves purchase or sale of a commodity at the present price with the object
of sale or purchase at future date at a favourable price. Speculator is concerned with
profit making from price movements. He purchases when prices are low, so he is not a
normal or regular trader. The difference in the prices prevailing at two times constitutes
his profit. Speculator may lose in this process.

Hedging refers to the purchase or sale of a commodity in a futures market accompanied

by a sale or purchase in !'the cash market.

Benefits
i) It protects the hedger from sustaining loss and enables him to earn his normal trade
profit.
ii) Hedging enables him to keep the trade margin at a lower level because there is no
risk.

70
 iii) Hedging facilitates the financing of inventories of stored commodities to the
maximum possible extent.

Role of Government in Promoting Agricultural Marketing

In the interest of public welfare, the government intervenes in the marketing system.
The extent of intervention depends on the objectives of the government and the extent
of defects and malpractices prevailing in the system. Government intervention maybe
direct or indirect, and it may take anyone or a combination of the' following forms.
1. The framing of rules and regulations for the protection of the interest of some
sections of the population. This may include restriction on activities of traders,
licensing and market regulation.
2. Promotional activities such as storage and warehousing, transportation and
communication facilities, credit facility, grading and standardization, and
encouragement of co-operative marketing.
3. Administration of prices at different levels of marketing -guaranteeing minimum
support prices to producers, providing commodities at fair prices to consumers,
and fixing the rates of commission charged by commission agents.
4. Influencing supply and demand by import, export, internal procurement and
distribution. Some of the govt. efforts to improve the marketing techniques of
agricultural commodities are

1. Establishment of Directorate of Marketing and Inspection. Its specific functions of this

Directorate are
a) Market research and commodity survey
b) Market extension
c) Statutory regulation of markets and market practices.
d) Promotion of Grading and Standardization.
e) Marketing Intelligence cell.
f) Training of marketing personnel.
g) Marketing Improvement and Development cell
h) Publication of Journal

71
2. State Marketing Departments
3. Regulation of Agricultural Marketing
4. State Agricultural Marketing Boards
5. Council of State Agricultural Marketing Boards (CO SAMB
6. State trading
7. Food Corporation of India
8. Buffer stock, Procurement and Distribution.
9 Quality Control of agricultural products
10. Consumer protection
11. Administered prices
a. Minimum support prices
b) Procurement prices
12. Statutory Price Control and Rationing
13. Passing of Acts for improving Agricultural Marketing
14. Promotion of Cooperative Marketing
15. NAFED, National Agricultural Co-operative Marketing Federation established in
1958.
Marketing Institutions and Government Intervention

Regulated Markets
Markets in which business is done in accordance with the rules and regulations framed by
the statutory market organization and represent different sections involved in markets.
The marketing costs in such markets are standardized and practices are regulated. As on
1995-96 there are 6968 regulated markets in India.

It is not compulsory for the farmer to sell his produce. in the regulated market yard.
Instead voluntary action on the part of the farmers to take advantage of such a market is
assumed. It acts as an alternative marketing system. The basic philosophy of the
establishment of regulated market is elimination of malpractices in the system and
assignment of dominating power to farmers or their representatives in the functioning of
markets. The specific objectives of the regulated markets are :

72
1) to prevent the exploitation of farmers by overcoming the handicaps in the
marketing of their products.
2) to make the marketing systems most effective and efficient so that farmers may get
better prices for :their products and goods are made available to consumers at
reasonable prices;
3) to provide incentive prices to farmers for a better production programme both in
quantitative and qualitative terms; and
4) to promote an orderly marketing of agricultural produce by improving the
infrastructure facilities.

73
Week : 12
Lecture : 21 & 22
Lecture Topic : Presentation

Report
Submission
&
Presentation

74