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Ag Management Chapter 7. Marketing. The Farm Gate Approach to Marketing. Lumping and labeling everything that is done to a product after it leaves the farm as marketing Shortcoming Implies that production on the farm and marketing are separate and independent.

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the farm gate approach to marketing
The Farm Gate Approach to Marketing
  • Lumping and labeling everything that is done to a product after it leaves the farm as marketing
  • Shortcoming
    • Implies that production on the farm and marketing are separate and independent
the true definition of marketing
The True Definition of Marketing
  • All the economic activities involved in preparing and positioning the product for the final consumer.
the concept of utility
The Concept of Utility
  • Satisfaction
  • Products with utility meet a need and in the process provide satisfaction to the consumer
  • 3 Basic Types
    • Form
    • Place
    • Time
form utility
Form Utility
  • Creation starts at the farm level
  • Satisfaction with product grows as processing changes the product form and prepares it for the final consumer
place utility
Place Utility
  • Consumers also demand convenience
  • The modern supermarket now provides almost any food product the consumer wants under 1 roof
  • Home delivery
time utility
Time Utility
  • Consumers want products to be available in a timely fashion
  • Products that do not meet consumer demand in a timely fashion will be deemed to failure.
dividing the consumer dollar
Dividing the Consumer Dollar
  • Controversial
  • Producers feel cheated because they only receive a small percentage of the consumer food dollar
  • Total Utility -the various contributors to the total consumer satisfaction and total product get paid based on what portion of the total utility they provide.
how much does the producer get
How Much Does the Producer Get?
  • Assuming that a dairy producer gets $0.34/dollar spent on milk they would receive $1.19 of every $3.50/gal sold.
  • The other marketing bill (processing, packaging, distributing) gets $0.65/dollar or a total of $2.31/gal
price directs the system
Price Directs the System
  • Contributors get paid for what they do

Production

Response

Price

Signal

price signals
Price Signals
  • Increasing production in response to consumer wants and needs.
  • As consumer demand for a product increases, then so do the prices paid by retailers for products and the prices paid to producers.
price efficiency
Price Efficiency
  • How effective the system is in communicating needed changes and prompting the proper response.
  • If clear signals are not sent, then the entire system persist in a state of imbalance
  • Consumer desires are not met as well and producers receive smaller returns
  • How well the system communicates via the price mechanism is important to the individual consumer, the individual producer and to society in general
law of demand
Law of Demand
  • At any point in time the rational consumer will take more only at a lower price.
demand curve
Demand Curve
  • Negative Slope
  • It is interpreted this way: Quantity taken will increase only if the price comes down
supply curve
Supply Curve
  • Slopes up and to the right
  • Reflects that producers will only offer more at higher prices
price
Price
  • Found where supply and demand intersect
  • That price is the equilibrium price
equilibrium quantity
Equilibrium Quantity
  • The quantity at which supply and demand match
price discovery
Price Discovery
  • The process of searching the equilibrium or market clearing price
market clearing price
Market Clearing Price
  • Also called an equilibrium price
  • It is the only price at which the quantity demanded by the buyers is exactly equal to the quantity offered by the producers.
micro macro paradox
Micro-Macro Paradox
  • Individual producers (the micro level) cannot control price but they are very vulnerable to the actions of producers in the aggregate (the macro level)
  • Never make a long term commitment to an increase in market price that is likely to be temporary.
  • No marketing strategy is sufficient to overcome the problems that come with making long term response to a short-run surge in price.
example
Example
  • In 1972-73 the (now former) Soviet Union was facing a poor grain crop. Reversing pas behavior, they came into the market and bought grain and oilseeds heavily. US prices were driven up to record prices or near the all time record highs. Corn prices moved above $4.00/bu., wheat $6.00/bu., and soybeans $11.00/bu. US producers responded to the higher prices in dramatic fashion, by the late 1970’s some 50 million acres had been brought into the production of corn, wheat, and soybeans. When the Soviet Union crops improved and it reduced buying in subsequent years, grain prices plunged. Producers were caught in the “micro-macro trap” with no where to turn. It was primarily the surge in acreage that brought on excessive expansion and prompted the “farm crisis” of the 1980’s when many grain farmers were forced out of business. Many of those added acres were grasslands, erodible fields and drained wetlands that were still being targeted by governmental conservation programs in the 1990’s.
economies of size
Economies of Size
  • Producers and processors tend to try to reduce cost by increasing in size.
  • Getting too large may cause cost to increase again
  • Cost decrease on a large farm because cost are spread over more bushels of production.
farm support programs
Farm Support Programs
  • Most common element is price support programs
  • 1950’s and 60’s price support was based upon a base period and the concept of parity
    • This demonstrated a willingness of society to keep the incomes of farmers on par with the income of non-farmers
    • Base price used for decades was 1910-1914
  • Biggest shortcoming: ignored technological advances.
farm support programs1
Farm Support Programs
  • 1960- surpluses were generated due to price supports
    • Surpluses were sold below market price and given away in domestic and international food programs
  • This allowed farm prices to be very stable with huge surpluses that made buffers against drought and crop shortage
farm support programs2
Farm Support Programs
  • 1972-73- price ceilings on food and other producers were imposed for the first time in non-war years
  • Imposing price ceilings below the equilibrium price creates shortages
  • Price ceilings have not been used since the 1970’s
  • Farm support programs are still in use and recent Farm Bill legislation works to provide support with pegging a specific price.
farm support programs3
Farm Support Programs
  • Target Price
    • Estimates the cost of production and is considered a “fair” price to farmers
  • Loan Rate
    • The price the government will pay for the product going into a 9 month loan program
  • The third component of the Farm Bill Support program is the deficiency payment
    • The deficiency payment is the difference between the target price and cash price
  • The net result
    • Subsidize farmers when prices are low but not in such a way that US prices are pushed above the world-level price.
marketing strategies
Marketing Strategies
  • It is important to recognize that farmers are vulnerable to price vulnerability brought on by weather and crop uncertainty and the impact of government price support and occasional price ceiling programs
elasticity
Elasticity
  • Percent Change in Quantity

Percent Change in Price

two primary types of supply side price variability
Two Primary Types of Supply-Side Price Variability
  • Price Cycle
    • Can last for a number of years
  • Seasonal Price
    • Movement across months within the year
three ways prices move forward
Three Ways Prices Move Forward
  • Cash Contracts
  • Futures Market
  • Options on Futures
futures contract
Futures Contract
  • A contract calling for delivery of a carefully described commodity for delivery at some later time period.
basis
Basis
  • Difference between cash and futures market
  • Usually negative
forward price
Forward Price
  • Futures+Basis
put option
Put Option
  • The right to sell underlying futures at a specific price
price floor
Price Floor
  • Strike Price+Basis-Premium
  • The price can not go below this.
net price
Net Price
  • Cash+Option Value-Premium
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