CHAPTER ONE

What is agricultural marketing?

1.1. Concept and Definition:
The term agricultural marketing is composed of two words- “Agriculture” and “Marketing”.
Agriculture, in the broadest sense, means activities aimed at the use of natural resources for human
welfare, i.e., it includes all the primary activities of production. But generally, it is used to 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. According to Thomsen, the study
of agricultural marketing, comprises all the operations, and the agencies conducting them, involved in
the movement of farm-produced foods, raw materials and their derivatives.

1.2. Scope and Subject Matter of Agricultural Marketing:

Agricultural marketing in a broader sense is concerned with:
 The marketing of farm products produced by farmers
 The marketing of farm inputs required by farmers in the production of farm products
Subject of agricultural marketing
This includes product marketing as well as input marketing. The subject of output marketing is as old
as civilization itself. The importance of output marketing has become more conspicuous in the
recent past with the increased marketable surplus of the crops following the technological
breakthrough. The farmers produce their products for the markets. Input marketing is a comparatively
new subject. Farmers in the past used such farm sector inputs as local seeds and farmyard
manure. These inputs were available with them; the purchase of inputs for production of crops
from the market by the farmers was almost negligible. The new agricultural technology is input-
responsive. Thus, the scope of agricultural marketing must include both product marketing and input
marketing.
Specially, the subject of agricultural marketing includes marketing functions, agencies, channels,
efficiency and costs, price spread and market integration, producers surplus, government policy
and research, training and statistics on agricultural marketing.

1.3. Importance of Agricultural Marketing

Agricultural marketing plays an important role not only in stimulating production and consumption,
but in accelerating the pace of economic development. Its dynamic functions are of primary importance
in promoting economic development.

Optimization of Resource use and Output Management:

An efficient agricultural marketing system leads to the optimization of resource use and output
management. An efficient marketing system can also contribute to an increase in the marketable
surplus by scaling down the losses arising out of inefficient processing, storage and transportation.

Increase in Farm Income

An efficient marketing system 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.

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An efficient system guarantees the farmers better prices for farm products and induces them to
invest their surpluses in the purchase of modern inputs so that productivity and production may
increase.
Widening of Markets:
A well-developed marketing system widens the market for the products by taking them to
remote corners both within and outside the country, i.e., to areas far away from the production
points. The widening of the market helps in increasing the demand on a continuous basis, and
thereby guarantees a higher income to the producer.
Growth of Agro-based Industries:
An improved and efficient system of agricultural marketing helps in the growth of agro-based
industries and stimulates the overall development process of the economy.
Price Signals:
An efficient marketing system helps the farmers in planning their production in accordance with the
needs of the economy.
Adoption and Spread of New Technology
The marketing system 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.
Employment:
The marketing system provides employment to millions of persons engaged in various activities,
such as packaging, transportation, storage and processing, etc.
Addition to National Income:
Marketing activities add value to the product thereby increasing the nation’s gross national
product and net national product.
Better Living:
The marketing system is essential for the success of the development programs which are
designed to uplift the population as a whole.
Creation of Utility:
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.
b) 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.
d) 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.

Why is agricultural marketing important?

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  Agricultural marketing is a specific part of marketing. It is related to agricultural products only.
It is the base of most of the economic activities of a country. It brings marketable surplus to the
market for sale. Farmers will keep a portion of their produce for self-consumption and cattle
and the remaining portions are left for sale. Higher level of marketable surplus leads to greater
economic development. The importance of agricultural marketing is as follows:
 Provides raw materials for industries.
 Provides food grains for the entire population and fodder for cattle.
 Provides a base for expansion of internal market of a country.
 Helps in the expansion of international market also when marketable surplus found in excess
of the demand of a country, fetches a considerable amount of foreign exchange.

What are the special characteristics of agricultural products that affect the way they are marketed?

1.4. Difference in Marketing of Agricultural and Manufactured Goods

The marketing of agricultural commodities is different from the marketing of manufactured
commodities because of the special characteristics. The special characteristics which the
agricultural sector possesses, and which are different from those of the manufactured sector, are:
1. 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.
2. 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
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.
6. 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.

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What are the common problems encountered in marketing agricultural products in LDCs?

1.5. Common problems encountered agricultural products in LDCs

The major problems affecting agricultural marketing in LDCs especially in Ethiopia are listed below
with their solutions;
1. Unstable price
 A constraint for sustained growth as it affects both producers and consumers.
 Public sector withdrawal from marketing and price stabilization operations has not been
replaced by adequate alternative mechanisms and market on its own is still inadequate to
resolve the problem.
 Public and non-government sector support for increasing production is not balanced by
support for storage, processing and marketing operations.
 Rigidity in input credit provision and repayment requirements not congenial for achieving
price stability.
 Weather and productions risks exacerbate the instability cycle.
Solutions/actions required
 Direct public sector involvement in marketing to stabilize price may be inefficient due to
complexity of marketing, high overhead cost in relation to low value added.
 Facilitation of private and cooperative sectors through finance, credit and regulations may be
better option. They may hold buffer stocks for supply management under certain regulatory
framework that will neither stifle investors’ profit nor lead to public sector losses through
subsidy.
 Aim should be to stabilize price partially (within certain limit) so that producer risk is reduced
but there is enough incentive to make investment in new technology. Market price should
remain the major guide or norm for stabilization policy.
 Price stabilization, buffer stock and supply management, and food aid management to deal with
chronic as well as transitory food insecurity should all be linked together. Role of public sector
should be limited in direct handling of the commodity and more in providing regulatory and
other facilitating services.
2. Finance and credit
 Input credit limited in supply
 Repayment schedules rigid, not always appropriate for marketing when prices are higher
 Credit for marketing operations both at farm and off-farm levels inaccessible or inadequate.
 Rural credit targeted to poverty alleviation programs by NGOs and those for production
activities are not always complementary
 Inadequate institutional arrangements for savings mobilization; traditional savings and credit
institutions, e.g. ekub and edir, not involved in savings mobilization for productive purposes.

Solutions/actions required
 Credit has many functions in marketing. Farmers may need credit to hold stocks until prices
rise and repay loan later, traders may need credit to create storage capacity and increase
investment in stocks.
 Supplier credit for inputs, warehouse receipt and cooperative credit for output have good
promise to stabilize price and contribute to sustained growth.

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  Investment policy should encourage the private sector to invest in marketing operations and
infrastructure rather than in commercial production enterprises, as the private sector can make
profit as well as contribute to the commercialization of smallholder agriculture through
investment and support in marketing.
 Donor or public fund may be provided as matching capital at subsidized interest rate to
encourage private sector banks and financial institutions for advancing marketing credit. Such
fund may be operated through village banks, which should also mobilize savings.
Decentralization of credit and savings operations with flexible interest rate for both savings and
credit may be key to make the scheme successful. Investment in technology and innovation
should be linked to savings and investment options.

3. Post-production losses
 Reliable estimates not available, perceived to be high (about 20% or more in some crops)
 Problems at all levels: production practices, harvesting, threshing, drying, husking/grinding,
storage methods

Solutions/actions required
 On-farm actions may be facilitated by extension education. Extension recommendations need
to include production as well as post-production methods and techniques, e.g. planting time,
selling time, storage and marketing practices, group marketing where possible and appropriate.
 Off-farm investments, especially for storage and processing, need to consider optimal location,
appropriate technology, source of finance and operation and management of enterprises
 Define and test role of private sector, cooperatives and public sector in investment, operation
and management
4. Transportation and communication
Inadequate road networks, so limited access to input and output markets and services, high transaction
costs, disincentive for adoption of new technologies.

Solutions/actions required
 Investment in road infrastructure and in agricultural development need to be complementary to
maximize benefits from both investments
 Investment to improve rural markets to link them better with larger markets
5. Grades and standards
 Exist in theory as standards and grades defined for export market, not relevant for domestic
market
 Traditional and informal trading recognize many grades and quality standards based on
norms accepted by the local market and the trading community. This is also a reflection of
the large diversity of crop varieties produced in the country. Improved technology and move
towards homogenization of production will lead to more uniform grades and standards.
 Producers loose

Solutions/actions required
 In theory, grades and standards may be defined in many ways, e.g. minimum standard which
may serve as a reference, different standards based on quality, standards for export. All
approaches difficult to enforce under current conditions.
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  Publicly defined grades and standards are often accompanied by declaration of uniform
prices. This is not enforceable in practice nor it is rational because marketing costs will vary
according to location of production.
 In partnership with traders, use traditionally accepted grades and standards, gradually
standardize them across markets and geographical regions, and formalize them through
extension education and training.
6. Storage
 On-farm storage methods poor, capacity inadequate.
 Bulk storage capacity was previously in the public sector, which has not been disinvested after
deregulation.
 Existing storage facilities are not optimally located to move grains from surplus to deficit areas
at least cost. Some storage capacity is used basically for maintaining food aid stocks.

Solutions/actions required
 Extension recommendation need to include methods of storage
 Need to facilitate private and cooperative sector investment in storage through finance and
credit provision. Link such investment and credit with price stabilization objective through
regulatory measures.
7. Processing
 On-farm processing methods poor, lead to losses and poor quality output
 Inadequate rural electrification limits scope for expansion of better methods
 Some large scale commercial capacities created based on aid but they suffer from low capacity
utilization due to poor management and marketing strategy, and inadequate supply of products.

Solutions/actions required
 Extension recommendation need to include improved processing methods
 Investment in processing capacity need to be increased mainly by supporting private sector
8. Information
 Market and price information not accessible to producers and local traders
 Information on profitability of inputs and technology not adequately covered, e.g. fertilizer is
not profitable in risky environment so credit for fertilizer may be unprofitable but fertilizer with
water increase productivity and profitability.

Solutions/actions required
 Extension material should include both information on production and marketing practices
 Cost, price and profitability information should be provided not as single values but as possible
ranges within which rational choices may be made.
9. Transaction costs
 All the problems mentioned above contribute to high transaction costs leading to either no or
low participation in market and also low returns where some participation is prevalent

Solutions/actions required
 Institutional mechanisms needed to overcome the problems in order to reduce transaction costs
 Cooperatives are being promoted, but success will depend on real farmer participation and
farmer control in management. Evaluation needed to identify where improvement can be made.

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1.6. The relationship between agriculture and the food marketing system
The food industry is a major user of agricultural products and commodities. As disposable incomes
increase in developing countries, the food industry will have to meet new and different needs from its
more affluent consumers. The food industry will, in turn, require agriculture support its efforts to meet
the new challenges and opportunities. In particular, the food industry will demand that agriculture
produces a wider range of qualities in its products and commodities with a greater proportion of total
supply in the top grades; downward pressure will be exerted on agricultural production costs;
agriculture will be required to supply throughout the year rather than seasonally; reliability in the
quantity, quality and timing of supplies will become the major determinant in supplier selection;
innovative producers who can provide differentiated products and products that make food processing
easier or cheaper are more likely to survive than those who persist in producing traditional products
using traditional farming methods; and issues related to the health aspects of food consumption will
become increasingly important.

What types of enterprises are involved in the marketing of agricultural products in LDCs and what
are their strengths and limitations?

1.7. Agricultural and food marketing enterprises

The principal component of any marketing system are the institutions and enterprises of which it is
comprised. Three of the principal forms of enterprise to be found in developing countries are discussed
in this section. These are: private companies, marketing boards and co-operatives.

Private enterprise
Private enterprise has much to commend it, including a much higher level of financial independence
from government than public enterprises. Moreover, private enterprise is able to adapt, rapidly, to
changing circumstances and opportunities and is usually able to provide what consumers want at a
lower cost than public enterprises. Abbott highlights several particular strengths of private enterprise,
including:

Low operating costs Nothing so concentrates the mind on cost control than ownership. The
private entrepreneur has every motivation to contain costs since to do
otherwise erodes his/her profit margin.
High levels of Since private enterprise has as its prime objective, profit, everything is done
equipment utilization to maximize the use of capital equipment, and thereby lower unit costs e.g.,
concern is shown to keep factories operating at high levels of capacity
utilization, attempts are made to ensure that the firms' vehicles have
economic return loads as well as outward loads etc.
Adaptability Decision making within private enterprise tends to be quicker, because of
the absence of a weighty bureaucracy, than in public enterprise equivalents.

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Marketing boards in developing countries

Marketing boards are, in most instances a government agency and/or statutory organization having the
function of intervening in the marketing process, with a view to serving the cause of efficient and
orderly marketing. Less frequently they are voluntary organizations established by farmers/producers.
The effectiveness of a particular marketing board is often viewed in terms of three factors:-

 Its contribution to orderly and efficient marketing

 The reduction in the capacity of intermediaries to manipulate margins at the expense of
producers and consumers
 The generation of producer-oriented monopoly power

In many cases the establishment of a marketing board was a reaction to situations where middlemen
and/or foreign buyers were perceived to hold monopolistic power over producers. Hence the role of the
marketing boards is frequently articulated as being one of organizing producers into monopolistic
agencies with real countervailing power; to reduce inefficiencies due to unwarranted competition, and
duplication of effort between intermediaries.

In theory at least, the marketing board contributes to orderly marketing by acting as an agent for
improving marketing practices, as a market regulator and as a provider of facilitating services. For
instance:

Change agent Marketing boards can establish marketing practices and procedures for raw
and/or processed products.
Regulatory role Marketing boards may act as “watch-dogs” over agreed marketing practices
and procedures e.g., credit arrangements, weights and measures, quality
control etc.
Facilitator Marketing boards may provide all or some of the facilitating services e.g.
credit, market intelligence and risk management. The last of these usually
takes the form of the guaranteeing of prices. In the case of tree crops prices
are announced in advance of harvest. Prices for annual crops are normally
made known before planting or sowing.

The role of marketing boards in bringing about more efficient marketing is most often framed by policy
makers in terms of modifying the market structure. That is, trying to make what is perceived to be an
imperfect market structure more advantageous to producers. Of course, in doing so, account ought to
be taken of the effect on both consumers and other players within the marketing system. This is not
always done and the question is begged whether a market structure which is organized to the principal
benefit of one particular set of players is anything other than imperfect to the others.

However, the argument in favor of giving producers real countervailing powers is strongest in situations
in which the marketing system is characterized by a myriad of largely powerless producers and a
relatively small number of powerful intermediaries. In these circumstances, the price-makers are the
middlemen and both producers and consumers are price-takers.

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One particular way that a marketing board may act to modify an existing market structure is to
rationalize the system in an attempt to reduce inefficiencies seen to be caused by unwarranted
competition and duplication of effort between intermediaries. For example, there may be duplication
of transport, storage and processing facilities to the extent that capacity utilization cannot rise to
economic levels without extremely high charges to compensate. Marketing boards may try to
rationalize the system through, for example, a system of licenses.

Co-operatives in the agriculture and food sectors

The co-operative enterprise has its origins in the 19th century and has become one of the most
ubiquitous examples forms of business/economic enterprise. Co-operatives exist in all countries of the
world and operate under diverse political systems: from communism to capitalism. The majority of
these co-operatives are, through their national apex organizations, ultimately in membership of the
International Co-operative Alliance (ICA), the representative world body of co-operatives of all types.

The motivation to form co-operatives has three particular aspects:

 The need for protection against exploitation by economic forces too strong for the individual to
withstand alone
 The impulse for self-improvement by making the best use of often scarce resources
 The concern to secure the best possible return from whatever form of economic activity within
which the individual engages whether as a producer, intermediary or consumer.

It is the belief that each of these aspirations can most advantageously be pursued and secured in concert
with like-minded people that provides the stimulus to co-operative action. The underpinning principles
with are those of self-help, voluntary participation, equity, democracy, and a common bond of common
need and purpose. The cohesion of the group is maintained by ensuring that individual members cannot
secure power or gain advantages at the expense of the others.

The Structure and organization of co-operatives: There are two principal forms of co-operative
organizations: primary co-operatives and secondary co-operatives. The basic unit in the co-operative
systems is the primary co-operative. A primary co-operative is one in which the shareholder are
individuals; each of them having an equal share in its control.

1. Primary co-operative:- In many cases, primary co-operatives will combine several functions
e.g. an agricultural co-operative may provide consumer supplies to its members. Primary
cooperatives may also own and run subsidiary enterprises related to their main functions, such
as a consumer co-operative with its own manufacturing/processing or servicing business.
2. Secondary co-operative:- While a primary co-operative has individual persons as members, a
secondary (or federal) co-operative is one in which other co-operatives are the members. Apart
from this basic difference the structure and organization of both types follow a very similar
pattern.

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