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

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!

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)

Packaging

Transportation

Before-tax profits

Fuel and power

Depreciation

Advertising

Rent

Net interest

Repairs

Other

Labor

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 Part 2: Role of Marketing in the Marketing in the

Agribusiness SystemAgribusiness 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 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 theyreceive from the products theyconsume with their limitedincomes

Sell large quantities of a fewproducts

Buy small quantities of manyproducts

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:

productionproductsellingmarketingsocietal 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

developmentREM: 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!