Lecture 7
Marketing of Agricultural Commodities
Required Text: Chapters 3 and 13
Marketing of Agricultural Commodities
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Agribusiness marketing can be categorized into two
broad categories
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Marketing of Agricultural Commodities
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Production, handling and sales of farm products
Marketing of Food Products
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Commodity procurement
Processing
Wholesaling
Retailing
Marketing of Agricultural Commodities …
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Much of the U.S. agricultural production fits relatively
well with the perfect competition model
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There are many relatively small producers (price takers in
the market)
Homogeneous commodities (not much product
differentiation) – cannot be promoted by individual producers
free entry and exit (easy to begin or cease production)
Thus marketing of agricultural commodities involves
decision on what and how much to produce and how
to market the production.
Marketing of Agricultural Commodities …
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Producer Decisions: Producers must decide what and
how much to produce and how to market the production.
Which commodity to produce and how much
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A particular farmer’s choice of which commodity to produce is
related to factors such as available land and soil quality,
production technology, climate, variable inputs (seeds, fertilizer,
water, and labor), investment capital, economies of size,
government programs, expected input and output prices, and
risks (price, production, and financial risks)
Special consideration: Biological constraints - biological lags
and perishability of the output, distance to the market, and
available marketing channels.
Marketing of Agricultural Commodities …
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Which commodity to produce and how much
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A particular farmer’s choice of which commodity to produce is
related to factors such as available land and soil quality,
production technology, climate, variable inputs (seeds, fertilizer,
water, and labor), investment capital, economies of size,
government programs, expected input and output prices, and
risks (price, production, and financial risks)
Special consideration: Biological constraints - biological lags
and perishability of the output, distance to the market, and
available marketing channels.
Marketing of Agricultural Commodities …
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When and how to market the agricultural commodity
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Marketing alternatives are limited for agricultural
commodities
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Storage – available storage facility, storage costs
Identifying the location of the market – distance, marketing
channels
Transportation – truck lines, railroads, barges, and ocean freight
Marketing by farmer groups
Risk management plays a greater role in the overall
profitability of agricultural commodities
Marketing of Agricultural Commodities …
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Marketing by Farmer Groups
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By acting jointly, farmers can often benefit economically by
working together in groups
Generally, groups of producers seek one or more of the following
objectives
 To improve commodity demand
 To regulate supplies and qualities more in line with demand
 To improve competitiveness and efficiency in the marketing
channel
 To gain more channel control and leadership for farmers
Generic promotion, marketing cooperatives, and bargaining
associations
Marketing of Agricultural Commodities …
Marketing by Farmer Groups
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Group promotion of agricultural commodities
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Generic promotion is the promotion of a particular commodity
(rather than a brand-name product) financed collectively by
producers of the commodity.
Promotion includes advertising and numerous other activities
designed to increase the demand of the commodity.
The purpose of generic promotion is to
 increase demand to raise the price of the commodity, or
 increase the volume that will clear the market at a given price
No single producer can afford to go it alone in commodity
promotion because the individual benefits will certainly be less
than costs.
Marketing of Agricultural Commodities …
Marketing by Farmer Groups
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Assume that D1 and S1 are the
current demand for and short run
supply of a commodity.
Generic promotion increases
demand to D2 raising price.
If the position of D2 is maintained in
the long-run through promotion, the
producers will increase supply to S2.
Thus, in the long-run, price declines
to the level determined by the
intersection of D2, S2, and LRS.
The long-run price may still be
higher than the initial price.
Price
S1
S2
LRS
D2
D1
Quantity
Marketing of Agricultural Commodities …
Marketing by Farmer Groups
An effective program for generic promotion should do the following
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Adopt clear, measurable objectives
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The turkey industry set out to promote year-round consumption
Develop a strategy that fits the commodity, the marketing system,
and buyers’ attitude
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The turkey industry developed and promoted “new products” – parts and
boneless portions for non-holiday seasons.
The grain sorghum industry contacted feed grain purchasers abroad
and convinced them to try U.S. sorghum
To offset the “negative image,” the pork industry promoted the “other
white meat” and invested in education, research, and legal actions
The Florida citrus industry developed an aggressive promotion program
and distributed nearly 2 billion consumer coupons for frozen
concentrated orange juice.
Marketing of Agricultural Commodities …
Marketing by Farmer Groups
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When advertising is a part of the adopted strategy, use a good
professional advertising agency
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Obtain and spend sufficient money to achieve a high probability of
obtaining the objectives
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The “Got milk” campaign has been an effective campaign of the milk
industry
Small expenditures are often a total waste – too little to capture the
attention of potential buyers
Set up a program to evaluate results (economic evaluation)
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The costs of a promotional campaign are easily measurable.
The benefits are not so easily measurable – requires sophistication
 Did the demand curve move to the right or become less elastic due
to promotion?
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Marketing Cooperatives
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A cooperative (coop) is a special type of business firm – “a
user-owned and –controlled business from which benefits
are derived and distributed equitably on the basis of use.”
The following three principles are currently the most
important for agricultural coops:
 User ownership – ownership by coop member-patrons
 User control – democratic member control
 User benefits – distribute benefits to its users equitably
on the basis of use
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Goals of Marketing Cooperatives
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To provide the most efficient marketing outlet
To expand demand for their members’ commodities
To provide better coordination between production and
consumption
To provide more dependable market outlets, including
sometimes the only remaining outlet
To achieve channel leadership, including vertical integration, and
even market power for the members
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Traditional coop principles
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Open membership
No supply controls
Member profit retained as growth capital
No secondary market for equity
Criteria for successful marketing coops
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Increased demand at the farm level for the marketed
commodity
Increased assurance of dependable and efficient market
access with some power and influence in the marketing
channel
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Virtually all agricultural coops were organized as small local
businesses – grain elevator, farm supplies store, packing shed for
shipping fresh fruits, etc.
Over time many coops have failed while others have grown.
Currently, the large coops are known as federated, centralized, and
a hybrid mixture of the two.
Federated Cooperative – cooperative or cooperatives – local coops
formed a second level coop to perform various marketing functions
such as processing distribution, advertising, and merchandising.
 Local coops are members of the federated coop
 Farmers exercise their control of the federation through a board
of directors elected through the local coops
 Example: Florida’s Natural Growers (part of Citrus World, Inc.)
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Centralized cooperative – formed as a merger of numerous local
cooperatives into one regional cooperative – the coop’s total
operations are owned and controlled as a unit
 Farmer members vote directly to elect directors
 Farmer control seems to be more direct and democratic
 Appear to have been more successful than federated coops
 Example: Dairy Farmers of America (DFA) – founded in 1998
Hybrid Cooperative – combination of the previous two organizational
types – a federated coop may rescue some local units that are in
financial trouble by purchasing their assets, thus moving from a
federated toward a centralized organization.
 The degree of farmers’ democratic control may depend more on
how committed the top management is to farmers’ objectives
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Special problems of marketing cooperatives
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Raising capital – the biggest problem of marketing cooperatives
Responsibility to patron-owners – conflict of interests
Directors vs. managers – directors direct but not manage
Competition with other coops – at both local and regional levels
Organizational variation and innovations
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Midwestern/Great Plains Grain and Livestock
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Performs a simple assembly-and-sales function and does little or no
processing
Capital requirements are low relative to sales
Membership is open and may be obtained automatically by selling
crops or livestock to the coop
Returns from coop savings provide the equity capital
Marketing of Agricultural Commodities …
Marketing Cooperatives
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Organizational variation and innovations
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American Crystal Sugar
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Started in 1973 with 1400 members, an investment of $86 million in
six sugar bit factories, $ 20 million of equity capital, and a market
share of 13% of the U.S. sugar beet market
The coop acquired the American Crystal Sugar Company
Grower-member provided initial capital equal to $100 per acre of
beets grown and signed five-year contract with the coop to market
all of their beets through it
West Coast Fruit and Vegetable Processing Coops
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High fixed costs in orchards and harvesting machinery - typically
have high capital requirements relative to sales
Raise capital through sales retains – compared to Midwestern grain
producers, the financial commitment is much higher for the fruit and
vegetable growers
Marketing of Agricultural Commodities …
Marketing by Farmer Groups
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New generation coop principles
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Closed membership
Upfront equity position by members
Delivery rights in proportion to equity positions
Transferability of delivery rights and the existence of a
secondary market for delivery rights
The possibility of immediate returns of profits to members
Examples – ethanol plants built in the late 1990s and early
twenty-first century.
Marketing of Agricultural Commodities …
Bargaining Associations
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A farmers’ bargaining association is a coop that represents its
members by collectively negotiating terms of trade but does not
engage in the physical aspects of marketing such as assembly,
processing, and distributions.
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It is not a cartel that controls supply of a commodity and raises farm
price to a revenue maximizing level – free rider problem.
Generally, bargaining associations operate in contractual markets,
engaging in both marketing and production contracts.
The function of a bargaining association – to bargain price and nonprice terms of trade – can be performed only when a buyer is willing to
negotiate with it.
Buyers usually consent to bargain when they are faced by a united
group representing a large segment of their supplies – the bargaining
association has more clout when it clearly has control of the commodity
Marketing of Agricultural Commodities …
Bargaining Associations
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Structure of Bargaining Associations
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Membership in bargaining associations, like other coops, is voluntary,
but once undertaken it involves definite rights and duties.
Capital requirements and operating expenses are small.
Bargaining associations are generally financed by deductions from crop
receipts, although some groups receive dues from growers.
Most bargaining associations pool their marketing so that each member
receives the average price of a particular grade of the crop.
Bargaining associations have been most active in dairy, fruits,
vegetables, sugar beets, and other specialty crops.
Functions of Bargaining Associations
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Discovering price and other non-price terms of trade
Non-price terms of trade may include harvest scheduling, harvesting
techniques, determination of grades (quality), delivery quotas, the
provision of shipping containers, hauling allowances, and costs.
Marketing of Agricultural Commodities …
Bargaining Associations
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Bargaining Accomplishments
 Group bargaining involves the strategic use of maneuvers, offers
and counter offers, and threats and counter threats.
 Net prices are a little higher on the average than they would
have been without bargaining.
 Prices are likely to be more stable from year to year.
 Prices may be more equitable among producers within the
group.
 Significant gains in efficiency may be obtained through group
negotiations
 Individual growers gain security and confidence that they will be
treated like all other growers.
Marketing of Agricultural Commodities …
Bargaining Associations
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Fruits and Vegetable Bargaining
 The California Canning Peach Association (1922) is one of the
oldest bargaining association - canning peaches are a highly
perishable commodity with only one market – canneries.
 It takes ownership of the commodity and then pools returns to
members.
 The entire peach canning industry is in California, and the
association handles a slight majority of the state’s production.
 The association seeks to negotiate all contract terms before
harvest – but, negotiations are sometimes prolonged to a much
later date.