Outline Study for Exam I AGEC 1003 1. THE GLOBABLAGRIFOOD SYSTEM a. The scope and size of the agri-food system i. Variety of firms in agribusiness sector: producers, shippers, processors, wholesalers, retailers, etc. 1. Input sector-Farm supply: Feed-major players; Seed, Fertilizer & Chemicals-major players; Petroleum-major players; Farm Machinery & Equipment-major players 2. Farm production-Farming,: changes in this sector affect input & output sectors a. Greenhouse b. Nursery c. Crop d. Livestock e. Aquaculture 3. Commodity Processors a. Food processing 4. Food Manufacturers 5. Food Retailers a. Grocery Stores b. Restaurants b. Changing Perception of Food i. Increased Farm Productivity ii. Increase in the number of people feed per farmer iii. Declining amount of income spent on food iv. Why people buy food 1. The food Hierarchy Triangle c. Concepts and definitions of agribusiness system-agrifood system d. The evolution of the Agribusiness-Agrifood system (The Input Sector, The Production Sector, The Commodity Processing and Manufacturing Sector) e. The Input Sector i. Scientific advancement ii. More than doubling of agriculture productivity since 1950 iii. Dramatic decline in labor use f. The Production Sector (now relative to 1950) i. Number of farms has shrunk by 2/3 since 1950 ii. Average Farm Size has doubled iii. Net Income has decline as a percent of farm receipts from 41% to 19% iv. 2% of the farms account for more than 50% of sales g. The Shifting Role of Exports and Imports i. Net Exporter of all Agricultural Goods ii. Net Importer of Processed Foods 1. High Labor in the US
h. Agriculture and the Environment i. Soil Erosion ii. Land Use i. The Commodity Processing and Food Manufacturing i. Provide consumers food in the time, place, and form they desire ii. Labor accounts for nearly 40% of the food dollar iii. Farmers only get 19.5% of the food dollar iv. Food retailing 1. Split evenly between eating in and out j. Overview of Agribusiness i. What is agribusiness? 1. Specifics of the farm production management, farm supply (production of feed, seed, fertilizers, chemicals, etc.) management, and output sector (food processing, distribution-wholesalers, retailers, rastaurants, etc.) management 2. Retailers, Restaurants)-major players 3. Greenhouse, Nursery, Aquaculture-major players
2. THE AGRIBUSINESS MANAGER a. The development of the agribusiness management profession i. The Practice of Management 1. Tools of agribusiness managers a. financial analysis b. budgeting c. break-even analysis d. feasibility studies e. market/economic f. forecasting, g. business/marketing plan h. basic economic concepts, demand, supply, elasticity ii. Agribusiness management challenge 1. The factors that necessitate increased emphasis on studying agribusiness management iii. Agribusiness management as a dynamic and continuous process 1. Trends in agribusiness affect management philosophy and decision making 2. Not only are agribusinesses influenced by the macro (government policy, foreign currency exchange rates and micro level economy but also by uncertain weather, diseases, and the perishability of products b. Six Steps in Decision Making i. Identifying the Problem ii. Determining Alternative courses of Action iii. Analyzing the Alternatives iv. Selecting the Best Alternative
v. Implementing the Decision vi. Following Up c. The Four Functions of Management i. The Planning Function- the management planning process 1. The role of economic principles in planning 2. Methods used in planning a. Short and long run planning b. Budgeting-purpose and role i. Decision Making ii. Approaches to decision making iii. Records-Checkpoints for decisions 3. Marketing Plan and its role (marketing utilities, pricing policies, role of marketing and consumer demand, factors influencing demand) 4. Forecasting (the basics and using forecasts) ii. The Organizing Function iii. The Controlling function-The role of control in the management process 1. Purpose of control: consolidate authority & efforts; predict trends & results; provide information for future planning, goal adjustment and about past 2. Tools for controling the agribusiness a. The role of the records in control of agribusiness i. Analysis farm records, analysis of balance sheet, analysis of income statement, efficiency measures, etc. ii. . Standards of comparison (size and volume of business, profitability measures, financial measures, efficiency and productivity, market control) iii. An adequate control process includes the use of key performance areas and key indicators 1. Quantitative and Qualitative 2. Checking that plans are on target 3. Taking action if needed iv. The Directing Function-The principles of effective personnel management a. Staffing the organization (firms personnel needs, training and development of personnel) i. how to find and keep the people necessary to run the agribusiness b. Becoming a leader i. What do leaders do? ii. Types of leadership c. Managing groups and teams i. Supervision and motivation of employees ii. Communicating iii.
THE PLANNING FUNCTION 3. The Role of Marketing a. The Misunderstood Mission of Marketing-Marketing is defined as the set of economic and behavioral activities that are involved in coordinating the various stages of economic activity from production to consumption. i. The Mission of Marketing 1. What products to produce 2. How much to produce 3. When to produce them 4. Who should produce them 5. For whom goods should be produced ii. Evolution the Marketing System 1. Specialization and Trade 2. Central Markets 3. Money 4. Middlemen iii. Marketing Resolves the Conflicting Needs of Producers and Consumers b. The Role of Marketing in the Economy i. The Five Barriers to Consumer Satisfaction 1. Ownership separation 2. Time separation 3. Space separation 4. Value separation 5. Information separation ii. NINE MARKETING FUNCTIONS -- Regardless of the product or commodity, there are a number of marketing functions that must be performed one or more times if the system is to move products efficiently from producers to consumers. 1. The Exchange Functions -- Adding Possession Utility a. Buying Function b. Selling Function 2. The Physical Functions -- Adding Time, Place, and Form Utility a. Processing Function -- a change in the form of the product b. Storage Function--Time utility; Grain elevators, Wholesale warehouses, etc. c. Transportation Function-- Place utility; Distribution companies, etc 3. The Facilitating Functions a. Grading and Standards Function -- The development of uniform notations of what comprises various grades and standards adds to marketing efficiency. b. Marketing Information Function -- This enhances the efficiency of the marketing system c. Risk-bearing Function -- This involves insuring the product and the assets in the system from physical damage or loss. d. Financing Function provides the funds necessary to pay
for the production, processing, storage and transportation of a production before the money is received from its sale 4. The Four Utilities of Marketing a. Form -- Form utility arises in having the product in the right form for the consumer to gain maximum utility from its consumption, i.e. processing the raw products into a form desired by the consumer. b. Place -- Place utility arises from having the product where the consumer wants it. c. Time -- Having the product when the consumer wants it, i.e. storing the product until the time it is desired by the consumer. d. Possession -- Possession utility the requires transfer of ownership. c. The Role of Marketing in the Agribusiness Firm i. What is the role of marketing within an agribusiness firm? ii. A popular misconception of marketing within the agribusiness firm is -- that it is limited to the function of selling. iii. The full marketing process includes: 1. identifies customer needs 2. developing products and pricing strategies to meet their customers needs 3. develops promotional programs 4. Implements a system of distribution to its customers 5. The marketing concept within a firm is concerned with managing this total process. iv. Evaluating the Performance of a Marketing System 1. Free Market Economy 2. Prices Reflect the Full Value of Resources a. Producers use the most efficient and cheapest technology available b. Consumers only purchase products that increase happiness 3. High Degree of Interaction between Consumers and Producers v. Criteria Used to Evaluate Performance 1. Efficiency: how efficiently goods and services flow from producers to consumers 2. Fairness: how well the marketing system meets the needs of consumers vi. The Structure-Conduct Performance 1. Conduct 2. Sufficient number of firms in market a. Large enough b. Operating costs per units of output 3. Few barriers a. To enter b. Exist from market
4. Firms differentiate a. Improve products over time vii. Conduct 1. Price change uncertainty 2. No unjustified price discrimination by firms 3. No collusion among firms 4. No unfair trade practices 5. Product claims are truthful viii. Performance 1. Optimum level of output 2. Produced at minimum cost per unit 3. Profits are reasonable 4. Product and process innovation encouraged 5. Levels of investment 6. Reinvestment of profits 7. Research and development are reasonable d. Why Study Market Performance i. Allow economists to evaluate efficiency and fairness ii. Managers to make a profit e. Government Intervention in Markets i. Protect consumer interests 1. Sherman Antitrust Act 2. Clayton Antitrust Act
4. Marketing Management a. Transition from Efficiency to Selling to Marketing i. Lower cost physical efficiency ii. Marketing shifting from physical efficiency to selling iii. Adoption of marketing approach b. The 4Ps of marketing and the marketing mix in agribusiness i. Product ii. Price iii. Place iv. Promotion Pricing strategy, policy, philosophy, practice and problems in agribusiness sector Promotion and advertising of food products Distribution and channel management in food Management of Product (product development an so on) c. The Business Plan i. The firms Purpose-what is the firm going to do ii. The firms Objective-How the firm will accomplish its purpose 1. What is our business?
2. Who are our customers? 3. What is value to our customers? 4. What will our business be? 5. What should our business be? iii. Strategic Planning and Management 1. Marketing Strategy a. Identification of target markets b. Product Positioning c. Size of the product line d. Price e. The number and type of distribution outlets f. The size and type of the sales force g. The level and quality of service h. Advertising i. Sales Promotion j. Research and Development k. Market Research 2. SWOT Analysis 3. Implementation program 4. Financial Analysis 5. Controls iv. Analyzing Market Potential 1. Transition from Mass to Target Marketing 2. Identifying Target Markets 3. Estimating Market Potential a. The Macroeconomic approach b. The Population Approach c. The Consumption Approach 5. Understanding consumer Demand a. Basics of Consumer Demand i. Two Principles of Consumer Behavior 1. The first principle of consumer demand is that consumers always seek to maximize their satisfaction, or utility. 2. The second principle is that the amount of satisfaction obtained from consuming each additional unit of a good or service diminishes as one consumes more of that good. a. The Law of Diminishing Marginal Utility--As the amount of a good consumed increases, the addition to total utility derived from adding one more unit of that good decreases. 3. The Role of Scarcity- If we had unlimited resources then we would not have an economic problem. We as consumers would not have to make choices. 4. How price Allocates scarce resources: Because consumers have limited income, the prices of products plays a very important role in how a consumer behaves, or what he (she) demands from the
market. b. Factors Influencing Consumer Demand i. Law of demandrefers to the inverse relationship between price and quantity, i.e. the higher the price, the lower the quantity consumed 1. Price of the Product (Own Price)-One of the most important price relationships we are concerned with is the effect on the quantity demanded of a certain good in response to a change in its own price. 2. Seasonality 3. Price of Competitors products (substitute products) 4. Price of Complement Goods 5. Income 6. Population 7. Taste and Prefernces ii. Factors that Shift Demand-It is important to recognize the difference between movements along the demand schedule, and shifts in the demand schedule. 1. The Price of Substitutes 2. The Price of Complements 3. Income-For most commodities individuals prefer more to less, so when incomes increase then demands for certain commodities increase. 4. Population 5. Changes in Consumers Tastes and Preferences 6. Seasonality iii. Derived Demand--the demand for one item that is largely determined by the demand for another item. c. Demand Elasticity The Impact of Price Changes on Sales-is a measure of the responsiveness of quantity demand to changes in prices or income. i. KNOW THE FORMULAS FOR EACH TYPE ii. Own Price Elasticity-Own price elasticity (Ep) is measured as the percentage change in quantity demanded of a good given a one percent change in its own price. iii. Cross Price Elasticities (Ecp)--is measured as the percentage change in quantity of a good demanded given a one percent change in the price of a substitute or a complement good. iv. Income Elasticity (Ey) is measured as the percentage change in quantity of a good demanded given a one percent change in income. v. The Impact of Price Elasticities on Total Sales-Price elasticities can assist managers in setting prices, because the elasticity of demand determines whether total revenues increase, remains the same, or decreases in response to a price change. 1. Total revenue increases (decreases) in response to a price increase (decreases), if the own price elasticity (Ep) is inelastic. 2. Price increase --> Total Revenue decline; Price decrease --> Total Revenue increases. Direct positive relationship between price and
TR. 3. Total revenue remains unchanged in response to a price change, if the own price elasticity (Ep) is unitary. 4. Total revenue decreases (increases) in response to a price increase (decrease), if the own price elasticity (Ep) is elastic. There is an inverse relationship between price and TR. Own-Price Elasticity Magnitude Elastic Unitary Inelastic Ep > 1 Ep = 1 Ep < 1 Increase in Price: Decreased Revenue Constant Revenue Increased Revenue Decrease in Price: Increased Revenue Constant Revenue Decreased Revenue
Cross-Price Elasticity Magnitude Substitutes Complements Income Elasticity Magnitude Superior Normal Inferior EI > 1 1 EI 0 0 > EI Increase in Income: Increased Demand Increased Demand Decreased Demand Decrease in Income: Decreased Demand Decreased Demand Increased Demand Ep > 0 0 > Ep Increase in Price of Other Good: Increased Quantity of Own Good Decreased Quantity of Own Good