MARKETINGAg Management

Chapter 6

Objectives

Define Marketing Understand the concept of utility Explain how price directs the system Know how demand, supply and price interact Explain the micro-macro paradox Understand the economies of size Know farm support programs, historically and today Understand marketing strategies for forward pricing NOTE– This chapter is #7 in the workbook & #6 in

the text.

The Farm Gate Approach to Marketing

Lumping and labeling everything that is done to a product after it leaves the farm as marketing

Shortcoming Implies that production on the farm and

marketing are separate

Stages of a Complete Marketing System

Consuming

Retailing

Wholesaling

Processing

Producing

True Definition of Marketing

All the economic activities involved in preparing and positioning the product for the final consumer.

The Concept of Utility

Satisfaction Products with utility meet a need and in

the process provide satisfaction to the consumer

3 Basic Types Form Place Time

Form Utility

Creation starts at the farm level Satisfaction with product grows as

processing changes the product form and prepares it for the final consumer

Place Utility

Consumers also demand convenience The modern supermarket now provides

almost any food product the consumer wants under 1 roof

Home delivery

Time Utility

Consumers want products to be available in a timely fashion

Products that do not meet consumer demand in a timely fashion will be deemed to failure.

Dividing the Consumer Dollar

Controversial Producers feel cheated because they

only receive a small percentage of the consumer food dollar

Total Utility -the various contributors to the total consumer satisfaction and total product get paid based on what portion of the total utility they provide.

See examples p. 6-3 & 6-4

Price Directs the System

Contributors get paid for what they do

Consuming

Retailing

Wholesale

Processing

ProducingPriceSignal

ProductionResponse

Price Signals

Increasing production in response to consumer wants and needs.

As consumer demand for a product increases, then so do the prices paid by retailers for products and the prices paid to producers.

Price Efficiency

How effective the system is in communicating needed changes and prompting the proper response.

If clear signals are not sent, then the entire system persist in a state of imbalance

Consumer desires are not met as well and producers receive smaller returns

How well the system communicates via the price mechanism is important to the individual consumer, the individual producer and to society in general

Law of Demand

At any point in time the rational consumer will take more only at a lower price.

Demand Curve

Negative Slope Quantity taken will increase only if the

price comes down

Supply Curve

Slopes up and to the right Reflects that producers will only offer

more at higher prices

Price

Found where supply and demand intersect

This price is the equilibrium price

Equilibrium Quantity

Quantity at which supply and demand match

Price Discovery

The process of searching for the equilibrium or market clearing price

Market Clearing Price

Also called an equilibrium price It is the only price at which the quantity

demanded by the buyers is exactly equal to the quantity offered by the producers.

Micro-Macro Paradox

Individual producers (the micro level) cannot control price but they are very vulnerable to the actions of producers in the aggregate (the macro level)

Never make a long term commitment to an increase in market price that is likely to be temporary.

No marketing strategy is sufficient to overcome the problems that come with making long term response to a short-run surge in price.

Example*

In 1972-73 the (now former) Soviet Union was facing a poor grain crop. Reversing pas behavior, they came into the market and bought grain and oilseeds heavily. US prices were driven up to record prices or near the all time record highs. Corn prices moved above $4.00/bu., wheat $6.00/bu., and soybeans $11.00/bu. US producers responded to the higher prices in dramatic fashion, by the late 1970’s some 50 million acres had been brought into the production of corn, wheat, and soybeans. When the Soviet Union crops improved and it reduced buying in subsequent years, grain prices plunged. Producers were caught in the “micro-macro trap” with no where to turn. It was primarily the surge in acreage that brought on excessive expansion and prompted the “farm crisis” of the 1980’s when many grain farmers were forced out of business. Many of those added acres were grasslands, erodible fields and drained wetlands that were still being targeted by governmental conservation programs in the 1990’s.

Economies of Size

Producers and processors tend to try to reduce cost by increasing in size.

Getting too large may cause cost to increase again

Cost decrease on a large farm because cost are spread over more bushels of production.

Farm Support Programs

Most common element is price support programs

1950’s and 60’s price support was based upon a base period and the concept of parity This demonstrated a willingness of society to

keep the incomes of farmers on par with the income of non-farmers

Base price used for decades was 1910-1914 Biggest shortcoming: ignored technological

advances.

Farm Support Programs

1960- surpluses were generated due to price supports Surpluses were sold below market price and

given away in domestic and international food programs

This allowed farm prices to be very stable with huge surpluses that made buffers against drought and crop shortage

Farm Support Programs

1972-73- price ceilings on food and other producers were imposed for the first time in non-war years

Imposing price ceilings below the equilibrium price creates shortages

Price ceilings have not been used since the 1970’s

Farm support programs are still in use and recent Farm Bill legislation works to provide support with pegging a specific price.

Farm Support Programs

Target Price Estimates the cost of production and is considered a “fair”

price to farmers Loan Rate

The price the government will pay for the product going into a 9 month loan program

The third component of the Farm Bill Support program is the deficiency payment The deficiency payment is the difference between the

target price and cash price The net result

Subsidize farmers when prices are low but not in such a way that US prices are pushed above the world-level price.

Marketing Strategies

Farmers are vulnerable to price vulnerability brought on by weather and crop uncertainty and the impact of government price support and occasional price ceiling programs

Elasticity

Percent Change in Quantity/ Percent Change in Price

Two Primary Types of Supply-Side Price Variability

Price Cycle Can last for a number of years

Seasonal Price Movement across months within the year

Three Ways Prices Move Forward

Cash Contracts Futures Market Options on Futures

Futures Contract

A contract calling for delivery of a carefully described commodity for delivery at some later time period.

Basis

Difference between cash and futures market

Usually negative

Forward Price

Futures + Basis

Put Option

The right to sell underlying futures at a specific price

Price Floor

Strike Price + Basis - Premium Price can not go below this

Net Price

Cash + Option Value - Premium

Summary*

See “Pulling It Together” p. 6-17

Assignment

Marketing Webquest Go to

http://www.zunal.com/webquest.php?w=2009

Follow instructions. Due Oct 1. Presentations will be made to class.