1. MARKETING Ag Management Chapter 6

2. Objectives  Define Marketing  Understand the concept of utility  Explain how price directs the system  Know how demand, supply and price interact  Explain the micro-macro paradox  Understand the economies of size  Know farm support programs, historically and today  Understand marketing strategies for forward pricing  NOTE– This chapter is #7 in the workbook & #6 in the text.

3. 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

4. Stages of a Complete Marketing System ConsumingRetailingWholesalingProcessingProducing

5. True Definition of Marketing  All the economic activities involved in preparing and positioning the product for the final consumer.

6. 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

7. 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

8. Place Utility  Consumers also demand convenience  The modern supermarket now provides almost any food product the consumer wants under 1 roof  Home delivery

9. 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.

10. 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.  See examples p. 6-3 & 6-4

11. Price Directs the System  Contributors get paid for what they do ConsumingRetailingWholesaleProcessingProducing Price Signal Production Response

12. 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.

13. 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

14. Law of Demand  At any point in time the rational consumer will take more only at a lower price.

15. Demand Curve  Negative Slope  Quantity taken will increase only if the price comes down

16. Supply Curve  Slopes up and to the right  Reflects that producers will only offer more at higher prices

17. Price  Found where supply and demand intersect  This price is the equilibrium price

18. Equilibrium Quantity  Quantity at which supply and demand match

19. Price Discovery  The process of searching for the equilibrium or market clearing price

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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

26. 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.

27. 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.

28. Marketing Strategies  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

29. Elasticity  Percent Change in Quantity/ Percent Change in Price

30. 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

31. Three Ways Prices Move Forward  Cash Contracts  Futures Market  Options on Futures

32. Futures Contract  A contract calling for delivery of a carefully described commodity for delivery at some later time period.

33. Basis  Difference between cash and futures market  Usually negative

34. Forward Price  Futures + Basis

35. Put Option  The right to sell underlying futures at a specific price

36. Price Floor  Strike Price + Basis - Premium  Price can not go below this

37. Net Price  Cash + Option Value - Premium

38. Summary*  See “Pulling It Together” p. 6-17

39. Assignment  Marketing Webquest  Go to http://www.zunal.com/webquest.php?w=2009 http://www.zunal.com/webquest.php?w=2009  Follow instructions. Due Oct 1. Presentations will be made to class.