Lecture 10

The Agribusiness System

ObjectivesThe agribusiness system approach to marketingSize and scope of agribusinessVarious sectorsMarketing in the economyFunctions of marketingMarketing in agribusiness firms

HistoryWhat 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 HistoryThe agribusiness system includes many facets: Not only production (e.g., farmers, hatchery managers), alsoOrganizations 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: EvolutionLate 1800s: self-sufficient farms!Then wars increased produce prices, stimulating more production (Recall: demand and supply). War was profitable even back then!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 SystemAquaculture Input SectorProduction SectorProcessing-Manufactoring SectorAgribusiness SystemNote: 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% employmentProduction systems occupy half of all land, valued at $1 trillion USAside from food production, why does this matter? Self sufficiency: (science, government, education); separates developed from developing economiesPoint of interest: processing is the largest sub-sector! (Preservation of goods perfected??)

The Input SubsectorProvides 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.

If labor costs increase, you typically see a shift towards increased purchase of inputs (Since 1960, farm labor has decreased 50%!)

Purchase of more inputs actually facilitates more production.

The Input SubsectorUse/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 SubsectorLarger farms in all areas (including aqua-)!Corporate farmsNew technologies have resulted in increased specialization 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

The Production SubsectorSpecialization 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 economicsproduction costs increase every year due to increase input costbut 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!)

The Production SubsectorTwo 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! ($16/lbs. shrimp!) Who knows what we can get for farm raised grouper off Florida coast?? $10, $12/lbs.

The Processing-Manufacturing SubsectorIncludes 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-ManufacturingSubsectorFirms in this sector are very large (again, gathering economies of scale); very responsive to consumer tastes/ preferencesExamples: ADM (grain processing), Zapata-Haynie (fish meal), Tyson Foods (feeds)The Marketing Bill: What are you paying for?

Big Companies: How do they work?Obviousley, aquaculture depends flexibility and diversification for sucess, 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 manufacturers, seed producers, etc.!!!

Part 2: Role of Marketing in the Agribusiness SystemMarketing 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 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

Producers seek to

Consumers seek to

Maximize long-term profits

Maximize the happiness they receive from the products they consume with their limited incomes

Sell large quantities of a few products

Buy small quantities of many products

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

Marketing Functionsprocessing (value addting): 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 theyre 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 Functionsrisk-taking: assuming the risk of loss between the time of purchase and salemarket information: includes methods information 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 MarketingAnother 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 wouldnt need middlemen?Adding value = increased consumer happiness or utilityUtilities: form, place, time, possession

Four Utilities of Marketingform: 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: storagepossession: gaining ownership so it can be legally used

Evaluating Performance of the Marketing SystemHow well does the marketing system meet the needs of consumers?: it has to be measuredTwo criteria or yardsticks: efficiency: how well goods and services flow from businesses to consumers fairness: how the marketing system meets the needs of the consumersWhen 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 CriteriaMarket Structurenumber 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 Marketfirms 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 Performanceoptimal 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 FirmsWeve 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 of agribusiness firms?

Introduce basic principles

Five Approaches to MarketingHow should a firm approach its market?Approaches:productionproductsellingmarketingsocietal marketingEach succeeding approach represents a higher level of marketing and management skill

Production ApproachMax production/lowest costworks in early stages of market development, (demand exceeds supply)maximum output/unit inputproducers 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 ApproachHigh-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 ApproachProducts need a strong selling effort for sales:if left alone, consumers wont buy enough of the product thats already been producedresult: producers try to convince consumers that their products are really the bestsetting: supply is greater than demandProblem: assumes that with enough pressure, or correct language, anything can be sold (selling an eskimo ice cubes)

Marketing ApproachProduce 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 strategymoves away from selling to meeting demandsmust truly understand users of products, not because of superior technologyappropriate for highly competitive markets where production capacity exceeds demand

Societal Marketing ApproachIncludes 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 if product is well thought outoften good just from a PR standpoint

Fantastic 4 ofManagementPlanning: what approach should be taken to marketing, setting firms goals and objectivesOrganizing: directing the flow of work: emphasize consumer needs, not those 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

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!