INTRODUCTION TO AGRICULTURAL MARKETING

1
INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Understand and explain the concepts of marketing and marketing system for agricultural
products.
2. Recognize the role of marketing and marketing in agricultural development.
3. Identify the problems in agricultural marketing.

A. CONCEPTS OF MARKET AND MARKETING SYSTEM

Agricultural marketing system is necessary to an understanding of the complexities involved
and the identification of bottlenecks with a view to providing efficient services in the transfer of farm
products and inputs from producers to consumers.

Meaning of Market

The word market comes from the latin word „marcatus which means merchandise or trade or a
place where business is conducted. Word „market has been widely and variedly used to mean (a) a
place or a building where commodities are bought and sold, e.g., super market; (b) potential buyers and
sellers of a product, e.g., wheat market and cotton market; Some of the definitions of market are given
as follows:
 A market is the sphere within which price determining forces operate.
 A market is area within which the forces of demand and supply converge to establish a
single price.
 The term market means not a particular market place in which things are bought and sold
but the whole of any region in which buyers and sellers are in such a free intercourse with
one another that the prices of the same goods tend to equality, easily and quickly.
 Market means a social institution which performs activities and provides facilities for
exchanging commodities between buyers and sellers.
 Economically interpreted, the term market refers, not to a place but to a commodity or
commodities and buyers and sellers who are in free intercourse with one another.

Components of a Market
For a market to exist, certain conditions must be satisfied. These conditions should be both
necessary and sufficient. They may also be termed as the components of a market:
1. The existence of a good or commodity for transactions(physical existence is, however, not
necessary)
2. The existence of buyers and sellers;
3. Business relationship or intercourse between buyers and sellers; and
4. Demarcation of area such as place, region, country or the whole world.
5. The existence of perfect competition or a uniform price is not necessary.

Classification of Markets

Marketing
There are many definitions of marketing, but for our purpose it may be defined as:
- A series of services involved in moving the product from the point of production to the point of
consumption.
- The process of moving the product from the point of production to the point of consumption.
There are, however, three terms in the definition that need clarification
1. Services
  a function performed on a product that alters its form, time, place or possession
characteristics.
 services performed involved costs and add value to the product (value added)
and somebody has to pay for it.
The Marketing Services
1. Processing- change the form of the product
2. Transporting-making goods available at the proper place
3. Storing- making goods available at the desired time
4. Buying and Selling

2. Point of production
 the point of first sale by the farmers.
 Services performed by the producer before the point of first sale are production
services and are not included in the definition.
3. Point of consumption
 The point where marketing ends.
 The point of last purchase/sale
 The price is established at this point

Agricultural Marketing

The term agricultural marketing is composed of two words-agriculture and marketing.

Agriculture, in the broadest sense, means activities aimed at the use of natural resources for human
welfare, i.e., it includes all the primary activities of production. But, generally, it is used to mean growing
and/or raising crops and livestock. Marketing connotes a series of activities involved in moving the goods
from the point of production to the point of consumption. It includes all the activities involved in the
creation of time, place, form and possession utility. Some of the definitions of agricultural marketing
are given below:
 Human activity directed at satisfying the needs and wants through exchange process
(Phillip Kotler).
 Performance of business activities that directs the flow of goods and services from
producers to users (American Marketing Association).
 The study of agricultural marketing comprises all the operations, and the agencies
conducting them, involved in the movement of farm produced foods; raw materials and
their derivatives, such as textiles, from the farms to the final consumers, and the effect of
such operations on the farmers, middlemen and consumers (Thomsen). This definition does
not include the input side of agriculture.
 Agricultural marketing is a process which starts with a decision to produce a saleable farm
commodity, involves all the aspects of market structure or system, both financial and
institutional, based on technical and economic considerations, and includes pre- and post-
harvest operations, assembling, grading, storage, transportation and distribution (National
Commission on Agriculture, 1976).

Importance of Agricultural Marketing

Agricultural marketing plays an important role not only in stimulating production and
consumption, but also in accelerating the pace of economic development. It is the most important
multiplier of agricultural development. In the process of shifting from traditional to modern agriculture,
marketing emerges as the biggest challenge because of production surpluses generated by the shift.

Why Marketing Is Productive?

- It is productive because it creates utility, i.e., the process of making useful goods and
services. Utility is not a physical quality of a thing in itself. It is the want-satisfying power of
an object or service.

Better Living
 The marketing system is essential for the success of the development programs which are designed to
uplift the population as a whole.

Creation of Utility

Marketing is productive, and is as necessary as the farm production. It is, in fact, a part of
production itself, for production is complete only when the product reaches a place in the form and at
the time required by the consumers. Marketing adds cost to the product, but, at the same time, it adds
utilities to the product. The following four types of utilities of the product are created by marketing:
 Form Utility:
The processing function adds form utility to the product by changing the raw material
into a finished form. With this change, the product becomes more useful than it is in the
form in which it is produced by the farmer. For example, through processing, oilseeds are
converted into oil, sugarcane into sugar, cotton into cloth and wheat into flour and bread.
The processed forms are more useful than the original raw materials.
 Place Utility:
The transportation function adds place utility to products by shifting them to a place of
need from the place of plenty. Products command higher prices at the place of need than at
the place of production because of the increased utility of the product.
 Time Utility:
The storage function adds time utility to the products by making them available at the time
when they are needed.
 Possession Utility:
The marketing function of buying and selling helps in the transfer of ownership from one
person to another. Products are transferred through marketing to persons having a higher
utility from persons having a low utility.

B. THE AGRICULTURAL MARKETING SYSTEM

The marketing system for agricultural products is complex system within various subsystem interact with
each other and with the different marketing environments.

The marketing system has 6 components or subsystem:

1. Producer subsystem- consists of the initiators of production who may be small farmers or corporate
farms.
2. Channel subsystem- goods produced in the Producer subsystem are brought to the final consumers via
this subsystem.
- Consist of market participants or intermediaries- who directly responsible for making the
farmers’ product available in the user at the right place, time and form.
- Considered the “actors” in the system that perform vital functions but sometimes they get
the ire to the producers, consumers and the government. Most often they are branded as “
necessary evil”.
3. Flow subsystem- facilitates products financial and information flows.
 Information to be relayed usually consists of product trends, grades and prices.
4. Functional subsystem- which consists of marketing function or services related to the creation of place,
time and form utilities that involve assembly, concentration, dispersion and equalization activities.
5. Consumer subsystem- refers to the final repository of products produced by farmers.
6. Environmental subsystem- which facilitates market performance encompasses four areas or factors
that affect the working of the entire marketing system: climatic/ physical, socio-cultural,
economic/technological and legal/ political factors.

C. PROBLEMS IN AGRICULTURAL MARKETING

Problems in Agricultural Marketing

 The marketing of farm products faces a number of special problems – problems that arise from or are due
to the conditions surrounding production and the products themselves, the marketing system, and the
consumers.

1. Characteristics of the product

The subject of agricultural marketing has been treated as separate discipline because agricultural
commodities possess special characteristics than manufactured commodities. The special
characteristics of agricultural commodities are given below:

 Perishability of the product: Most farm products are perishable in nature; but the period
of their perishability varies from few hours to a few months. Their perishability makes it
almost impossible for producers to fix the reserve price for their farm grown products.
The extent of perishability of farm products can be reduced by processing function: but
they can not be made nonperishable like manufactured products. The more perishable
products require speedy handling and often-special refrigeration, which raises the cost of
marketing.
 Seasonality of production
Farm products are produced in a particular season of the year. They can not be produced
throughout the year. It leads to intra-year seasonality in the prices. In the harvest season,
prices of farm products fall. But the supply of manufactured products can be adjusted or
made uniform throughout the year.
 Bulkiness of products
The characteristics of bulkiness of most farm products makes their transportation and
storage difficult and expensive. This fact also restricts the location of production to
somewhere near the place of consumption or processing. The price spread in bulky
products is higher because of the higher costs of transportation, handling and storage.
 Product homogeneity
Due to smallness of production (growers produce a number of different items in small lots), it
will take time before a handler can collect enough to transport or store efficiently.
 Variation in quality of products
There is a large variation in the quality of agricultural products, which makes their
grading and standardization somewhat difficult. There is no such problem in
manufactured goods because they can be produced of uniform quality.
 Irregular supply of agricultural products
The supply of agricultural products is uncertain and irregular because of the dependence
of agricultural production on natural conditions. With the varying supply, the demand
 Small size of holding and scattered production
Farm products are produced throughout the length and breadth of the country and most
of the producers are of small size. This makes the estimation of supply difficult and also
creates problem in marketing.
2. Number of Producers
The marketing of farm products would be simple if only one farm produces a single item or limited
number of different items. But there are over two million farms single in the country and hundreds of
different products are produced. This creates a special problem in that the small outputs of individual
farms must be assembled into larger volumes before they can be efficiently stored or transported.

3. Characteristics of consumers
The characteristics of consumers are one of the intriguing marketing problems. Consumers level of
income, demographic, psychographic characteristics varies which makes it difficult to identify the
demand for agricultural products. For the farm-product marketing system to have a broad selection of
appropriate products available at the right time, at the right form, is a major challenge.
4. Reflecting the demand of consumers
Another problem involved in marketing farm products is the need for the marketing system to reflect by
prices the demand of consumers so that products may flow to the most appropriate
7. Increasing marketing efficiency
The need to move products through the channels at the lowest possible cost, considering the services
performed, is still one of the pressing problems faced by the marketing system today. Five major
problems hinder the efficiency of marketing in various regions of the country:
 poor condition of physical infrastructure that link producer to market
intermediaries and final consumers;
 minimal flow of market information;
 small volume of market-oriented output for many agricultural commodities;
 inadequate know-how on the part of farmers and traders, especially on grading and
handling
 the absence or lack of definitive public marketing policies and the non-enforcement of
public regulatory policies
 APPROACHES TO THE STUDY OF AGRICULTURAL MARKETING
2
INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Differentiate the various approaches in the study of agricultural marketing.
2. Apply each approach in solving agricultural marketing problems.
3. Conceptualize these approaches to the study of marketing

APPROACHES TO THE STUDY OF MARKETING

1. Commodity Approach
2. Institutional Approach
3. Functional Approach
4. Market Structure-conduct-performance approach

A. Commodity Approach
- One way of analyzing the marketing system is studying the commodity concerned.
- It is a product oriented rather than marketing function oriented
- May cover the characteristics of the product, demand and supply at the domestic and
international levels, the behavior of consumers in relation to a specific product, and prices
either at the farm, wholesale or retail level.

B. Institutional Approach
- An approach of marketing system where it analyze of the various agencies involved in the
marketing process.
- Answers the “who” in the marketing process.
- Marketing institutions include the wide variety of business organizations which have
developed to operate marketing machinery.
- It considers the nature and character of various middlemen and related agencies and also
the arrangement and organization of the marketing machinery.

Types of Middlemen:

1. Merchant middlemen
- Take the title to and therefore own the products they handle.
- Buy and sell for their own gain.

Examples of merchant middlemen:

a. Contract Buyer- practice contract buying of agricultural products
b. Grain miller- own warehouses and mills and procure grains from suppliers including their own
agents, farmers, wholesalers and farmer’s cooperative.
c. Wholesaler- sell to retailers, other wholesalers and industrial users, but do not sell
insignificant amounts to ultimate consumers.
d. Retailer- buy products for resale directly to the ultimate consumer.

2. Agent middlemen
- acts as representative of their clients.
- do not take title to and therefore do not own the products they handle;
- income is in the form of fees and commission.
a. Commission agent- normally takes over the physical handling of the products,
arranges for the terms of sales, collects, deducts his fees and remits the balance to his
principal.
 b. Broker- usually does not have physical control over the product. He ordinarily follows
the instructions of his principal closely and has less discretionary power in price
negotiations than the commission agent.

3. Processors and manufacturers- primarily undertake some action of production change their form.

4. Facilitative organizations – aid the various middlemen in performing their tasks.

5. Market associations- are active in buying and selling of goods and often have far-reaching influence on the
nature of marketing.

C. Functional Approach

One method of classifying the activities in the marketing process is to break down processes into
functions. Marketing Function is any single activity performed in carrying a product from the point of its
production to the ultimate consumer may be termed as a marketing function. A marketing function may have
anyone or combination of three dimensions, viz., time, space and form. The functional approach attempts to
answer “what” in the query “who does what?” Marketing function – a major specialized activity performed in
accomplishing the marketing process

Marketing functions are classified as follows:

1. Exchange functions – those activities involved in the transfer of title of goods. they represent
the point at which price determination enters into the study of marketing.
a. Buying (assembling) function: Involves seeking out the source of supply, assembling
the products, and the activities associated with purchase.
b. Selling Function: Covers all various activities which sometimes as called as
merchandising; including the arrangements of displays of goods, advertising & other
promotional devices to influence or create demand; decisions as to the proper unit of
sale, proper packaging, best marketing channel, proper time and place to approach
potential buyers.
2. Physical Function – activities that involve handling, movement and physical change of the
actual commodity itself. They are involved in solving the problems of when, what and where in
marketing.
a. Storage function: Primarily concerned of making goods available on time like activities
of holding supplies of finished products as the inventories of processors, wholesalers
and retailers.
b. Transportation function: Primarily concerned with making goods available at the
proper time; this function requires the weighing of alternative routes and types of
transportation costs like activities involving the preparation of the product for
shipment such as crating and loading.
c. Processing function: Includes essentially manufacturing activities that change basic
form of the product such as converting a live animal into meat, fresh mango into
canned mango, or cassava into flour and finally into bread.
3. Facilitating function- those which make possible the smooth performance of the exchange and
physical functions. These activities are not directly involved in either the exchange of title r in
the physical handling of products.
a. Standardization: The establishment and maintenance of uniform measurements;
simplifies buying and selling since it makes possible the sale by sample and description.
 Effective standardization simplifies the concentration process since it
permits the grouping of similar lots of commodities early in movement
from the production points.
b. Financing function: The advancing of money to carry on the various aspects of
marketing. Financing maybe in the form of cash advances from various leading
agencies or in the form of tying up the owner’s capital resources.
 The need for financing arises because of the time lag between the
purchase and sale of the product. The period may be one year or more, as
 in the operations of the canning industry, or a relatively short time as in
the marketing of perishables.
o Ex. Whenever storage or delay takes place, someone must
finance the holding goods
c. Risk-bearing function: Is the acceptance of the possibility of loss in the marketing of a
product. The need for risk-bearing arises because of the possibility of loss during the
holding period. Risk-bearing may take a more conventional form such as the use of
insurance companies in the case of possible risks or the utilization of future exchange in
the case of price risks.
Classification of Risk:
1. Physical risk- arise from destruction or deterioration of the product
through fire, accident, wind, earthquake, cold & heat.
2. Market risk- occur because of the change in the value of a product as
it is marketed. Unfavorable movement in price might reduce the
desirability of the product. A change in the operation of competitors
might result in a loss of customer.
d. Market Intelligence function: The job of collecting, interpreting, and disseminating the
large variety of data which are necessary to the smooth operation in the marketing
processes.
 Successful decision on how much to pay for commodities or what kind of
pricing policy to use in their sale require the assembling of a large amount
of knowledge for study.
 Adequate storage programs, efficient transportation service, and an
adequate standardization program all depend to considerable extent on
good information.
e. Market Research: Much of the market research is being undertaken to evaluate the
possible the possible alternative marketing channels that may be used, the different
ways of performing other functions and the market potentials for new products.
f. Demand creation: Usually achieved through effective advertising of the product and
other promotional devices using either mass media or house-to-house campaign.

Uses of the functional approach:

a. Considers the jobs which must be done. Some marketing agencies specialize in
performing specific functions. For example, cold storage warehouses are operated to
perform the storage function. A potato broker may specialize in selling and market
intelligence.
b. Helpful in evaluating marketing costs of various middlemen. For example the
marketing costs of a contract buyer are usually higher than those of the wholesaler and
retailer.
c. Useful in understanding the differences in marketing costs of various commodities. For
example, a perishable product is often more costly to market than one which is less
perishable. Much of this difference may be due to the greater difficulty in the
performance of the transportation, storage and risk-bearing functions.
d. Aids in efforts to improve the performance of the marketing machinery by breaking
down a complex marketing task into its component functions.

D. Market structure-conduct-performance approach

Market Structure
The term structure refers to something that has organization and dimension shape, size and design; and
which is evolved for the purpose of performing a function. A function modifies the structure, and the nature of the
existing structure limits the performance of functions. By the term market structure we refer to the size and
design of the market.
1. Market structure refers to those organizational characteristics of a market which influence the
nature of competition and pricing, and affect the conduct of business firms;
 2. Market structure refers to those characteristics of the market which affect the traders behaviour and
their performances;
3. Market structure is the formal organization of the functional activity of a marketing institution.

An understanding and knowledge of the market structure is essential for identifying the imperfections in
the performance of a market.

Components of Market Structure

The components of the market structure, which together determine the conduct and performance of the
market, are:
1. Concentration of market power;
2. Degree of product differentiation;
3. Conditions for entry of firms in the market;
4. Flow of market information; and
5. Degree of integration.

Based on the above conditions, markets may be classified as competitive, monopoly, oligopolistic or
monopolistic. Another category, which is sometimes used, is monopolistic competition.

Purely competitive market

 Where the number of buyers and sellers is sufficiently large so that no individual can
perceptively influence price by his decision to buy or sell.
 The product is sufficiently homogeneous so that the product of one firm is essentially a perfect
substitute for that of another firm.
 There are no artificial restrictions on demand, supply or prices such as government intervention
or collusion among firms.
 Mobility of resources and product also exists in the economy, e.g., a new firm should be free to
enter the industry.

In this concept, "perfect" implies perfect knowledge by buyers and sellers, divisibility of the
product, and the perfect mobility of the product within the market, in addition to large numbers and
product homogeneity.

Monopoly
 The distinguishing characteristics of this type of market structure is a single seller.
 The firm's demand schedule coincides with the industry's demand schedule.
 No available substitute of goods and services so that it is considered unique
 Difficult to enter
 It controls the total supply of raw materials in the industry and has control over price
 It owns patent or copyright
 Its operations are under economies of scale

Monopolistic competition
 Refers to a market in which a large number of sellers offer differentiated products.
 These products are presumably close substitutes, but the individual sellers are able to
differentiate their products on the basis of a trade name, style, quality, service, location, or
other factors. Consequently, the firm has some influence on price but the number of
substitutes is likely to limit the firm's discretion in pricing. The demand relation faced by the
individual firms, while not perfectly elastic, is likely to be quite elastic in the prevailing range of
prices.
 New firms can enter the market easily.
 Economic rivalry not only upon price but also upon product variation and product promotion.

Oligopoly
 refers to a market with a few large sellers.
 Each firm produces a large fraction of the industry's total product, and consequently the action
of one firm in the industry can greatly influence other firms.
 Sellers are producing a homogeneous product.
 In a differentiated oligopoly, the firms are producing a similar
but not identical product.
 This classification of markets emphasizes the number of sellers and implicitly assumes a large number of
buyers. Other classification may be devised with emphasis on the number of buyers in the market. For instance, a
market with a single buyer is referred to as monopsony. A market with a single seller is called a bilateral
monopoly. Obviously, a large number of market structures could be devised, each involving different
combinations of numbers of buyers and sellers and degree of product differentiation.

Dynamics of Market Structure – Conduct

and performance:
The market structure determines the market conduct and performance.

Market Conduct
The term market conduct refers to the patterns of behaviour of firms, especially in relation to pricing and their
practices in adapting and adjusting to the market in which they function. Specifically, market conduct includes:
(a) Market sharing and price setting policies;
(b) Policies aimed at coercing rivals; and
(c) Policies towards setting the quality of products.

Market Performance
- Is the appraisal of how much economic resources of industry’s market behaviour or conduct
deviates from the best possible contribution it can make to achieve relevant economic goals.
- The term market performance refers to the economic results that flow from the industry as
each firm pursues its particular line of conduct. Society has to decide the criteria for
satisfactory market performance. Some of the criteria for measuring market performance
and of the efficiency of the market structure
For a satisfactory market performance, the market structure should keep pace with the following changes:
1. Production pattern:
2. Demand pattern:
3. Costs and patterns of marketing functions:
4. Technological change in Industry: