Transcript here - Department of Real Estate and Construction

LECTURE VIII
Marketing Agricultural Commodities
Concept of Market
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Market
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Basic function of a market:
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A place where willing buyers and willing sellers
interact to exchange goods and services for
money.
To bring together buyers and sellers who wish to
exchange goods for money.
In efficient markets there is a single price for
the good in question.
 Once goods are transported from one market
to the other there is price divergence to
reflect the transport cost.
Concept of Market

With poor communication there could be
price differences over and above those
accounted for by transport costs.
 Modern telecommunication systems make it
no longer necessary for buyers and sellers to
meet in the same place (E-commerce)
 Thus the most appropriate definition of a
modern market is the totality of arrangements
where buyers and sellers exchange goods
and services for money.
Concept of Market

Marketing begins when the farmer plans
his/her production to meet specific demands
and market prospects.
 Agricultural products do not usually go
directly to the consumer after harvest due to:
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Location of production in relation to location of consumption
Seasonality of agricultural production
Form acceptable to consumers.
Farmers Expectation of payment before produce leaves the
farm.
Marketing provides these services between
production and consumption.
Demand of Agricultural
Commodities
 Concept
of demand thus involves pricequantity relationships
 Demand is the quantity of a commodity
that buyers are prepared to buy at each
specified price in a given market at a
given time.
 The quantity demanded has an inverse
relationship with the price of the
product.
Demand of Agricultural
Commodities
 The
law of demand states that
relationships between the price and
quantity is such that consumers will buy
a larger quantity as the price is reduced.
 Closely related to demand is the
concept of utility
Utility
 Utility
is the capacity to give satisfaction.
 It is a measure of personal satisfaction
that people derive from owning and
using goods and services.
 Utility does not necessarily imply
usefulness.
 Different people buy different
commodities and derive different
amounts of utility from them.
Utility
 Utility
of any one good or service varies
according to how much of that good or
service is in possession.
 Marginal utility declines as additional
units of a good or service are
consumed.
 Marginal
utility is the extra or additional
utility derived from consuming one more
unit of product or service.
Utility
 The
same commodity may also have
different amounts of utility for different
people or for the same person at
different times.
 A consumer would normally rationalize
purchases to receive maximum utility
from the limited money available.
Factors Affecting Demand
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These factors include
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Price of the commodity
Consumer’s disposable income
Population
Consumer Tastes and Preferences
Price of Related Goods
Future Expectations
Advertising
Technical Innovations
Religious teaching
Traditional taboos
Habits
Price of the commodity
 The
higher the price, the lower the
quantity purchased.
 This is because there are substitutes for
most commodities.
 E.g.
if the price of palm oil rises, some
consumers will use other cooking oils
whose price has not changed.
Consumer’s disposable income

Increase in the consumer’s income increases
purchasing power leading to an increase in
the rate of purchase at each alternative price
and vice versa
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“Superior” food products (T-bone steak, Ice
cream) have a direct or positive relationship
between income level and demand level.
“Inferior” food products (cassava, arrowroots)
have a negative or inverse relationship between
income level and demand level.
Population
 An
increase in Population is likely to
lead to an increase in demand for most
commodities especially food provided
that per capita income levels are
maintained or increased.
Tastes and Preferences
 Change
tastes and preferences for
commodities depends on income levels.
 A change in consumer tastes and
preferences affects the demand for
individual commodities more than it
affects the total or aggregate demand.
 The introduction of completely new
products also tends to shift demand
levels among commodities
Price of Related Goods
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For two goods e.g. tea and sugar that are
compliments an increase in the price of one
e.g. tea leads to a decreases the demand for
the other i.e. Sugar.
 For goods that are substitutes, an increase in
the price of one e.g. coffee leads to less of
coffee demanded and more of the substitute
e.g. Chocolate in spite the fact that the price
of chocolate has not fallen.
Future Expectations
A
consumer is likely to buy more of
a commodity today if the price of
the commodity is about to rise or
the commodity is about to be
banned.
 A producer will buy raw materials if
a greater demand for the product is
foreseen.
Advertising
 Consumers
may buy more of a
commodity if they are educated or
influenced by effective advertising.
 This may affect the consumer’s ability to
purchase rationally.
Technical Innovations
 Attempts
by consumers to keep pace
with innovations shift the demand curve
for many goods and pushes some other
goods completely out of the market.
 Farmers who can afford the latest
technology and equipment buy it forcing
earlier models out of the market.
Religious and Traditional taboos
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Certain religious beliefs prohibit consumption
of certain products lowering demand for such
product where the beliefs dominate.
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Moslems and Jews do not eat pig meat.
Many Hindus do not eat beef and some of them
are completely vegetarian.
During Christian fasting the demand for meat
greatly reduces.
Some African taboos may prohibit eating of
certain foods such as eggs or poultry.
Habits
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People enjoy the food they are used to.
 A liking of certain foods depends on the food
our parents gave us when we were children.
 This depended on the foods that were
available locally, the family’s social status, the
cultural background etc.
 Influences like these may be important than
income.
 Many people continue to eat the food they
are used to after their income has increased.
Supply of Agricultural
Commodities

Concept of supply involves price-quantity
relationships.
 Supply is the quantity of a commodity that
sellers are willing and able to supply at each
specified price in a given market at a given
time.
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It is the amount of a product that will be offered for
sale at various price levels.
It is not the same as total output or production
because a large part of a crop is consumed on the
farms where it is produced
Agricultural Commodities Supply
A
higher price induces more production.
 The law of supply states that the
quantity of goods and/or services
offered on a market varies directly with
price.
 The supply curve is upward sloping and
is based on marginal costs in relation to
the price the product is sold.
Factors affecting Supply
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Change in the price of the commodity causes
change in quantity supplied but several other
factors may also cause this change.
 These factors include:
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Factor prices
Technology
Future expectations
Weather
Fiscal Policies
Management
Factor prices
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An increase in the price of the factors of
production means increased production
costs.
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At the same price the supply of that commodity
decreases.
Changing demands for fertilizers, insecticides
and capital constantly cause dynamic
changes in the prices of farm inputs.
 Non-farm factor markets often influence
changes in prices of factors concerned with
agricultural production.
Technology
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Discovery and adaptation of new
technologies creates lower costs per unit
output thus acting as an incentive for the
individual farmer to increase production.
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Mechanization may reduce labour costs or more
efficient working produced by better supervision.
New ideas as well as the readjustment of
existing factors of production may lead to
lower cost of production.
 The increase in production that results from
these measures can increase supply of the
produce without increasing the price.
Future expectations
 If
a producer fears that the demand for
a product is declining and will continue
to decline in future, production factors
may be switched to some other.
 The supply of this commodity will
decrease.
Weather
 Long
spells of drought or torrential
rainfall and flooding could seriously
disrupt production and lead to a fall in
supply of agricultural commodities.
 Supply of agricultural commodities will
increase in years of favourable weather
and increased yields.
Fiscal Policies
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These policies may involve alterations in
expenditure for goods and services or
changes in the level of taxation.
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Increased government expenditure in a particular
direction could stimulate increased production in
that direction.
Conversely, an increase in taxation may increase
production costs and lead to a curtailment of
supply.
An increase in taxation will reduce disposable
income and may lead to reduced supply in
anticipation of gluts in the market.
Management
 Differences
in the attitudes,
understanding and response of
managers exist depending on to:
 Differences
in information available to
individual managers.
 Differences in individual interpretations of
available information
 Differences in the necessity to sell.