Agricultural commodity marketing; marketing issues related to form

Agribusiness Marketing

Agricultural Commodity MarketingMarketing Issues Related To Form

Daisy Odunze

MARKETING ISSUES RELATED TO FORM

Grading and Standardization of agricultural commodities

Unlike manufactured products, for which specifications can be met with very close tolerances, farm products come off the production line carrying a spectrum of quality.

Public and private programs are continuing to assist farmers to produce to specification, but the vagaries of Mother Nature will often interface and thwart those efforts.


Grades and standards help buyers and sellers in the marketing chain communicate quality among themselves and back to producers.

Grading is the evaluation of an agricultural commodity for compliance with official standards.

Certification is the official documentation of the grading evaluation and the identification of the graded commodity with an official grade mark or seal.


Quality grade marks are usually seen on beef, lamb, veal, chicken, turkey, butter, and eggs.

The grade mark isn't always visible on the retail product. In these commodities, the grading service is used by wholesalers, and the final retail packaging may not include the grade mark.

However, quality grades are widely used--even if they are not prominently displayed--as a "language" among traders.


Consumers, as well as those involved in the marketing of agricultural products, benefit from the independent assessment of product quality provided by grade standards.


Grading is based on standards, and standards are based on measurable attributes that describe the value and utility of the product. Beef quality standards, for instance, are based on attributes such as

marbling (the amount of fat interspersed with lean meat),

colour, firmness, texture, and age of the animal, for each grade.


In turn, these factors are a good indication of tenderness, juiciness, and flavour of the meat--all characteristics important to consumers. Prime, Choice, and Select are all grades familiar to consumers of beef.

MARKETING ISSUES RELATED TO FORM Standards for each product describe the entire

range of quality for a product, and the number of grades varies by commodity.

There are eight grades for beef, and three each for chickens, eggs, and turkeys. On the other hand, there are 38 grades for cotton, and more than 312 fruit, vegetable, and specialty product standards.


It is important to have a grading system which accurately describes products in a uniform and meaningful manner.

Grades and standards contribute to operational and pricing efficiency by providing buyers and sellers with a system of communicating price and product information.


By definition, commodities are indistinguishable from one another. However, there are differences between grades and this has to be communicated to the market.

Prices vary among the grades depending upon the relative supply of and demand for each grade. Since the value of a commodity is directly, affected by its grade, disputes can and do arise.

In fact, the government may establish grading services to serve as a disinterested third party.


Grading typically occurs at the assembly stage or when a product moves into storage, during storage, or just before it leaves storage.

Grading is not normally a separate marketing stage, It is a function provided by the storage firm or the commodity merchant or the government.

The absence of grades and standards restricts the development of effective and efficient marketing systems.


Effective standardization is basic to an efficient pricing process.

Consumers use the price differentials they are willing to signal to suppliers what they want with regard to produce quantities and qualities. If produce is not in well defined units of quantity and quality then the pricing mechanism fails as a device for communicating consumer wants to suppliers

CONSUMER AWARENESS AND REQUIREMENTS TO COMPLY WITH STANDARDS

Standards

Agricultural products vary greatly in their intrinsic characteristics. Some, such as color or odor, are recognizable to the naked eye, whereas other characteristics related to the production process (i.e. the use of pesticides, moisture content, etc.) may require testing.

Standards Traditionally standards in developing countries

have been informal, and based primarily on product shelf life, with buyers and sellers bargaining over products that can be assessed physically.

Global markets, for a number of reasons, require formal and widely recognized standards.

Standards Products are handled in large volumes over

greater distances. Buyer power has increased, and standards reduce

buyer and retailer risk, as well as increasing shelf life and reducing waste.

Standards permit trade by specification, reducing transactions costs. Banks are more willing to provide credit for goods with a known market value.

Standards In addition to these concerns, increased consumer

awareness in developed countries has driven the implementation of sanitary and phytosanitary measures to address health and safety concerns, social standards to protect workers, and environmental measures such as reduced pesticide levels.

Standards The phenomenal growth of the organic market in

recent years is one example of how consumer preferences are influencing agricultural practices.

Formerly, standards were seen as the domain of the public sector while grades were determined by the private sector. Standards and grades today are increasingly determined and enforced by private industry.

Standards While many developing country ministries of

agriculture continue to offer or require certain types of certification for sale or export, in many cases the standards used are less strict than those required by buyers, and thus they are irrelevant.

In other cases, developing country governments lack the capacity to administer and enforce standards.

Standards There are numerous potential benefits for developing

countries conforming to standards, such as: reduced transaction costs, access to more stable markets and high-end

consumers, increased earnings, reduced post-harvest deterioration, improved

health and safety of workers and consumers, and greater provision for worker welfare and

environmental issues.

Standards Furthermore, certifications offer producers an

opportunity to add value and/or differentiate their products. However, it is no wonder if developing country producers feel overwhelmed by the range of certification options they face shade-grown, HACCP, organic, bird-friendly, ISO 9000 and 14000, fair trade.... the list goes on.

Standards Some certifications are mandatory, others “boutique”

certifications are voluntary. Certifications can be quite expensive, and usually

have to be updated/renewed annually. Some are required by each producer, others can be

handled at the collection point by an organization (perhaps a cooperative or association).

Some can be obtained in a few days or weeks, others take years (such as organic certification, which takes a minimum of 3 years).

Standards There are three general categories of standards

and certifications: quality (including food safety), environmental, and social (such as labor standards).

Key components of compliance with standards and certifications include: The ability to trace a product (or input) back to its

source of origin. Auditing systems. Labeling.

Standards Compliance with international standards and

certifications pose two potentially inhibiting barriers for small producers trying to gain access to foreign markets: It is not always easy to gain knowledge of these

standards, and Even armed with knowledge, producers may lack the

skills, technology and capital to implement the measures necessary to comply with the standards.

Standards Under the best of circumstances, compliance with

international standards may simply be prohibitively costly for small developing country producers. Some national governments and international donors have focused their interventions on reducing these barriers.

A central challenge for agriculture development today is learning how to facilitate such processes to include and benefit small producers.

Value addition versus processing Value addition in the agro-food system is often

confused with processing, which changes the form of the product.

Value can be added to products without changing their physical form and processing (in the sense of changing the form of the product) does not necessarily add value to the product.

Value addition versus processing Value addition does involve processing in the

sense that the product undergoes some process (which can just involve cleaning, grading, or labelling), after which a buyer is willing to pay a price for the product that more than compensates for the cost of the inputs used in the process.

Value addition versus processing Sorting a heterogeneous mix of mangoes into

high-quality fruit targeted to the fresh fruit export market and lower-quality fruit targeted to juice production for local consumption allows a firm to separate markets and practice price discrimination by charging higher prices in export markets for high-quality fresh mangoes, thereby increasing its earnings.

In a market economy, this added value is typically manifested by the processor earning a profit.

Value addition versus processing

Across the continent, new opportunities for upgrading into value added production and/or processing of agro-food and agro-industrial products have emerged, though in some value chains, actors are under pressure from competition in other developing regions of the world and from increasing demands or decreasing prices applied by retailers and processors in developed countries.


The term ‘value chain’ describes the full range of value-adding activities that firms, farmers and workers carry out to bring a product from its conception to its end use and beyond.

The benefits of supplying specific value chains vary dramatically depending on how these chains are governed, whether suppliers receive inputs, knowledge and ancillary services as part of their engagement, and what end market they cater to.

Value addition versus processing While supplying some global value chains can

offer handsome rewards in comparison to regional or local value chains, these often come at a high cost in terms of increased risk and greater vulnerability.

Many factors determine whether a value chain is local, regional or global27 but in general, what keeps a value chain local (or reverts a global to local) is a combination of:

Value addition versus processing Traditional trade barriers (tariffs, subsidies in

competing producer countries). Standards, which have tended to become stricter, more

numerous, and ever changing in rich countries. Greater profitability vis-à-vis risks in local markets. The inability of local players to match volume and

logistical and quality specifications demanded by international buyers.

The emergence of competitors that squeeze out a group of players (or a country) from a value chain.

Value addition versus processing Farmers, traders and processors based in Africa

are said to upgrade when they acquire new capabilities or improve existing ones.

Upgrading refers to innovation or improvements among a firm or group of firms that increases value added and/or competitiveness

Upgrading paths (and possible combinations of paths) can be characterized as follows:

Value addition versus processing Product upgrading: this is based on increased

efficiency. It involves moving into more sophisticated products with increased unit value, or with more complex content, or that match more exacting product standards

This requires knowledge of what the end consumer wants.

Improvements can include planting desired varieties, better harvest and postharvest handling, packaging improvements, more efficient transport, etc.

Value addition versus processing Process upgrading: achieving a better

transformation of inputs into outputs through the reorganization of productive activities, and/or from improving standards in quality management, environmental impact and the social conditions of production.

Examples include providing technical assistance (cultural and postharvest handling practices) and/or improved inputs (improved varieties, fertilizers, etc.)

Value addition versus processing Functional upgrading: acquiring new functions

that increase the skill content of activities and/or improve profitability. Often, this implies moving into value-added activities beyond the farmgate (forward integration ; moving from production only, to production and primary processing).

Examples include simple processing (such as drying), or packing into consumer-ready packs (such as dried beans in small bags)


Intra-industry upgrading: Moving to a new market channel, i.e., selling to large retailers or export brokers rather than local markets.

This requires knowledge of exact product specifications. SMEs must have some access to this information as well as the ability to comply.

Value addition versus processing Inter- industry upgrading : applying competences

acquired in one function of a chain and using them in a different sector/chain. It involves Moving to a new value chain to offer a different product. This would include diversifying crops or substituting high-value crops for traditional production.

Value addition versus processing Other forms of upgrading:

matching strict logistics and lead times (time to market),

consistently delivering supplies reliably and homogeneously (a major challenge in agro-food products),

being able to supply large volumes (thus improving economies of scale)—

these can involve a combination of the upgrading types listed above.

Value addition versus processing There is no ideal path of upgrading—success will

depend on the value chain, the strategic objective of the industry (and/or government), and the specific structure and contingent situation in a given industry.

Furthermore, where the profitability of a particular function is decreasing or carrying out such a function becomes too risky, African actors could be better off moving back to simpler products, processes or functions (also known as downgrading

Value addition versus processing Successful upgrading in value chains depends not

only on a business-friendly operating environment for private sector players, but also on specific opportunities that may be linked to a particular product or product form, to the emergence of particular technologies, to changes in international trade rules, or to the emergence of niche markets.


Such windows of opportunity are often time bound: first-mover advantage is important, and abrupt changes in price and/or quality demands mean that rewards may be limited in time.

The end References John. N. Ferris (2005) Agricultural Prices

and Commodity Market Analysis 2nd edition: Michigan state university press.

James Vercammen (2011) Agricultural Marketing; Structural Models for Price Analysis 1st edition, Routledge publishers.