LECTURE VIII

Marketing Agricultural Commodities

Concept of Market Market

A place where willing buyers and willing sellers interact to exchange goods and services for money.

Basic function of a market: To bring together buyers and sellers who wish to

exchange goods for money. In efficient markets there is a single price for

the good in question. Once goods are transported from one market

to the other there is price divergence to reflect the transport cost.

Concept of Market With poor communication there could be

price differences over and above those accounted for by transport costs.

Modern telecommunication systems make it no longer necessary for buyers and sellers to meet in the same place (E-commerce)

Thus the most appropriate definition of a modern market is the totality of arrangements where buyers and sellers exchange goods and services for money.

Concept of Market Marketing begins when the farmer plans

his/her production to meet specific demands and market prospects.

Agricultural products do not usually go directly to the consumer after harvest due to: Location of production in relation to location of consumption Seasonality of agricultural production Form acceptable to consumers. Farmers Expectation of payment before produce leaves the

farm.

Marketing provides these services between production and consumption.

Demand of Agricultural CommoditiesConcept of demand thus involves price-

quantity relationshipsDemand is the quantity of a commodity

that buyers are prepared to buy at each specified price in a given market at a given time.

The quantity demanded has an inverse relationship with the price of the product.

Demand of Agricultural Commodities

The law of demand states that relationships between the price and quantity is such that consumers will buy a larger quantity as the price is reduced.

Closely related to demand is the concept of utility

UtilityUtility is the capacity to give satisfaction. It is a measure of personal satisfaction

that people derive from owning and using goods and services.

Utility does not necessarily imply usefulness.

Different people buy different commodities and derive different amounts of utility from them.

UtilityUtility of any one good or service varies

according to how much of that good or service is in possession.

Marginal utility declines as additional units of a good or service are consumed. Marginal utility is the extra or additional

utility derived from consuming one more unit of product or service.

Utility

The same commodity may also have different amounts of utility for different people or for the same person at different times.

A consumer would normally rationalize purchases to receive maximum utility from the limited money available.

Factors Affecting Demand These factors include

Price of the commodity Consumer’s disposable income Population Consumer Tastes and Preferences Price of Related Goods Future Expectations Advertising Technical Innovations Religious teaching Traditional taboos Habits

Price of the commodity

The higher the price, the lower the quantity purchased.

This is because there are substitutes for most commodities. E.g. if the price of palm oil rises, some

consumers will use other cooking oils whose price has not changed.

Consumer’s disposable income Increase in the consumer’s income increases

purchasing power leading to an increase in the rate of purchase at each alternative price and vice versa “Superior” food products (T-bone steak, Ice

cream) have a direct or positive relationship between income level and demand level.

“Inferior” food products (cassava, arrowroots) have a negative or inverse relationship between income level and demand level.

Population

An increase in Population is likely to lead to an increase in demand for most commodities especially food provided that per capita income levels are maintained or increased.

Tastes and PreferencesChange tastes and preferences for

commodities depends on income levels. A change in consumer tastes and

preferences affects the demand for individual commodities more than it affects the total or aggregate demand.

The introduction of completely new products also tends to shift demand levels among commodities

Price of Related Goods For two goods e.g. tea and sugar that are

compliments an increase in the price of one e.g. tea leads to a decreases the demand for the other i.e. Sugar.

For goods that are substitutes, an increase in the price of one e.g. coffee leads to less of coffee demanded and more of the substitute e.g. Chocolate in spite the fact that the price of chocolate has not fallen.

Future ExpectationsA consumer is likely to buy more of

a commodity today if the price of the commodity is about to rise or the commodity is about to be banned.

A producer will buy raw materials if a greater demand for the product is foreseen.

AdvertisingConsumers may buy more of a

commodity if they are educated or influenced by effective advertising.

This may affect the consumer’s ability to purchase rationally.

Technical InnovationsAttempts by consumers to keep pace

with innovations shift the demand curve for many goods and pushes some other goods completely out of the market.

Farmers who can afford the latest technology and equipment buy it forcing earlier models out of the market.

Religious and Traditional taboos Certain religious beliefs prohibit consumption

of certain products lowering demand for such product where the beliefs dominate. Moslems and Jews do not eat pig meat. Many Hindus do not eat beef and some of them

are completely vegetarian. During Christian fasting the demand for meat

greatly reduces.

Some African taboos may prohibit eating of certain foods such as eggs or poultry.

Habits People enjoy the food they are used to. A liking of certain foods depends on the food

our parents gave us when we were children. This depended on the foods that were

available locally, the family’s social status, the cultural background etc.

Influences like these may be important than income.

Many people continue to eat the food they are used to after their income has increased.

Supply of Agricultural Commodities

Concept of supply involves price-quantity relationships.

Supply is the quantity of a commodity that sellers are willing and able to supply at each specified price in a given market at a given time. It is the amount of a product that will be offered for

sale at various price levels. It is not the same as total output or production

because a large part of a crop is consumed on the farms where it is produced

Agricultural Commodities Supply

A higher price induces more production.The law of supply states that the

quantity of goods and/or services offered on a market varies directly with price.

The supply curve is upward sloping and is based on marginal costs in relation to the price the product is sold.

Factors affecting Supply Change in the price of the commodity causes

change in quantity supplied but several other factors may also cause this change.

These factors include: Factor prices Technology Future expectations Weather Fiscal Policies Management

Factor prices An increase in the price of the factors of

production means increased production costs. At the same price the supply of that commodity

decreases. Changing demands for fertilizers, insecticides

and capital constantly cause dynamic changes in the prices of farm inputs.

Non-farm factor markets often influence changes in prices of factors concerned with agricultural production.

Technology Discovery and adaptation of new

technologies creates lower costs per unit output thus acting as an incentive for the individual farmer to increase production. Mechanization may reduce labour costs or more

efficient working produced by better supervision. New ideas as well as the readjustment of

existing factors of production may lead to lower cost of production.

The increase in production that results from these measures can increase supply of the produce without increasing the price.

Future expectations If a producer fears that the demand for

a product is declining and will continue to decline in future, production factors may be switched to some other.

The supply of this commodity will decrease.

WeatherLong spells of drought or torrential

rainfall and flooding could seriously disrupt production and lead to a fall in supply of agricultural commodities.

Supply of agricultural commodities will increase in years of favourable weather and increased yields.

Fiscal Policies These policies may involve alterations in

expenditure for goods and services or changes in the level of taxation. Increased government expenditure in a particular

direction could stimulate increased production in that direction.

Conversely, an increase in taxation may increase production costs and lead to a curtailment of supply.

An increase in taxation will reduce disposable income and may lead to reduced supply in anticipation of gluts in the market.

Management

Differences in the attitudes, understanding and response of managers exist depending on to: Differences in information available to

individual managers. Differences in individual interpretations of

available information Differences in the necessity to sell.