Lecture 10 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 1870’s: self-sufficient farms! War was profitable even back then too! Increased produce prices, stimulated production (Recall: demand and supply). 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 Processing-Manufactoring Sector Aquaculture Input Sector Production Sector Agribusiness System Note: the success of each part depends upon the proper functioning of the other two!

How large is it?? Agribusiness is largest sector in the U.S. economy: >11% of all goods, >16% employment Production systems occupy nearly half of all land, valued at $1 trillion US. Aside from food production, why does this matter? Again, self-sufficiency: (science, government, education); separates developed from developing economies Point of interest: processing is the largest sub-sector! (Preservation of goods perfected??)

The Input Subsector Provides farmers with all things needed for production: feed, fry, credit, equipment, fuel, chemicals Total level of inputs remains stagnant since WWII; but, type of inputs has varied greatly. (examples?) If labor costs increase, you typically see a shift towards increased purchase of inputs (Since 1960, farm labor has decreased 50%!) (why?) 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? In a word... 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! ($34/lbs. pompano!) Who knows what we can get for pen-raised grouper off Florida coast?? $10, $12/lbs, $34?? *The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. 

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: ADM (grain processing), Zapata-Haynie (fish meal), Tyson Foods (chicken or animal feeds) The Marketing Bill: What are you paying for?

Big Companies: How do they work? Obviously, aquaculture depends flexibility and diversification for success, 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 manufacturer, seed producer, etc.!!!

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 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

Nine Marketing Functions and Barriers to Consumer Satisfaction buying/selling: required for product exchange, exchange of legal title between producer and consumer storage: keeps product fresh between production and final sale transportation: overcomes separation of space by moving product from site of production to where it is sold (globalization)

Marketing Functions processing (value adding): changing the form of a commodity or raw product to one that has more convenience, better taste.) grades/standards: assures the consumer they are getting what they think they’re purchasing financing: providing the funds necessary to pay for the production and marketing of a product during the time period the producer must wait to receive payment for a sale

Marketing Functions risk-taking: assuming the risk of loss between the time of purchase and sale market information: includes methods and information which is communicated about markets, market prices, etc. All of the above functions are usually performed by “middlemen” (added step: has a tendency to increase prices)

Four Utilities of Marketing Another way to describe marketing is to look at the performance of the previous marketing functions as a way of adding value to products. Otherwise, we wouldn’t need “middlemen”? Adding value = increased consumer happiness or “utility” Utilities: form, place, time, possession

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: 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)

Role of Marketing in Agribusiness Firms We’ve been talking about the role of the marketing system in a free market economy. We’ll now bring this down to the “firm” level What is the role of marketing in the operation of agribusiness firms? Introduce basic principles

Five Approaches to Marketing How should a firm approach its market? Approaches: production product selling marketing societal marketing Each succeeding approach represents a higher level of marketing and management skill

Production Approach Max production/lowest cost works in early stages of market development REM: 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)

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/she wants, not consumer need-oriented

Selling Approach Products need a strong selling effort for sales: if left alone, consumers won’t buy enough of the product that’s already been produced result: producers try to convince consumers that their products are really the best setting: supply is greater than demand Problem: assumes that with enough pressure, or correct language, anything can be sold (selling an eskimo ice cubes)

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 truly understand users of products, not because of superior technology appropriate for highly competitive markets where production capacity exceeds demand

Societal Marketing Approach Includes same items as Marketing Approach, but includes both consumers’ and society’s well-being firms and their products often introduce societal backlashes (e.g., increased garbage) not practiced by many, often not needed if product is well thought out often good just from a PR standpoint

Final Thoughts... The marketing idea is the driving force for the entire firm and gives it direction and purpose. The purpose is meeting the needs of consumers and their satisfaction. Meeting these goals = profit!