Chapter Four

4. Agricultural Marketing

Course Instructor: Tolera M.(MSc)

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 4.1. Meaning of market
• The word market comes from the latin word
“marcatus” which means merchandise or
trade or a place where business is conducted.
• In common parlance, a market includes any
place where persons assemble for the sale or
purchase of commodities intended for
satisfying human wants.
• The word market in the economic sense
carries a broad meaning.

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• Some of the definitions of market are given as
follows:
• 1. A market is the sphere within which price
determining forces operate.
• 2. A market is the area within which the forces of
demand and supply converge to establish a single
price.
• 3. The term market means not a particular market
place in which things are bought and sold
– but the whole of any region in which buyers and
sellers are in such a free interact with one
another that the prices of the same goods tend
to equality, easily and quickly.
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• 4. Market means a social institution which
performs activities and provides facilities
for exchanging commodities between buyers
and sellers.
• 5. Economically interpreted, the term market
refers, not to a place but to a commodity or
commodities and buyers and sellers who are
in free interact with one another.

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• A market exists when buyers wishing to
exchange the money for a good or service
are in contact with the sellers who are willing
to exchange goods or services for money.
• Thus, a market is defined in terms of the
existence of fundamental forces of supply
and demand and is not necessarily confined
to a particular geographical location.
• The concept of a market is basic to most of
the contemporary economies, since in a free
market economy, this is the mechanism by
which resources are allocated.
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4.2. Components /Essentials of a Market:
• For a market to exist, certain conditions
must be satisfied.
• 1. The existence of a good or commodity for
transactions (physical existence is, however,
not necessary);
• 2. The existence of buyers and sellers;
• 3. Business relationship between buyers and
sellers; and
• 4. Demarcation of area such as place, region,
country or the whole world.
– The existence of perfect competition or a 6
uniform price is not necessary.
 4.3. Market Structure
• Market structure refers to those
organizational characteristics of a market
which influence the nature of competition
and pricing, and affect the conduct of
business firms;
• An understanding and knowledge of the
market structure is essential for identifying
the imperfections in the performance of a
market

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• Components of Market Structure:
• The components of the market structure, which
together determine the conduct and performance
of the market, are:
• 1. Concentration of Market Power:
• This is measured by the number and size of firms
existing in the market.
• The extent of concentration represents the
control of an individual firm or a group of firms
over the buying and selling of the produce.
• A high degree of market concentration restricts
the movement of goods between buyers and sellers
at fair and competitive prices, and creates an
oligopoly or oligopsony situation in the market.
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• 2. Degree of Product Differentiation:
• Whether or not the products are
homogeneous affects the market
structure.
• If products are homogeneous, the price
variations in the market will not be wide.
When products are heterogeneous, firms
have the tendency to charge different
prices for their products.
• Everyone tries to prove that his product is
superior to the products of others.

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• 3. Conditions for Entry of Firms in the Market:
• Another dimension of the market structure is the
restriction, if any, on the entry of firms in the market.
• Sometimes, a few big firms do not allow new firms to
enter the market or make their entry difficult by their
dominance in the market.
• There may also be some government restrictions on the
entry of firms.
• 4. Flow of Market Information:
• A well-organized market intelligence information system
helps all the buyers and sellers to freely interact with
one another in arriving at prices and striking deals.
• 5. Degree of Integration:
• The behaviour of an integrated market will be different
from that of a market where there is no integration
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either among the firms or of their activities.
 4.4. Agricultural Marketing
• The term agricultural marketing is composed of two
words-agriculture and marketing.
• Agriculture, mean growing and/or raising crops and
livestock.
• Marketing connotes a series of activities involved in
moving the goods from the point of production to the
point of consumption.
• It includes all the activities involved in the creation of
time, place, form and possession utility.
• Agricultural marketing refers to all marketing
functions performed to move agricultural inputs and
outputs from the point of production to the point of
their final utilization.
• The agricultural marketing system is a link between the
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farm and the non – farm sectors
 4.4.1.Marketing of Agricultural and
Manufactured Goods:
• The marketing of agricultural commodities is
different from the marketing of
manufactured commodities because of the
special characteristics of the agricultural
sector (demand and supply) which have a
bearing on marketing. Because of these
characteristics, the subject of agricultural
marketing has been treated as a separate
discipline – and this fact makes the subject
somewhat complicated.
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• These special characteristics of the
agricultural sector affect the supply and
demand of agricultural products in a manner
different from that governing the supply and
demand of manufactured commodities.
• The special characteristics which the
agricultural sector possesses, and which are
different from those of the manufactured
sector, are:

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• Perishability 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.
• Their perishability makes it almost
impossible for producers to fix the reserve
price for their farm-grown products.
• The extent of perishability of farm products
may be reduced by the processing function;
but they cannot be made non-perishable like
manufactured products.
• Nor can their supply be made regular.
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Seasonality of Production:
• Farm products are produced in a particular season; they
cannot be produced throughout the year.
• 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.
• 3. Bulkiness of Products:
• The characteristic of bulkiness of most farm products
makes their transportation and storage difficult and
expensive. This fact also restricts the location of
production to somewhere near the place of consumption
or processing.
– The price spread in bulky products is higher because of the
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higher costs of transportation and storage.
• 4. 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.
• 5. Irregular Supply of Agricultural Products:
• The supply of agricultural products is uncertain and
irregular because of the dependence of agricultural
production on natural conditions.
– With the varying supply, the demand remaining almost
constant, the prices of agricultural products fluctuate
substantially.

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• Small Size of Holdings and Scattered Production:
• Farm products are 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
• 7. 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.
• Processing firms enjoy the advantage of monopsony,
oligopsony or duopsony in the market.
– This situation creates disincentives for the producers and
may have an adverse effect on production in the next year.
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 IMPORTANCE OF AGRICULTURAL MARKETING
• Marketing is productive, and is as necessary as the farm
production.
• Marketing adds cost to the product; but, at the same
time, it adds utilities to the product.
• The following four types of utilities of the product are
created by marketing
• (a) 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, through processing, oilseeds are converted into
oil, sugarcane into sugar, cotton into cloth and wheat into flour
and bread.
– The processed forms are more useful than the original raw 18
materials.
• Place Utility: The transportation function
adds place utility to products by shifting
them to a place of need from the place of
plenty.
• Products command higher prices at the place
of need than at the place of production
because of the increased utility of the
product.
• (c) Time Utility: The storage function adds
time utility to the products by making them
available at the time when they are needed.

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• Possession Utility: The marketing function of buying
and selling helps in the transfer of ownership from
one person to another.
• Products are transferred through marketing to
persons having a higher utility from persons having a
low utility.
• In addition to creation of utilities, marketing also
contributes for economic development.
• From the point of view of economic development,
marketing provides profit motive and the necessary
– input to increase agricultural production
– provides sufficient food for consumers,
– raw material and market for industrial producers.
• For this reason, it has been described as the most
important multiplier of agricultural development. 20
• 4.4.3. AGRIMARKETING FUNCTIONS
• Marketing Functions: A marketing function may be
defined as a major activity performed in
accomplishing the marketing process. There are 3
major marketing functions:
• a. Exchange functions:
• i. Buying (Assembling)
• ii. Selling
• b. Physical Functions:
• i. Storage & Packaging
• ii. Processing
• iii. Transportation & Distribution

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• c. Facilitating Functions:
– i. Standardization (grading & quality)
– ii. Risk Bearing
– iii. Market Intelligence (advertisement &
promotion)
– iv. Financing

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• 1. The Exchange Functions: Are those activities
involved in the transfer of title of raw and
processed agricultural products and services (food
& fiber).
– It involves buying and selling.
– Here price determination is always considered.
• A. Buying (Assembling) function
– Involves the activities associated with finding out
sources of supply, assembling products and purchases.
– Assembling involves delivering of the farm
produce from several farmers to a central
location into a larger lot to enable other
functions in marketing to occur - i.e. massing
quantities of farm products & includes vegetable
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packing sheds, grain elevators, livestock sale
• B. Selling function
• Selling occurs in several ways in agricultural
marketing and includes selling of supplies and
services to farmers, selling of farm produce
to assemblers & processors; selling of food &
fiber to consumers.
• All these involve price acceptance and
merchandising ( i.e. display of goods, decisions
on place and time to approach customers,
promotion of goods, providing sample,
preparing private tender or open auction).
• The selling function involves transfer of
ownership or creation of possession utility. 24
• 2. Physical Functions
• These are those activities that involve
handling, movements, and physical change of
the product.
• They are involved in creating utility or adding
value to the farm produce by solving the
problems of when, what and where in
marketing.
• A. Packaging Function
• Packaging provides a number of advantages
including protection from weather or
contamination, enhancing handling, providing
information and means of ads, etc
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• B. storage
• Storage is an important marketing function, which involves
holding and preserving goods from the time they are
produced until they are needed for consumption.
• Storage is an exercise of human foresight by means of
which commodities are protected from deterioration, and
surplus supplies in times of plenty are carried over to the
season of scarcity.
• The storage function, therefore, adds the time utility to
products.
• Agriculture is characterized by relatively large and
irregular seasonal and year – to – year fluctuations in
production.
• The consumption of most farm products, on the other hand,
is relatively stable.
– These conflicting behaviors of demand and supply make it necessary
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that large quantities of farm produce should be held for a
• C. Transport & Distribution Functions
• It is making the good available at the proper place.
Most of the goods are not consumed where they
are produced.
• Agricultural commodities have to be brought from
the farm to the local market and from there to
primary wholesale markets, secondary wholesale
markets, retail markets and ultimately to the
consumers.
• The inputs from the factories must be taken to the
warehouses and from the warehouses to the
wholesalers, retailers and finally to the consumers
(farmers).
• Transportation adds the place utility to goods..
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• The main advantages of the transport function are:
• i. Widening of the Market: Transport helps in the
development or widening of markets by bridging the gap
between the producers and consumers located in
different areas.
• ii. Narrowing Price Difference over Space:
• iii. Creation of Employment:
– The transport function provides employment to a large
number of persons through the construction of roads,
loading and unloading, plying of the means of
transportation, etc.
• iv. Facilitation of Specialized Farming:
– Different areas of the country are suitable for different crops,
depending on their soil and agro-climatic conditions.
– Farmers can go in for specialization in the commodity most suitable
to their area, and exchange the goods required by them from other
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areas at a cheaper price than their own production cost
• D. Processing
• The processing activity involves a change in the
form of the commodity.
• This function includes all of those essentially
manufacturing activities which change the basic
form of the product.
• Processing converts the raw material and brings
the products nearer to human consumption.
• It is concerned with the addition of value to the
product by changing its form.
• Processing also helps to reduce the perishability of
agricultural products and squeeze their size
thereby facilitate storage and transportation. 29
• 3. Facilitating Functions
• Facilitating functions are the grease that makes
the wheels of marketing process turn.
• They are the functions that make possible the
smooth performance of the exchange and physical
functions
• a. Standardization and grading
• Standardization means the determination of the
standards to be established for different
commodities.
– Standards are established on the basis of certain
characteristics-such as weight, size, colour, appearance,
texture, moisture content, staple length, amount of
foreign matter, ripeness, sweetness, taste, chemical
content, etc. 30
• These characteristics, on the basis of which
products are standardized, are termed grade
standards.
• Grading is the sorting of the unlike lots of
the produce into different lots according to
the quality specifications laid down.
• Each lot has substantially the same
characteristics in so far as quality is
concerned.
• It is a method of dividing products into
certain groups or lots in accordance with
predetermined standards. Grading follows
standardization 31
• b. Financing (Capital)
• Is the provision of capital (money) to carry out the
various aspects of marketing such as storage,
transportation, process, etc.
• c. Risk Bearing
• It refers to accepting the possibility of loss in the
marketing of a product. There are physical and
market risks.
– Physical risks occur from destruction or deterioration of
the product by fire, accident, wind, cold or heat.
– Market risks occur because of changes in the value of
the product - such as price changes.
• In general risk bearing may be insurance provision in case of
physical risks or utilization of futures in case of price risks,
but the entrepreneur may also bear risks in terms losses 32

etc.
• d. Market Intelligence (Advertising and
Promotion)
• It is the function of collecting, interpreting and
dissemination of market information.
• Market information is an important marketing
function which ensures the smooth and efficient
operation of the marketing system.
– What to buy and sell, when to store and how much, where
to transport etc. require good market information.
• Market information creates a competitive market
process and checks the growth of monopoly or
profiteering by individuals.
• Market information is of two types- market
intelligence and market news.
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• The first includes information relating to
such facts as the prices that prevailed in the
past and market arrivals over time.
• It is therefore, of historical nature.
• An analysis of the past helps us to take
decision about the future.
• The second type of market information
(market news) refers to current information
about prices, arrivals and changes in market
conditions.
• This information helps the farmer in taking
decisions about when and where to sell his
produce
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• 4.4.4 MARKET FUNCTIONARIES
• Marketing functionaries /marketing agencies are those who
actually perform the marketing functions. The following
functionaries commonly involve in marketing of agricultural
products.
• 1. Producers
• Most farmers or producers, perform one or more marketing
functions.
• They sell the surplus either in the village or in the market.
Some farmers, especially the large ones, assemble the
produce of small farmers, transport it to the nearby
market, sell it there and make a profit.
• This activity helps these farmers to supplement their
incomes

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• 2. Middlemen
• Middlemen are those individuals or business
concerns which specialize in performing the
various marketing functions and rendering
such services as are involved in the
marketing of goods.
• They do this at different stages in the
marketing process.
• The middlemen in agricultural marketing may,
therefore, be classified as follows

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• (a) Merchant Middlemen: Merchant middlemen are
those individuals who take title to the goods they
handle. They buy and sell on their own and gain or
lose, depending on the difference in the sale and
purchase prices.
• i. Country Buyers: These buyers undertake the
initial task of assembling produce from farms or
local country markets.
– They may be farmers who collect the produce of other
cultivators, landlords, itinerant traders, cooperatives,
wholesale merchants and processors, cooperatives or
government procurement agencies.
• ii. Wholesalers: Wholesalers are those merchant
middlemen who buy and sell food grains in large
quantities. 37
• iii. Retailers: The function of the retailer is to
obtain supplies and display them for sale in forms,
time and places convenient for consumers.
• (b) Agent Middlemen:
• Agent middlemen act as representatives of their
clients. They do not take title to the produce and,
therefore, do not own it. They merely negotiate
the purchase and/or sale.
• They sell services to their principals and not the
goods or commodities. They receive income in the
form of commission or brokerage.
• They serve as buyers or sellers in effective
bargaining.
• Agent middlemen are of two types: commission 38
agents and brokers
• i. Commission Agents: 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 but do not bear any risk.
– Commission agents receive a percentage of the price
obtained or paid.
• ii. Brokers: Brokers render personal services to
their clients in the market; but unlike the
commission agents, they do not have physical
control of the product.
– The main function of a broker is to bring together buyers
and sellers on the same platform for negotiations.
– Their charge is called brokerage.
– They may claim brokerage from the buyer, the
seller or both, depending on the market situation
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• (c)Speculative Middlemen
• Those middlemen who take title to the
product with a view to making a profit on it
are called speculative middlemen.
• They are not regular buyers or sellers of
produce. They specialize in risk – taking.
• They buy at low prices when arrivals are
substantial and sell in the off – season when
prices are high. They do the minimum
handling of goods.
• They make profit from short-run as well as
long-run price fluctuations
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• (d)Facilitative Middlemen
• Some middlemen do not buy and sell directly
but assist in the marketing process.
• Marketing can take place even if they are
not active. But the efficiency of the system
increases when they engage in business.
• These middlemen receive their income in the
form of fees or service charges from those
who use their services 41
• The important facilitative middlemen are:
• i. Laborers: They perform such physical tasks in
the marketing process as loading and unloading,
cleaning, filling and stitching the bags, etc.
• ii. Graders: These middlemen sort out the product
into different grades, based on some defined
characteristics, and arrange them for sale. They
facilitate the process of prices settlement
between the buyer and the seller. Example; the
Ethiopian commodity exchange (ECX)
• iii. Transport Agency: This agency assists in the
movement of the produce from one market to
another.
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• iv. Communication Agency: It helps in the
communication of the information about the prices
prevailing, and quantity available, in the market.
• The post and telegraph, telephone, newspapers, the
radio, television, internet and informal links are the
main communication channels in agricultural marketing.
• v. Advertising Agency: It enables prospective
buyers to know the quality of the product and
decide about the purchase of commodities.
Newspapers, the radio, cinema slides, television and
internet are the main media for advertisements.
• vi. Auctioners: They help in exchange function by
putting the produce for auction and bidding by the
buyers.
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4.4.5. MARKETING CHANNELS
• Marketing channels are routes through
which agricultural products move from
producers to consumers.
• The length of the channel varies from
commodity to commodity, depending on the
quantity to be moved, the form of
consumer demand and degree of regional
specialization in production.
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• Marketing channels for agricultural products
vary from product to product, country to
country, lot to lot and time to time.
– For example, the marketing channels for fruits
are different from those for food grains.
Packagers play a crucial role in the marketing of
fruits.
• The level of the development of a society or
country determines the final form in which
consumers demand the product.
– For example, consumers in developed
countries demand more processed foods in
a packed form. Wheat has to be supplied
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in
the form of bread.
• The distribution channel for agricultural
products may take either of the following
routes:
• 1. Producer or manufacturer – Retailer –
Consumer.
• 2. Producer or manufacturer – Consumer.
• 3. Producer or manufacturer – Wholesaler
– Retailer – Consumer.
• Wholesaler is most important functionary
in the chain of distribution of goods.
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• 4.4.6. MARKET INTEGRATION
• Market integration is a process in which
firms expand by combining additional
marketing functions and activities under a
single management.
– Example: Setting up of milk processing plant,
establishment of wholesale facilities by
retailers, etc.
• Integration influences market conduct of
firms and consequently their marketing
efficiency.
• Integration renders the following
advantages: 47
• a). Assure supplies and outlets, thus reducing
business risk and marketing costs;
• b). Improve the bargaining power of the
seller either through handling large volume
of business or having more alternative
market and service opportunities;
• c). Economies scale through making fuller use
of management and resources already
available, and from advertisement and
promotion

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• Types of market integration
• 1. Horizontal integration
• This form of integration occurs 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 but may jeopardize
the interest of consumers or buyers.
• If farmers join hands and form cooperatives,
they are able to sell their produce in bulk and
reduce their cost of marketing
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• 2. Vertical integration
• This form of 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.
• Vertical integration leads to some economies in the
cost of marketing.
• It provides greater market power for the integrated
firm while reducing the number of middlemen in the
market
• There are two types of vertical integration: forward
integration when the firm incorporates subsequent
marketing functions and backward integration when
the firm accommodates preceding functions. 50
 4.4.7. MARKETING EFFICIENCY
• Marketing efficiency is essentially the
degree of market performance.
• It is the ratio of market output
(satisfaction) to marketing input (cost of
resources).
• An increment in the ratio represents
improvement in efficiency and vice versa.
• It can also be defined as the maximization of
participant’s satisfaction with the least cost
incurred in providing that satisfaction
through the system of marketing
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Components of marketing efficiency
• 1.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.
– Eg: - Storage processing, handling etc.
• 2. Pricing / Allocative efficiency:
– System is able to allocate farm products either over
time, across the space or among the traders, processors
and consumers at a point of time in such as 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. 52
• 4.4.8. Marketing Costs And Margins
• The movement of products from the producers to
the ultimate consumers involves costs, taxes, and
fees which is called marketing costs.
• Marketing costs are incurred by marketing
enterprises to carryout marketing functions.
• Marketing costs would normally include:
– Handling charges at local point
– Assembling charges
– Transport and storage costs
– Handling by wholesaler and retailer charges to customers
– Expenses on secondary service like financing, risk taking
and market intelligence
– Profit margins taken out by different agencies.
– Producer’s share in consumer’s price: 53
• Margin refers to the difference between the price
paid and received by a specific marketing agency,
such as a single retailer, or by any type of
marketing agency such as retailers or assemblers
or by any combination of marketing agencies such
as the marketing system as a whole.
• Marketing margin depends on the marketing costs
in such a way that higher marketing costs imply
higher marketing margin.
• This is because the marketing margin should at
least cover the marketing cost and for a private
marketing enterprise, the marketing margin should
further provide an acceptable profit.

54
• Ways of reducing marketing costs of farm
products.
• 1. Increased efficiency in a wide range of activities
between produces and consumers such as increasing
the volume of business, improved handling methods
in pre-packing, storage and transportation,
adopting new managerial techniques and changes in
marketing practices such as value addition, retailing
etc.
• 2. Reducing profits in marketing at various stages.
• 3. Reducing the risks adopting hedging.
• 4. Improvements in marketing intelligence.
• 5. Increasing the competition in marketing of farm
products. 55
• 4.4.9. Agricultural Price Stabilization
• Most of agricultural commodities in developing
countries constitute the basic purchases of
consumers.
• Producers may also be victims of their surplus
production during times of favourable production or
harvesting seasons.
• Hence, the fact that the supply of agricultural
products is seasonal and volatile have important
bearing on the living of many people.
• Moreover, the marketing channel may be
unnecessarily long and marketing cost/margin is
very high as result of which consumers are paying
exaggerated prices while producers are not getting
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their fair share.
• These marketing problems call for price
stabilization policy.
• Governments take the responsibility to
stabilize agricultural prices.
• The mechanisms of price stabilization by the
government may different forms such as:
– procurement operations,
– public distribution at fixed issue prices,
– rationing,
– restrictions on movement of food grains from
one place to another place and
– direct price control (setting price ceiling to
protect consumers or price floor to protect 57
producers).
End of chapter Four

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