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Agribusiness Sample LessonAB112 The Business of Marketing Agricultural Products
Marketing is a word that can be used in different ways. To a grain farmer, marketing may mean planning and carrying out a strategy to sell a crop at the best time and at a profitable price. To a homemaker it may mean the weekly trip to a food market to buy groceries. The word marketing has an entirely different meaning for the executive of a food company that buys the grain the farmer will sell and produces the bread or other cereal product the homemaker will buy. Marketing at such a food company may include purchasing, processing, sales, advertising and promotion. A major food company will employ professional people in each of these areas. Their work may include buying from producers as well as making contracts to sell their output to wholesalers or retail chains of supermarkets. It also could include managing a fleet of trucks to deliver products. Driving one of those trucks is also a part of the marketing process. The different definitions used by the farmer, the homemaker and the food company executive are all correct definitions. Each one of them knows what they mean by the word. Anyone can easily understand what each of them means when they use the word because of the context in which the word is used. You can also define marketing, and come to understand it fully, when you place it in a context that includes all three of the above meanings. A complete way to define marketing is to describe it as the "business activities that direct the flow of goods and services from the producer to the consumer or final user." Many different types of agribusinesses work together to market the products of U.S. agriculture. The marketing process starts when the producer sells grain, soybeans, cotton, livestock, dairy, eggs, poultry, fruit, nuts, vegetables or other products. From there the job is taken over by other agribusinesses that perform functions that are necessary to deliver the product to a consumer. The process ends when the consumer buys a ready-to-use product such as a steak, a loaf of bread, a pizza, a bag of apples, a can of peas, a shirt or a pound of cheese. You will find more highlights about this process in two other AgEdNet.com lessons, AB101 Understanding U.S. Agriculture and Agribusiness and MK101 What Is Agricultural Marketing? In addition, you will find over 100 lessons in the Marketing Library covering marketing from the perspective of commodity producers. AG MARKETING COMPANIES There are two ways to understand the agribusinesses that market the products of agriculture. One way is the look at the "marketing functions" these companies perform. The other is to look at the "types of companies" that perform them. Marketing functions: Marketing functions are the things that must happen to a product to make it useable and to bring that product to the consumer. Ownership must be transferred from producers to marketers to consumers. A price must be established at each step so the producer and marketer are paid for what they do. To pay this price, consumers must be satisfied with the VALUE they get for their expenditures. For most agricultural products, VALUE MUST BE ADDED to the raw farm commodity before it will be acceptable to a consumer. It must be moved to where it can be processed and to where it can be distributed to buyers. The product also must be in a convenient place and in a condition that makes it easy to use. Adding value means the product must be transported, processed, packaged and delivered to where consumers want to buy and use it. Consumers want to buy steak at a local food market or restaurant -- not steers at a Texas feedlot. They want a loaf of bread, not a bushel of wheat. Increasingly American consumers prefer a prepared meal ready-to-serve at home, or at a fast food or family restaurant. They want to buy a shirt or woolen sweater, not a bale of cotton or freshly sheared fleece. Communication is also an important function of marketing. Information needs to be exchanged to bring buyers and sellers together. The term promotion is used for general information about companies and the availability and merits of their products. Advertising is used to attract customers with information about specific values of a specific brand or product. Marketing firms: Marketing firms are the agribusiness companies that carry out the functions that add value to agricultural products. These agribusinesses make it possible for an agricultural producer to receive a price for his or her products. Many different types of companies take part in this process. Agribusiness marketing firms include huge multinational corporations that process and market food products. They also include some as small as a roadside stand selling fresh apples in the fall. They include major meat packers as well as the auction markets and cooperatives that provide an outlet for livestock from smaller farms. These auctions and cooperatives can attract buyers because they assemble and offer for sale a larger number of animals than is offered by any one of the smaller farms. Different types of companies have evolved because of what is required to market different types of agricultural products. Some products need more processing than others. A consumer can use an egg or an apple without processing. But the egg and the apple still require pricing, assembly, transportation and packaging. A bushel of corn or wheat, a live hog or a boiler chicken will require more processing than an apples does before a consumer will buy or can use them. Additional value can be added to most products, depending on what consumers want. For example, some food shoppers may not want to buy a bag of apples, they will want applesauce or an apple pie. They may not want to buy a whole or cut-up broiler chicken. Instead, they will want a frozen chicken dinner or a broiled chicken breast sandwich at a fast food restaurant. All of these requirements and consumer demands have helped to build a huge and complex agribusiness industry. The agricultural marketing sector of U.S. agribusiness includes several interrelated industries. The types of companies that make up these industries include meat packers, canning companies, food processors, grain millers, commodity brokers, commodity exchanges, marketing cooperatives, baking companies, food market chains, local food retailers and restaurants. UNDERSTANDING VERTICAL INTEGRATION The term "vertical integration" is often used to describe the growth of companies that perform several production and marketing functions. Vertical integration is very common in the poultry industry. That is where the idea first started. Today many aspects of a trend to integrate agribusinesses vertically are also a part of the companies that market other agricultural products. A good way to understand vertical integration is to take a look at how the U.S. broiler chicken industry got started and grew. At one time, Iowa was the nation's leading producer of fryer chickens. These fryer chickens were a seasonal product enjoyed mainly through the summer when young cockerels were culled from the pullet flocks being raised to become laying hens in farm flocks across the country. Farm-raised summer fryer chickens began to disappear from the U.S. food supply in the mid-1900s as a new broiler chicken industry emerged and began to grow in the Southeast and Eastern Seaboard. Iowa summer fryers were soon replaced by a year-round supply of broiler chickens produced in southern and eastern states including Arkansas, Georgia, Virginia and Maryland. The new broiler industry introduced some new concepts into the businesses of agricultural production and marketing. Before the new broiler industry began to grow, there were a number of different types of agribusiness that took part in providing summer fryer chickens to the American dinner tables. There were breeder flocks and hatchery businesses that provided baby chicks to farmers. There were feed manufacturers that produced starter chick feeds and supplements used with farm-raised grains to grow birds and maintain layer flocks. There were meat companies that purchased cockerels as well as culled layers for processing and wholesaling to food stores and meat markets. As the broiler industry emerged, feed companies, hatcheries and processors joined forces to pull together all of these functions into one organization. This was done through contracts as well as by forming companies that performed several production and marketing functions. These vertically integrated organizations strove for maximum efficiency and uniformity of product. It resulted in a year-round supply of fryer and broiler chickens. Consumers liked this new product. Broiler chickens were more uniform and available at much lower prices than the traditional farm-produced summer fryers. In addition, these chickens provided a cheap, lower fat meat product that soon began to compete with pork and beef for a larger share of the consumer dollar. As the broiler industry began to grow in the 1950s, most of the birds were grown on small farms. But unlike farm fryer chickens, they were produced in much larger batches in broiler houses built especially for that purpose. The farmer grew the chickens under a contract that paid a few cents per bird. Chicks and feed were supplied by the contracting organization. The grower was required to follow growing and health practices prescribed by the organization. An interesting aspect of this change is that ownership of the bird remained with the same organization all the way from the hatching of the baby chick through delivery of a processed broiler chicken to a food market. There was no need for a price to be paid for the baby chick or the finished broiler chicken. Prices and markets for fryer chickens essentially disappeared from U.S. agriculture. Today much of the chicken meat Americans eat is provided by large, complex companies that produce and market finished products. They own and control the entire process from hatching chicks to growing, processing, producing and delivering packaged chicken meat products to food retailers. Their products include cut-up broilers as well as separately packaged chicken parts, such as boneless, skinless chicken breasts. In addition, some of these companies produce frozen chicken foods such as chicken nuggets or frozen chicken dinners. Today's integrated poultry meat industry also produces and markets turkeys and turkey meat products as well as chicken. That industry has been very effective in promoting poultry meat as a healthy, low-fat, high-quality food. In addition, they have been able to market their product at a significantly lower retail price than consumers needed to pay for beef and pork. When integrated poultry firms began to grow, they were able to capture an increasing share of what Americans eat. Per capita consumption of poultry meat began creeping higher, sometimes at the expense of beef and pork.
The market gains made by the poultry meat industry were especially dramatic in the 1980s and 1990s. In 1981 74 percent of the meat Americans consumed was beef and pork, while 26 percent was chicken and turkey. By the year 2001 the American meat diet had changed to only 56 percent beef and pork and 44 percent poultry. No agricultural industry is yet to become as vertically integrated as the poultry industry. Still, there have been some elements of vertical integration in many other agricultural products. Some cattle ranchers, for example, maintain ownership of their calves by having them fed under contract at commercial feedlots. Some packers maintain ownership of cattle on feed to help them maintain a steady flow of market-ready cattle moving through their plants. In recent years, there also has been an increase in contracted hog production by firms that market a line of pork products to retailers. Recently, there also has been an interest in contract production of genetically engineered crops that are marketed to provide added value for certain processors. BOTTOM LINE: The job of marketing food and fiber from U.S. farms, orchards, ranches and feedlots is a very complex task. It involves many different types of companies, workers and professional people. These people and companies help to provide abundant, high-quality food and a high standard of living for America. EXERCISES: Divide your class into enough groups to have at least one group for each important crop, type of livestock and type of poultry produced in your area. The assignment for each of these groups is as follows: 1. List ways your agricultural product is used, including a list of the final products in which it is consumed. 2. Determine the market routes the product follows on its way through processing where value is added and on to where the final products are purchased and used by consumers. Remember that your farm-produced product may be used in a number of different end products. It will follow a different route for each product. 3. List types of companies involved in the marketing of your agricultural product. Try to identify the names of specific companies that market the output from farms in your area, including those that buy from farmers as well as those that process, distribute and retail the product. 4. Prepare to make a presentation or build a display that provides a complete picture of the various ways your product is marketed. Ask your teacher to suggest how, where and when you could make your presentation or display your information.
INTERNET RESOURCES:
** The American Meat Institute
** The American Association of Meat Processors
** The Food Institute
** The Food Marketing Institute
** Grocery Manufacturers Association
** National Cotton Council of America (NCC)
** NCC - Member Web Sites TEST: 1. The marketing of agricultural products can be defined as the agribusiness activities that direct the flow of agricultural goods and services from producer to consumer or final user. TRUE or FALSE? 2. Large multinational corporations as well as roadside fruit stands can both be considered marketing firms. TRUE or FALSE? 3. Give an example of how an agribusiness could process a fruit or vegetable to make it more valuable. 4. What marketing function is an Iowa farmer performing when using grain from his or her corn harvest to finish feeder pigs? 5. A vertically integrated agribusiness is one that performs several production and marketing functions. TRUE or FALSE? 6. The earliest example of vertical integration in agriculture is the development of the __________ __________ industry.
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AB112 The Business of Marketing Agricultural Products
TEACHER'S GUIDEOBJECTIVE: Students will be able to define "marketing" and describe the marketing sector of U.S. agriculture. They will be able to list the functions of marketing and describe typical agricultural marketing firms. In addition they will understand "vertical integration" and will be able to discuss how it has contributed to the growth and success of the U.S. broiler chicken industry. PREPARATION: Review lesson content and be acquainted with the economic concepts it covers. Be ready to answer students' questions about the suggested exercises. Offer suggestions and be ready to suggest when, how and where they can make their presentations or place a display. You also may want to review AgEdNet.com lessons AB101 Understanding U.S. Agriculture and Agribusiness, found in the Agribusiness Library and MK101 What Is Agricultural Marketing? found in the Marketing Library. These lessons may also help you to discuss this topic with your class. INTERNET RESOURCES:
** The American Meat Institute
** The American Association of Meat Processors
** The Food Institute
** The Food Marketing Institute
** Grocery Manufacturers Association
** National Cotton Council of America (NCC)
** NCC - Member Web Sites IMPORTANT TERMS: baking companies, broiler chickens, commodity brokers, commodity exchanges, grain elevator companies, grain merchants, grain millers, marketing, meat packers, processors, retailers, restaurants, supermarkets, vertical integration, wholesalers. EXTENSION: Invite a manager or representative of a local cooperative or other organization that purchases products from farmers in your area to be processed or resold to others in the marketing chain. Ask your guest to discuss what values their organization adds to the product. Also ask who will get the product next and where it must go and what other values must be added before it is consumed. EXERCISE ANSWERS: 1. With a little research, students will discover that the output of farms and ranches and feedlots can result in a very diverse group of products and by-products. Corn, for example, is fed to livestock and poultry, resulting in meat products that are consumed. Corn is also used in various ways in a number of human food products as well as for industrial products such as ethanol. While students may not be able to identify every possible product, they should be able to come up with a variety of uses that includes the major and most important products. 2-3. The uses and consumer products identified in #1 will help to determine the routes as well as types and names of companies that may take part in the marketing process. Some students may be able to contact local buyers to help them identify the destination of the local output. Sites listed under Internet Resources will also be helpful in finding names of marketing companies. 4-5. Students will need your help in deciding to create a presentation or display. You will also want to suggest visual aid resources available to them. What they do can be as simple or as extensive as you prefer. TEST KEY: 1. The marketing of agricultural products can be defined as the agribusiness activities that direct the flow of agricultural goods and services from producer to consumer or final user. TRUE or FALSE? TRUE. 2. Large multinational corporations as well as roadside fruit stands can both be considered marketing firms. TRUE or FALSE? TRUE. 3. Give an example of how an agribusiness could process a fruit or vegetable to make it more valuable. There are many correct answers. One example given in the lesson was to process an apple into applesauce or an apple pie. Potatoes could be processed into french fries; raspberries could be made into jelly; carrots could be made into baby food. Many other answers are possible. 4. What marketing function is an Iowa farmer performing when using grain from his or her corn harvest to finish feeder pigs? The Iowa farmer is adding value to the corn by converting it into live pork and marketing it as finished feeder pigs. 5. A vertically integrated agribusiness is one that performs several production and marketing functions. TRUE or FALSE? TRUE. 6. The earliest example of vertical integration in agriculture is the development of the broiler chicken industry. CROSSWORD PUZZLE ANSWERS:
Across: 1. Arkansas, 3. Beef, 6. Promotion, 8. Milk, 10. Chicken, 11. Pork, 13. Advertising, 14. Cotton. END TEACHER'S GUIDE
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