MADDA WALABU UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

ECONOMICS OF AGRICULTURE

Instructor: Genemo Fitala

Email : genemo.fitala@mwu.edu.et

December, 2022

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 CHAPTER FOUR:

AGRICULTURAL MARKETING

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 What Is Marketing?

The process of determining the needs and wants of consumers & being able to satisfy
those needs & wants profitability

Marketing includes all of the activities necessary to move a product from the producer to
the consumer

Traditionally, a “market” was a physical place where buyers and sellers gather to buy and sell
goods. A market is made up of buyers & sellers

Buyers are people who need or want a product or service and have the money to buy it

A market must also have sellers who are willing & able to produce goods & services for
sale

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 4.1. Agricultural marketing

 AM is the study of all activity agencies, and policies involved in the

procurement of farm inputs by the farms and the movement of agricultural
product from the farms to the consumer.

Thus AM is the link between the farm and non-farm sector.

AM includes
 Organization of agricultural and material supply to processing industries,

 the assessment of demand for farm inputs and raw materials,

 and the policy related on the marketing of farm products to the consumer.

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 Factors leading to the growth of agricultural marketing

The following factors have led to the growth in agricultural

marketing:
Specialization
Urbanization
Transportation and communication
Technological change in agriculture

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 4.3 Characteristics of Marketing of Agricultural product
 Perishability of the Product

 Seasonality of Production

 Bulkiness of Products
The special characteristics which the
agricultural sector possesses, and  Variation in Quality of Products
which are different from those of the
manufactured sector, are:  Irregular Supply of Agricultural Products
 Small Size of Holdings and Scattered
Production
 Processing
 Time lag of agricultural products
 The law of diminishing returns
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 Characteristics of Marketing of AP…
a) Perish ability of the Product:
 Most farm products are perishable in nature; but the period of their perishability varies
from a few hours to a few months.
b) Seasonality of Production:
 Farm products are produced in a particular season; In the harvest season, prices fall.
 But the supply of manufactured products can be adjusted or made uniform throughout the
year. Their prices therefore remain almost the same throughout the year.
c) Bulkiness of Products
 It makes their transportation and storage difficult and expensive.
 The price spread in bulky products is higher because of the higher costs of transportation
and storage.
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 Characteristics of Marketing of Agricultural product…

d) Variation in Quality of Products: there is a large variation in the quality of agricultural

products, which makes their grading and standardization somewhat difficult. There is no such
problem in manufactured goods, for they are products of uniform quality.

e) Irregular Supply of Agricultural Products: Its supply is uncertain and irregular

because of the dependence on natural conditions. The prices of agricultural products
fluctuate substantially.

f) Small Size of Holdings and Scattered Production: produced throughout the length
and breadth of the country and most of the producers are of small size. This makes the
estimation of supply difficult and creates problems in marketing.

g) Processing: Most of the farm products have to be processed before their consumption by the
ultimate consumers. This processing function increases the price spread of agricultural
commodities.
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 4.4. Importance of Agricultural Marketing

a) Optimization of Resource use and Output Management: EAMS leads to the

optimization of resource use and output. EAMS can also contribute to an increase in the
marketable surplus by scaling down the losses arising out of inefficient processing, storage
and transportation.

b) Increase in Farm Income: EAMS ensures higher levels of income for the farmers by
reducing the number of middlemen or by restricting the commission on marketing
services and the malpractices adopted by them in the marketing of farm products.

 An efficient system guarantees the farmers better prices for farm products and
induces them to invest their surpluses in the purchase of modern inputs

c) Widening of Markets: It widens the market for the products by taking them to remote
corners both within and outside the country. This helps in increasing the demand on a
continuous basis.
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Importance of Agricultural Marketing …

d) Growth of Agro-based Industries: An improved and EAMS helps in the growth

of agro-based industries and stimulates the overall development process.

e) Price Signals: helps the farmers in planning their production in accordance with the
needs of the economy.

f) Adoption and Spread of New Technology: It helps the farmers in the adoption
of new scientific and technical knowledge. New technology requires higher investment
and farmers would invest only if they are assured of market clearance.

g) Employment: provides employment to millions of persons engaged in various

activities, such as packaging, transportation, storage and processing, etc.

h) Addition to National Income: add value to the product- ncreasr GNP and NNP
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Importance of Agricultural Marketing …

i) Creation of Utility: Marketing adds cost to the product; but, at the same time, it
adds utilities to the product. Utilities of the product created by marketing are:

 Form utility: The processing function adds form utility to the product by changing the
raw material into a finished form. With this change, the product becomes more useful than it is in
the form in which it is produced by the farmer . For example, palm oil bunch to edible cooking oil.

 Time utility: The storage function adds time utility to the products by making them
available at the time when they are needed

 Place utility: Making the products and services available in convenience location and
place. Products command higher prices at the place of need than at the place of production
because of the increased utility of the product.

 Possession utility: buying and selling helps in the transfer of ownership from one person to
another. Products are transferred to persons having a higher utility from persons having a low
utility.
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 4.5. Functions Of Agricultural Marketing

• Marketing tasks are much more extensive than simply the process of buying and
selling

• Any single activity performed in carrying a product from the point of its
production to the ultimate consumer may be termed as a marketing function.

• A marketing function may have anyone or combination of three dimensions, viz.,

time, space and form

• A marketing function is a fundamental or basic physical process or service required

to give a product the utility consumers desire.

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 Marketing Function…

Marketing functions can be broadly classified as following:-

A. Exchange Functions Buying
Selling
Pricing

Assembling
B. Physical Functions Transportation and handling
Grading and standardization
Processing and packaging
Storage
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 Marketing Function…

Financing and risk-bearing,

Market information
C. Facilitating Functions Demand and supply creation
Marketing research

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Marketing Function…
1) Exchange Function(primary functions): involve finding a buyer or a seller, negotiating price and
transferring ownership (but not necessarily physical transfer)
 These functions take place at the "market" - that is, the physical meeting point for buyers and sellers at the point
of production or via some other means of communication.

 At this point, formal or informal property rights are important to ensure the reliable transfer

2) Physical function (secondary functions) – enable the actual flow of commodities through
space and time from producer to consumer and their transformation to a form desirable to the
consumer.
 Assembling or concentrating the product at convenient points allows its economical transport. It’s a
valuable function which is often overlooked in the public perception of traders.
 Storage allows the commodity to be held until peak season demand, thereby stabilizing supply.
 Processing transforms the commodity into the products desired by the consumers.
 Grading and standardization allow the consumer to be more confident of the characteristics of the good being
purchased
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Marketing functions…

3) Facilitating Functions (tertiary functions):

 Are the functions that make smooth performance of the exchange and physical functions.
 Financing and risk-bearing are two important facilitating functions.
 The owner of goods at any marketing stage must sacrifice the
opportunity to use the working capital needed to buy those goods elsewhere. Or the
owner must borrow that capital.
 In either case, capital must be provided by the trader or by some lending source.
 Further, there is an implicit cost in the risk of losing all or part of that capital
through theft, spoilage, mortality or changing market conditions.
 Without the willingness to provide the capital and to bear these costs, no stage of the
market chain could function.
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Facilitating functions…

 Other facilitating functions enable producers to respond to consumer needs and

thus provide goods in the locations, quantity and form desired.

 These functions create the marketing environment, whose elements are:

1. Market and facilities - including the entire physical infrastructure that a market may
depend on.

2. Market information and intelligence - including informal and formal communication

systems, and standard weights and grades on which market information depends.

3. Institutional environment - including the government policy environment, regulations

and supporting legislation.

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 4.6. Marketing Agents and Enterprises
 Market actors can be defined by:
 the roles they play,
 the nature of their financing activities and
 their responsibility to ownership
 Actors in the market can choose between
Specializing in one activity or
integrating a number of activities into one enterprise in a vertical or horizontal
manner.
 A specialized enterprise can offer its customers more individual attention and
provide the exact quality and form of goods desired (e.g. local butcher).
 The roles of actors are often difficult to separate. The roles of vertically-
integrated actors are likely to overlap with those of more specialized agents in
the market
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 Marketing Agents and Enterprises…

Marketing Agents:
1. Producers: Most farmers or producers, perform one or more marketing
functions.
2. Middlemen: these are those individuals or business concerns which
specialize in performing the various marketing functions.

The middlemen in agricultural marketing may, therefore majorly be classified as

follows:
a) Merchant Middlemen
b) Agent Middlemen

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Market Agents…
A.Merchant Middlemen: - three types: Country buyer, Wholesaler and Retailer.
1. Country Buyers: often carry out the initial task of assembling goods from
dispersed farms or local rural markets; - may be farmers, shopkeepers, itinerant traders
or some co-operative or government-buying agency.
2. Wholesalers: their role is to transfer goods from producers or country buyers
to retailers or other wholesalers.
 There may role overlap with that of country buyers, in that they may deal directly with producers.
Often self financed and consequently bear the cost of marketing risks. To operate profitably, they
must be well-informed about current market prices and conditions, since the costs of market risks
increase with the number of stock being handled.

3.Retailers: their function is to obtain supplies and display them for sale in forms,
time and places convenient for consumers.
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Market Agent…

B. Agent Middlemen: Agent middlemen act as representatives of their clients. They

do not take title to the product and, therefore, do not own it. They merely negotiate
the purchase and/or sale.
Agent middlemen are of two types:
1. Commission Agents:- act as the representative of either a seller or a buyer.
 They take charge of the goods on behalf of buyer or sellers on demand
 Commission agents receive a percentage of the price obtained or paid.
2. Brokers: render personal services to their clients in the market; but unlike the
commission agents, they do not have physical control of the product.
Their main function is to bring together buyers and sellers on the same platform
for negotiations. Their charge is called brokerage.
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 Marketing Enterprises
 Enterprises of four types normally fulfill the roles of middlemen described
above. These are:
A. Independent, locally-based private enterprise
B. Co-operatives
C. Marketing boards and other state enterprises
D. Transnational companies
A. Independent, locally-based private enterprises: They operate with capital
owned directly by the operators and their partners, or in some cases by
shareholders.
• Great variety exists in their level and degree of sophistication. Sometimes
foreign-owned operations may' occupy important roles in this niche, particularly in
foreign trade of livestock products.
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Marketing Enterprises…

B. Co-operatives: they have the potential to improve marketing efficiency -

reduce marketing costs.

 For example, a village livestock marketing co-operative could co-ordinate the production
schedules of small farmers, so that sufficient animals would reach market age at the same
time, allowing truck transport to markets and lowering per unit transport costs.

 Co-operatives can also be used to counteract imperfect competition among

buyers, by creating greater bargaining power among producers.

 Typically, they are used to distribute credit or subsidized inputs.

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Co-operatives …
 To be successful in the long run, a co-operative must be able to carry out marketing
functions with lower cost or effort than available alternatives.

 If this ability is not perceived by members, co-operatives are likely to break down.

 Since the ownership of cooperatives, by definition, lies in the hands of those who are
entitled to any profits, a distinction must be made between farmer-owned and farmer-
controlled co-operatives and parastatals.

 Parastatals are co-operatives in name only, since they are government controlled.

 Parastatals may serve as taxation mechanisms or to promote government support.

 Private co-operatives are likely to be more efficient than parastatals, because of

ownership incentives.

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C. Marketing boards and other state enterprises
 Although popular with many African governments, they have been much criticized.
 They are set up by government direction with government capital and approval
 Parastatals are slightly more independent; although government financed, they are
autonomous in terms of handling funds, recruiting staff and making operational
decisions.
 The objectives of establishing such public intermediaries are:
To raise the bargaining power of agricultural producers via an imposed monopoly
To raise the scale of operation
To capture economies of scale;
To stabilize market supply and prices
 They often fail to achieve these objectives because of inappropriate policies, poor
management and lack of knowledge.
 Managers succumb to patronage and corruption, and incentives for efficient operation are
usually lacking.
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D. Transnational companies:
 Often succeed because of their access to processing technology and external markets.
 By definition, they operate in countries other than that of their headquarters.
 They can assist market development by facilitating the movement of skills and
capital to areas where they are in short supply, potentially contributing to the leveling
of commercial expertise.
 When considering the relative advantages of each of these enterprises, attention must
be given to the particular environment of livestock marketing in Africa.
 Its marketing structures are more complicated and differentiated than those in a developed
country where production is much more specialized.
 Further, issues of equity and income distribution between producers are more acute
and must be considered in the policy decision to promote certain types of enterprise.

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 4.7. Integration and diversification of marketing
• Integration shows the relationship of firms in a market.

• Integration influences market conduct of firms and consequently their marketing

efficiency. Markets differ in the extent of integration.

• Market integration can be defined as process which refers to the expansion of

firms by consolidating additional marketing functions and activities under a
single management.

– For example, setting up of milk processing plant by milk producers and

establishment of wholesale facilities by retailers are instances of integration.

• We can find three types of market integration: horizontal, vertical and

conglomerate.

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Integration…

1. Horizontal integration: When a firm gains control over other firms, performing
similar marketing functions.

 Some marketing agencies (say, sellers) combine to form a union with a view to
reducing their effective number and the extent of competition in the market.

 Horizontal integration is advantageous for the members who join the group.

 If farmers join hands and form cooperatives, they are able to sell their produce in
bulk and reduce their cost of marketing. Horizontal integration of selling firms is
not in the interests of consumers or buyers.

 E.g. Primary milk producers can organized as cooperative union.

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Integration…
2. Vertical integration: Occurs when a firm performs more than one activity in the
sequence of the marketing process. It is linking together of two a more functions
within a single firm or under a single ownership. Example : If a firm assumes the
functions of the commission agent as well as retailing.

There are two types of vertical integration

i. Forward integration: Eg: Wholesaler assuming the function of retailing i.e.

assuming another function.

ii. Backward Integration: Eg: Processer assumes function of assembling / purchasing

the produce from villages.

3. Conglomeration: A combination of agencies or activities not directly related to each

other, when it operates under a united management, be termed a conglomeration.
 If DANGOTE cement factory and TSEGA BOTTELED WATER factory merged into
one firm, this is an instance of conglomeration since these two companies produce
different products and operate in different markets
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 4.8. Transaction Costs And Marketing Efficiency
a) Transaction Cost :

 Costs associated with the act of exchanging ownership rights of economic

assets. Transaction costs includes information and search costs with respect to
finding
The price
Quality
Quantity and durability of the product
Negotiation and contracting (legal) fees
Communication charges
Monitoring and enforcement costs among others

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Transaction costs…
 Ronald Coase (1937) introduced the concept of transaction costs associated with
information, negotiation, monitoring, coordination, and enforcement of contracts.
 Based on these transaction costs faced by individual firms, Coase theorized the natural
emergence of intermediary firms to reduce these costs.

 Building on Coase, Hobbs (1997) has classified the components of transactions costs in
relation to the transaction: information costs as arising before the transaction; negotiation
costs as the costs of physically carrying out the transaction; and monitoring costs as costs of
ensuring that the terms of the transaction are adhered.

 Transaction costs can also be classified into observable and unobservable transaction costs
(de Silva et al., 2008; Staal, Delgado, & Nicholson, 1997).

 The observable transaction costs include marketing costs such as transport, handling,
packaging, storage, spoilage, etc. that are visible when a transaction takes place.

 Unobservable transaction costs include cost of information search, bargaining and

enforcement of contracts, etc.
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 Marketing Efficiency

 Marketing efficiency is essentially the degree of market performance. It is a broad and

dynamic concept.
 Marketing efficiency can be defined as the ratio of market output (satisfaction) to
marketing input (cost of resources).
 An increase in this ratio represents improved efficiency and vice versa.
 Efficiency in marketing is exhibited by the following components:
1. Effectiveness with which a marketing service is performed.
2. The cost at which the service is provided.
3. The effect of this cost and the method of performing the service as production and
consumption i.e. effect of (1) and (2), last two are more important.
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 Marketing efficiency…

Marketing efficiency is usually assessed by considering the following indicators:

i. Technical or Physical or Operational efficiency: It pertains to the cost of

performing a function; Efficiency is increased when the cost of performing a function
per unit of output is reduced.

ii. Pricing/A locative efficiency: System is able to allocate farm products either over
time, cross the space or among the traders, processors and consumers at a point of
time in such a way that no other allocation would make producers and
consumers better off.

Pricing efficiency refers to the structural characteristics of the marketing

system, when the sellers are able to get the true value of their produce and the
consumers receive true worth of their money.
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 End of the Chapter

Thanks a lot!

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