Lecture 10

The Agribusiness System

 Objectives
The agribusiness system approach to
marketing
Size and scope of agribusiness
Various sectors
Marketing in the economy
Functions of marketing
Marketing in agribusiness firms
 History
What is agriculture to most people? Farming, ranching,
fishing??

This was true until the early 1960s when agribusiness

evolved into a complex system reaching well beyond the
farm

The big picture included all things needed to bring food to

the consumer.

As it turned out aquaculture shares many similarities to

traditional agribusiness.
 Agribusiness History
The agribusiness system includes many facets:
Not only production (e.g., farmers, hatchery
managers), also
Organizations which provide inputs (e.g., fry,
chemicals, feed)
Processors the output (e.g., processing plants)
Manufacturers (e.g., shrimp microwavable products)
Transporters/Sellers/Brokers (e.g., retail grocery
stores, seafood wholesalers, etc.)
 Agribusiness: Evolution
Late 1800s: self-sufficient farms!
Then wars increased produce prices, stimulating more
production (Recall: demand and supply). War was profitable
even back then!
Mechanization was developed largely due to labor shortages.
Crop production became a focus of farmers. (They started
purchasing inputs; this is where aquaculture is today!)
Much of the manufacturing and processing was relocated
off the farm to become businesses themselves.
Preservation of raw products was also improved.
This made food more convenient to consumers.
 The Agribusiness System

Processing-
Aquaculture Production Manufactoring
Input Sector Sector Sector

Agribusiness System

Note: the success of each part depends upon the proper functioning
of the other two!
 How large is it??
Agribusiness is largest sector in the U.S. economy:
11% of all goods, 16% employment
Production systems occupy half of all land, valued
at $1 trillion US
Aside from food production, why does this matter?
Self sufficiency: (science, government, education);
separates developed from developing economies
Point of interest: processing is the largest sub-
sector! (Preservation of goods perfected??)
 The Input Subsector
Provides farmers with all things needed for production:
feed, fry, credit, equipment, fuel, chemicals

Total level of inputs remains stagnant since WWII; but,

type of inputs has varied greatly.

If labor costs increase, you typically see a shift towards

increased purchase of inputs (Since 1960, farm labor has
decreased 50%!)

Purchase of more inputs actually facilitates more production.

 The Input Subsector
Use/efficiency of energy usage has also
changed.

Relatively few input businesses compared to

production or processing (look at feed
manufacturing vs. the number of farms!)

Why is this trend observed??

 The Production Subsector
Larger farms in all areas (including aqua-)!
Corporate farms
New technologies have resulted in increased
specialization of production
genetically altered animals
specific pathogen-free stocks (big deal in aqua-)
What does this mean?
Stability in that aquaculture production is
becoming more diversified
 The Production Subsector
Specialization also allows for increased production
efficiency (telltale sign: increased production in face
of decreased or constant levels of input)
Another blast from the past: production economics
production costs increase every year due to increase input
cost
but cost of inputs is not related to commodity prices
(e.g., shrimp)
when commodity prices drop, gross farm income falls,
but amount spent on inputs doesnt (the great squeeze!)
 The Production Subsector
Two sizes of farms: Large (economies of scale)
and small (no economy of scale)
Large farms: new technologies (aeration, telemetry,
genetically-improved strains)
Small farms can also, however: sell something that
commands a high price! ($16/lbs. shrimp!)
Who knows what we can get for farm raised
grouper off Florida coast?? $10, $12/lbs.
The Processing-Manufacturing
Subsector
Includes all business that turn raw materials into finished (or
partially-finished) products

In aquaculture, mostly done by processors

Also includes packaging, distribution, and sales, places and

forms desired by consumers (Marketing bill?)

Marketing bill represents 70% of total amount spent by

consumers on food!!!
The Processing-Manufacturing
Subsector
Firms in this sector are
very large (again,
gathering economies of Packaging

scale); very responsive to Transportation

Before-tax profits
consumer tastes/ Fuel and power

preferences Depreciation
Advertising

Examples: ADM (grain Rent

Net interest
processing), Zapata- Repairs
Other
Haynie (fish meal), Tyson Labor

Foods (feeds) The Marketing Bill: What

are you paying for?
 Big Companies: How do they
work?
Obviousley, aquaculture depends flexibility and
diversification for sucess, not isolation.

Many large companies have divisions in other parts

of the agribusiness system

Example: Cargill, Inc., one of the largest grain

traders in the world, also largest soybean processor,
flour miller, feed manufacturers, seed producers,
etc.!!!
 Part 2: Role of Marketing in
the Agribusiness System
Marketing mission revealed!: not to rip-off people (Hard to
believe, esp. after buying a new car!!!)

Lowers prices/increase availability

1) bridge between producers and consumers
2) helps producers understand consumer needs
3) helps producers decide what to produce
4) helps consumers know what products are available and at what prices

Bottom Line: Consumer satisfaction!!, higher profits for

producers! Everyone wins!!

Extension of the business world?? Maybe!

Conflicting Needs of Producers
and Consumers
Producers seek to
Maximize long-term profits
Sell large quantities of a few
products
Consumers seek to
Maximize the happiness they
receive from the products they
consume with their limited
incomes
Buy small quantities of many
products
 Nine Marketing Functions and
Barriers to Consumer Satisfaction
buying/selling: required for product
exchange, exchange of legal title between
producer and consumer
storage: keeps product fresh between
production and final sale
transportation: overcomes separation of
space by moving product from site of
production to where it is sold (globalization)
 Marketing Functions
processing (value addting): changing the form of
a commodity or raw product to one that has more
convenience, better taste.)
grades/standards: assures the consumer they are
getting what they think theyre purchasing
financing: providing the funds necessary to pay for
the production and marketing of a product during
the time period the producer must wait to receive
payment for a sale
 Marketing Functions
risk-taking: assuming the risk of loss between the
time of purchase and sale
market information: includes methods
information is communicated about markets, market
prices, etc.
All of the above functions are usually
performed by middlemen (added step: has
a tendency to increase prices)
 Four Utilities of Marketing
Another way to describe marketing is to look
at the performance of the previous marketing
functions as a way of adding value to
products.
Otherwise, we wouldnt need middlemen?
Adding value = increased consumer
happiness or utility
Utilities: form, place, time, possession
 Four Utilities of Marketing
form: to process the product into a form
desired or needed by the consumer (fish in the
round vs. nuggets)
place: transporting the product to a location
desired by the consumer (shipping,
convenience= big deal!!!)
time: storage
possession: gaining ownership so it can be
legally used
 Evaluating Performance of the
Marketing System
How well does the marketing system meet the needs of
consumers?: it has to be measured
Two criteria or yardsticks:
efficiency: how well goods and services flow from businesses to
consumers
fairness: how the marketing system meets the needs of the
consumers
When you buy something, you are saying that you like the
price, the goods/services, etc.
Rating of the system is indirect through voting and has led
to the rise of consumerism.
 Market Performance Evaluation Criteria
Market Structure
number and size of firms in the market (no monopolies)
barriers to market entry/exit (not prevented by other firms)
degree of product and price competition (allows increased quality)
Conduct of Firms in the Market
firms compete via price (sell at lower price)
no unlawful cooperation between firms (price fixing-this still happends)
truthful product claims (better? Show me the data!)
meaningful product differences (Are different models different?)
Market Performance
optimal output available at minimal price (appropriate tech, conserve resources)
reasonable levels of profits (good firms deserve this)
encouragement of innovation (products should be improved over time, how is
this possible with seafood??)
reasonable levels of investment (firms support in industry, new tech, higher
efficiency, devleopment of company)
 Role of Marketing in
Agribusiness Firms
Weve been talking about the role of the marketing
system in a free market economy.

Well now bring this down to the firm level

What is the role of marketing in the operation of

agribusiness firms?

Introduce basic principles

 Five Approaches to Marketing
How should a firm approach its market?
Approaches:
production
product
selling
marketing
societal marketing
Each succeeding approach represents a higher level
of marketing and management skill
 Production Approach
Max production/lowest cost
works in early stages of market development,
(demand exceeds supply)
maximum output/unit input
producers can become insensitive to needs of
consumers (uh oh!)
only trying to find ways to lower the cost of
production and transport (feed industry)
 Product Approach
High-quality product; Build it and they will come?
(Japanese car manufacturers.)

Another inwardly-looking approach to marketing

Hopefully consumers will recognize this quality and pay

a premium price (How do we do this with seafood?)

Caveat: producer still making the product(s) he/she

wants, not consumer need-oriented
 Selling Approach
Products need a strong selling effort for
sales:
if left alone, consumers wont buy enough of the
product thats already been produced
result: producers try to convince consumers that
their products are really the best
setting: supply is greater than demand
Problem: assumes that with enough pressure, or
correct language, anything can be sold (selling an
eskimo ice cubes)
 Marketing Approach
Produce a product that fills a consumer need,
offer it at the correct price, make it available, and
promote it properly (What a concept!)
major advance in strategy
moves away from selling to meeting demands
must truly understand users of products, not because
of superior technology
appropriate for highly competitive markets where
production capacity exceeds demand
 Societal Marketing Approach
Includes same items as Marketing Approach,
but includes both consumers and societys
well-being
firms and their products often introduce societal
backlashes (e.g., increased garbage)
not practiced by many, often not needed if
product is well thought out
often good just from a PR standpoint
Fantastic 4
of
Management
Planning: what approach should be taken to marketing,
setting firms goals and objectives
Organizing: directing the flow of work: emphasize
consumer needs, not those of the employee, can planning
goals be met efficiently? Who reports to whom?
Controlling: establishing a system of feedback to determine
how well goals are being met
Directing: implementing plans, 90% of mgrs job, most
important
 Final Thoughts...
The marketing idea is the driving force for the entire
firm and gives it direction and purpose.

The purpose is meeting the needs of consumers and

their satisfaction.

Meeting these goals = profit!