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Lecture 10
The Agribusiness System
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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
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History
What is agriculture to most people? Farming, ranching,fishing??
This was true until the early 1960s when agribusinessevolved into a complex system reaching well beyond thefarm
The big picture included all things needed to bring food to
the consumer.
As it turned out aquaculture shares many similarities totraditional agribusiness.
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Agribusiness History
The agribusiness system includes many facets:
Not onlyproduction (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 grocerystores, seafood wholesalers, etc.)
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Agribusiness: Evolution
Late 1800s: self-sufficient farms!
Then wars increased produce prices, stimulating moreproduction (Recall: demand and supply). War was profitableeven back then!
Mechanization was developed largely due to labor shortages.
Crop production became a focus of farmers. (They startedpurchasing inputs; this is where aquaculture is today!)
Much of the manufacturing and processing was relocated offthe farm to become businesses themselves.
Preservation of raw products was also improved.
This made food more convenient to consumers.
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The Agribusiness System
Aquaculture
Input Sector
Production
Sector
Processing-
Manufactoring
Sector
Agribusiness System
Note: the success of each part depends upon the proper functioning
of the other two!
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How large is it??
Agribusiness is largest sector in the U.S. economy:11% of all goods, 16% employment
Production systems occupyhalf of all land, valuedat $1 trillion US
Aside from food production, why does this matter?
Self sufficiency: (science, government, education);separates developed from developing economies
Point of interest: processing is the largest sub-sector! (Preservation of goods perfected??)
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The Input Subsector
Provides farmers with all things needed forproduction:feed, fry, credit, equipment, fuel, chemicals
Total levelof 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 hasdecreased 50%!)
Purchase of more inputs actually facilitates more production.
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The Input Subsector
Use/efficiency of energy usage has alsochanged.
Relatively few input businesses compared toproduction or processing (look at feed
manufacturing vs. the number of farms!)
Why is this trend observed??
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The Production Subsector
Larger farms in all areas (including aqua-)!
Corporate farms
New technologies have resulted in increasedspecialization of productiongenetically altered animals
specific pathogen-free stocks (big deal in aqua-)
What does this mean? Stability in that aquaculture production is
becoming more diversified
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The Production Subsector
Specialization also allows for increased productionefficiency (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 inputcost
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 doesnt (the great squeeze!)
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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 thatcommands a high price! ($16/lbs. shrimp!)
Who knows what we can get for farm raisedgrouper off Florida coast?? $10, $12/lbs.
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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 andforms desired by consumers (Marketing bill?)
Marketing bill represents 70% of total amount spent byconsumers on food!!!
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The Processing-Manufacturing
Subsector Firms in this sector are
very large (again,gathering economies ofscale); very responsive toconsumer tastes/preferences
Examples: ADM (grainprocessing), Zapata-Haynie (fish meal),
Tyson Foods (feeds)
Packaging
Transportation
Before-tax profits
Fuel and power
Depreciation
Advertising
Rent
Net interest
Repairs
Other
Labor
The Marketing Bill: What
are you paying for?
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Big Companies: How do they
work? Obviousley, aquaculture depends flexibility and
diversification for sucess, not isolation.
Many large companies have divisions in other partsof 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.!!!
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Part 2: Role of Marketing in
the Agribusiness System Marketing mission revealed!: not to rip-off people (Hard to
believe, esp. after buying a new car!!!)
Lowers prices/increase availability1) bridge between producers and consumers2) helps producers understand consumer needs3) helps producers decide what to produce4) helps consumers know what products are available and at what prices
Bottom Line: Consumer satisfaction!!, higher profits forproducers! Everyone wins!!
Extension of the business world?? Maybe!
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Conflicting Needs of Producers
and ConsumersProducers seek to Consumers seek to
Maximize long-term profits Maximize the happiness theyreceive from the products theyconsume with their limitedincomes
Sell large quantities of a few
products
Buy small quantities of many
products
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Nine Marketing Functions and
Barriers to Consumer Satisfaction buying/selling: required for productexchange, exchange of legal title between
producer and consumer storage: keeps product fresh between
production and final sale
transportation: overcomes separation ofspace by moving product from site ofproduction to where it is sold (globalization)
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Marketing Functions
processing (value addting): changing the form ofa commodity or raw product to one that has moreconvenience, better taste.)
grades/standards: assures the consumer they aregetting what they think theyre purchasing
financing: providing the funds necessary to pay for
the production and marketing of a product duringthe time period the producer must wait to receivepayment for a sale
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Marketing Functions
risk-taking: assuming the risk of loss between thetime of purchase and sale
market information: includes methods
information is communicated about markets, marketprices, etc.
All of the above functions are usually
performed by middlemen (added step: hasa tendency to increase prices)
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Four Utilities of Marketing
Another way to describe marketing is to lookat the performance of the previous marketing
functions as a way ofadding value toproducts.
Otherwise, we wouldnt need middlemen?
Adding value = increased consumerhappiness or utility
Utilities: form, place, time, possession
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Four Utilities of Marketing
form: to process the product into a formdesired or needed by the consumer (fish in the
round vs. nuggets) place: transporting the product to a locationdesired by the consumer (shipping,convenience= big deal!!!)
time: storage possession: gaining ownership so it can be
legally used
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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 toconsumers
fairness: how the marketing system meets the needs of theconsumers
When you buy something, you are saying that you like the
price, the goods/services, etc. Rating of the system is indirect throughvoting and has led
to the rise ofconsumerism.
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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)
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Role of Marketing in
Agribusiness Firms Weve been talking about the role of the marketing
system in a free market economy.
Well now bring this down to the firm level
What is the role of marketing in the operation ofagribusiness firms?
Introduce basic principles
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Five Approaches to Marketing
How should a firm approach its market?
Approaches:
productionproduct
selling
marketing
societal marketing
Each succeeding approach represents a higher levelof marketing and management skill
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Production Approach
Max production/lowest cost
works in early stages of market development,
(demand exceeds supply)maximum output/unit input
producers can become insensitive to needs of
consumers (uh oh!)only trying to find ways to lower the cost of
production and transport (feed industry)
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Product Approach
High-quality product; Build it and they will come?(Japanese car manufacturers.)
Another inwardly-looking approach to marketing
Hopefully consumers will recognize this quality and
pay a premium price (How do we do this with seafood?)
Caveat: producer still making the product(s) he/shewants, not consumer need-oriented
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Selling Approach
Products need a strong selling effort forsales:
if left alone, consumers wont buy enough of theproduct thats already been produced
result: producers try to convince consumers thattheir products are really the best
setting: supply is greater than demandProblem: assumes that with enough pressure, or
correct language, anything can be sold (selling aneskimo ice cubes)
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Marketing Approach
Produce a product that fills a consumer need,offer it at the correct price, make it available, and
promote it properly (What a concept!) major advance in strategy
moves away from selling to meeting demands
must trulyunderstand users of products, not because
of superior technology appropriate for highly competitive markets where
production capacity exceeds demand
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Societal Marketing Approach
Includes same items as Marketing Approach,but includes both consumers and societys
well-beingfirms and their products often introduce societal
backlashes (e.g., increased garbage)
not practiced by many, often not needed ifproduct is well thought out
often good just from a PR standpoint
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Fantastic 4
ofManagement
Planning: what approach should be taken to marketing,setting firms goals and objectives
Organizing: directing the flow of work: emphasizeconsumer needs, notthose of the employee, can planning
goals be met efficiently? Who reports to whom? Controlling: establishing a system of feedback to determine
how well goals are being metDirecting: implementing plans, 90% of mgrs job, most
important
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Final Thoughts...
The marketing idea is the driving force for the entirefirm and gives it direction and purpose.
The purpose is meeting the needs of consumers andtheir satisfaction.
Meeting these goals = profit!