Transcript Lecture __. The Agribusiness System

The Agribusiness System
Objectives
• The “agribusiness system” approach to
marketing
• Size and scope of agribusiness
• Various sectors
• Marketing in the economy
• Functions of marketing
• Marketing in agribusiness firms
History
• What is agriculture to most people? Farming, ranching,
fishing??
• This was true until the early 1960s when “agribusiness”
evolved into a complex system reaching well beyond the
farm
• The big picture included all things needed to bring food to
the consumer.
• As it turned out aquaculture shares many similarities to
traditional agribusiness.
Agribusiness History
• The agribusiness system includes many facets:
• Not only production (e.g., farmers, hatchery
managers), also
• Organizations which provide inputs (e.g., fry,
chemicals, feed)
– Processors the output (e.g., processing plants)
– Manufacturers (e.g., shrimp  microwavable products)
– Transporters/Sellers/Brokers (e.g., retail grocery stores,
seafood wholesalers, etc.)
Agribusiness: Evolution
• Late 1800’s: self-sufficient farms!
• Then wars increased produce prices, stimulating more production
(Recall: demand and supply). War was profitable even back then!
• Mechanization was developed largely due to labor shortages.
• Crop production became a focus of farmers. (They started
purchasing inputs; this is where aquaculture is today!)
• Much of the manufacturing and processing was relocated off the
farm to become businesses themselves.
• Preservation of raw products was also improved.
• This made food more convenient to consumers.
The Agribusiness System
Aquaculture
Input Sector
Production
Sector
ProcessingManufactoring
Sector
Agribusiness System
Note: the success of each part depends upon the proper functioning
of the other two!
Agro-input
subsystem:
Seeds;
Agro-chemicals;
Agro-machinery;
etc
Agricultural
Production
Subsystem:
Crop; Horticulture;
Aquaculture;
Animal Husbandary;
Forestry
Agro-Industrial
Subsystem:
Marketing
Subsytem:
Food industry;
Food processing;
Natural fiber
industry; and
cigarette industry
Distribution;
Promotion,
Information
market; Trade and
Market structure
Service and supporting of Agricultural subsystem:
Credit; Insurance; Transportation, Government Policy; Education; Agricultural
Extension; Institutional
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The Input Subsector
• Provides farmers with all things needed for production: feed,
fry, equipment, fuel, chemicals
• Total level of inputs remains stagnant since WWII; but, type
of inputs has varied greatly.
• If labor costs increase, you typically see a shift towards
increased purchase of inputs (Since 1960, farm labor has
decreased 50%!)
• Purchase of more inputs actually facilitates more production.
The Input Subsector
• Use/efficiency of energy usage has also
changed.
• Relatively few input businesses compared to
production or processing (look at feed
manufacturing vs. the number of farms!)
• Why is this trend observed??
The Production Subsector
• Larger farms in all areas (including aqua-)!
• Corporate farms
• New technologies have resulted in increased
specialization of production
– genetically altered animals
– specific pathogen-free stocks (big deal in aqua-)
• What does this mean?
• Stability in that aquaculture production is
becoming more diversified
The Production Subsector
• Specialization also allows for increased production
efficiency (telltale sign: increased production in face of
decreased or constant levels of input)
• Another blast from the past: production economics
– production costs increase every year due to increase input cost
– but cost of inputs is not related to commodity prices (e.g.,
shrimp)
– when commodity prices drop, gross farm income falls, but
amount spent on inputs doesn’t (the great squeeze!)
The Production Subsector
• Two sizes of farms: Large (economies of scale) and
small (no economy of scale)
• Large farms: new technologies (aeration, telemetry,
genetically-improved strains)
• Small farms can also, however: sell something that
commands a high price! ($16/lbs. shrimp!)
The Processing-Manufacturing
Subsector
• Includes all business that turn raw materials into finished (or
partially-finished) products
• In aquaculture, mostly done by processors
• Also includes packaging, distribution, and sales, places and
forms desired by consumers (Marketing bill?)
• Marketing bill represents 70% of total amount spent by
consumers on food!!!
The Processing-Manufacturing
Subsector
• Firms in this sector are
very large (again,
gathering economies of
scale); very responsive to
consumer tastes/
preferences
• Examples: Indofood;
WingsFood; GarudaFood; Cargill, etc
Packaging
Transportation
Before-tax profits
Fuel and power
Depreciation
Advertising
Rent
Net interest
Repairs
Other
Labor
The Marketing Bill: What
are you paying for?
Big Companies: How do they
work?
• Obviousley, aquaculture depends flexibility and
diversification for sucess, not isolation.
• Many large companies have divisions in other parts
of the agribusiness system
• Example: Cargill, Inc., one of the largest grain
traders in the world, also largest soybean processor,
flour miller, feed manufacturers, seed producers,
etc.!!!
Part 2: Role of Marketing in the
Agribusiness System
• Lowers prices/increase availability
1) bridge between producers and consumers
2) helps producers understand consumer needs
3) helps producers decide what to produce
4) helps consumers know what products are available and at what prices
• Bottom Line: Consumer satisfaction!!, higher profits for
producers! Everyone wins!!
• Extension of the business world?? Maybe!
Conflicting Needs of Producers
and Consumers
P roducers seek to
C onsum ers seek to
M axim ize long-term profits
M axim ize the happ iness they
receive from the products they
consum e w ith their lim ited
incom es
B uy sm all quantities of m any
products
Sell large quantities of a few
products
Four Utilities of Marketing
• form: to process the product into a form
desired or needed by the consumer (fish in the
round vs. nuggets)
• place: transporting the product to a location
desired by the consumer (shipping,
convenience= big deal!!!)
• time: storage
• possession: gaining ownership so it can be
legally used
Evaluating Performance of the
Marketing System
• How well does the marketing system meet the needs of
consumers?: it has to be measured
• Two criteria or yardsticks:
 efficiency: how well goods and services flow from businesses to
consumers
 fairness: how the marketing system meets the needs of the
consumers
• When you buy something, you are saying that you like the
price, the goods/services, etc.
• Rating of the system is indirect through voting and has led to
the rise of consumerism.
Market Performance Evaluation Criteria
• Market Structure
– number and size of firms in the market (no monopolies)
– barriers to market entry/exit (not prevented by other firms)
– degree of product and price competition (allows increased quality)
• Conduct of Firms in the Market
–
–
–
–
firms compete via price (sell at lower price)
no unlawful cooperation between firms (price fixing-this still happends)
truthful product claims (better? Show me the data!)
meaningful product differences (Are different models different?)
• Market Performance
– optimal output available at minimal price (appropriate tech, conserve resources)
– reasonable levels of profits (good firms deserve this)
– encouragement of innovation (products should be improved over time, how is
this possible with seafood??)
– reasonable levels of investment (firms support in industry, new tech, higher
efficiency, devleopment of company)