7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

1/33

Lecture 10

The Agribusiness System

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

2/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

3/33

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.

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

4/33

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.)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

5/33

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.

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

6/33

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!

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

7/33

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??)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

8/33

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.

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

9/33

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??

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

10/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

11/33

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!)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

12/33

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.

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

13/33

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!!!

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

14/33

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?

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

15/33

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.!!!

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

16/33

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!

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

17/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

18/33

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)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

19/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

20/33

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)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

21/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

22/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

23/33

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.

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

24/33

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)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

25/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

26/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

27/33

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)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

28/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

29/33

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)

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

30/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

31/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

32/33

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

7/30/2019 503B1804E37C4CB3981A80BCB65A8D9E

33/33

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!