MENSCHEN FOR MENSCHEN FOUNDATION

AGRO-TECHNICAL AND TECHNOLOGY COLLEGE

AGRO-ECOLOGY DEPARMENT

HANDOUT FOR THE COURSE

AGRICULTURAL PRODUCTS MARKETING

BY: MS. EDEN ANDUALEM (M.SC., in Agricultural and Applied Economics)

MAY, 2021

HARAR, ETHIOPIA
Chapter One: Concept of Marketing

1.1. Definition of Agricultural Marketing

Marketing can be defined in various ways as many writers have used their own way of defining it. In fact,
there are almost as many definitions as to the number of marketing specialists. As such, there cannot be a
universally accepted definition. The definitions depend upon the role marketing is expected to play and
the perspective from which it is viewed. Generally, Marketing is a total system of business activities
designed to plan, price, promote and distribute want-satisfying products to target markets and to achieve
organizational objectives.

Like marketing, there are many ways of defining agricultural marketing; some writers have used the
“economists” definition of production as a basis for the term agricultural marketing. The economists’
reason states that man cannot create matters; he produces by changing matters in form, place, and
possession so that it might better suit his wants. Other writers have limited their definition to include only
the sale of the product. This concept probably originated from the word market is a place where the
ownership of a product changes hands where goods are bought and sold. Here the producer may sell
directly to the consumer, but to do so, he may have to pack, store and transport and advertise his product.
Note that, selling is not marketing; it is one component/function/ of marketing. Based on the above
concept agricultural marketing can be defined as follows:

Agricultural marketing is the study of all activities, agencies, and policy involved in the procurement of
farm inputs and the movement of agricultural product from the farms to the consumer.
Thus agricultural marketing is the link between the farm and nonfarm sectors. It includes organization of
agricultural and material supply, processing industries, the assessment of demand for farm inputs and raw
materials and the policy related to the marketing of farm products to the consumer. Therefore the term,
”agricultural marketing” as used in this learning task describes nothing more than a series of services
involved in getting goods from the point of production to the point of consumption.

1.2. Characteristics of agricultural products and the difference with manufactured goods

The special characteristics of farm products have pronounced influence on where and when they are
produced. There are some major characteristics of farm products which make them different from
manufactured products, these are:
i) Dependence of seasonal and weather condition: agricultural production is heavily dependent on
weather condition, especially in developing countries like Ethiopia. It heavily depends on
seasons because most of the crop production system is rain fed agriculture. The quality of
agricultural product is subject to many conditioning factors as the agro-ecological zones of the
regional states is one of the cases, and the weather, again being not the least among them. Good
quality and large yields go hand in hand; in that when yields are poor, quality is frequently poor.
Wide variations in quality tend to disorganize the market, because wide price complicate
dragging and makes transportation difficult.
ii) Time lag of agricultural products: there is a long difference in time of commencement and getting
the produce. For annual crops it may take 60days, 90days, 120days, and 150days and may be
 more and for perennial crops like coffee, fruit, cotton it takes more time. Because of this time
difference, there may be a change in the demand for the commodity and this makes marketing
difficult.
iii) Nature of perishability and bulkiness: the bulkiness character of farm products can affect
marketing in such a way that it needs huge storage facility, transport facility, which in turn
increases the marketing margin. The extent of perishable of farm products may be reduced by the
processing function but it cannot be non perishable like manufactured products. Perishable farm
products are sensitive to price fluctuation which an implication that it demands effective and
efficient storage and distribution systems.
iv) Control over the conditions of production: Agriculturalists have little control of production
processes and thus it is difficult to plan accurately. Farming business return compared to industry:
Farming business is slow and of low return over time when compared to industrial products and
this can be ascertained by analyzing payback period.
v) The law of diminishing returns: This begins to operate at earlier stage which means the marginal
productivity of the same quality of labor is more in industrial sector than in agricultural sector.
vi) Size of land holding and low farm production: farmland holdings are small in size and production
is scattered of farm products in the country which can be a problem to estimate market supply and
to set market prices.

1.3. Importance of agricultural marketing in Economic Development

The basis of all marketing is man’s effort to satisfy his wants. These include the basic items such as food,
clothing and shelter. The desire to cultivate material goods, the mental and spiritual wants have lead to
both acceleration and maintaining tradition of man’s progress. The marketing economy has developed
much more rapidly. Agricultural marketing plays an important role not only in stimulating production but
also in accelerating the pace of economic development. The importance of agricultural marketing in
economic development is stated as to the following:

Optimization of resource use and output management: An efficient agricultural marketing system
leads to the optimization of resource use and output management. An efficient output 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 of farm income: An efficient marketing system ensures higher levels of income for the farmer
by reducing the number of middle men or restricting the commission on marketing services. When there
is an efficient marketing system, farmers get better prices for their farm products and enable them to
invest their surplus in purchasing modern inputs. This may lead to an increase of production and
productivity.

Widening of markets: A well-knit marketing system widens the market for the product by: taking them
to remote corner both within and outside the country i.e. to areas far away from the production point. 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.
Many industries depend on agriculture for the supply of raw materials.

Price signals: An efficient marketing system helps the farmer in planning their production in accordance
with the need of the economy. This work is carried out through pricing signals.

Adoption and spread of new technology: The marketing system helps the farmer in the adoption of
new, scientific and technical knowledge. New technology requires higher investment and farmers would
invest only if they are assured of the market clearance.

Employment: The marketing system provides employment to millions of persons engaged in various
activities such as: packaging, transportation, storage and processing. These persons are like commission
agents, brokers, traders, retailers and packagers who directly employed in the marketing system.

Addition to the national income: Marketing activities and value added to the product thereby increases
the nation’s gross national product and net national product.

Better living: The marketing system is essential for the success of the development program, which are
designed to uplift the population as a whole. In any plan of development that aims at diminishing the
poverty of the agricultural population, reducing consumer food prices, and earning more foreign exchange
or eliminating economic waste has therefore, to get special attention to the development of an efficient
marketing system for agricultural products.

Creation of utility: Agricultural marketing is productive by creating utility. Though, many people
consider the marketing system and those engaged in various marketing activities as parasite to producers
and/or farmers.

Farmers and processors complain about the profit the middlemen make because they consider that they
alone produce the final product. But in reality, it is the farmers who produce raw materials. Many things
should be done to the farm products like transport, processing, transfer, storage etc. thus the middlemen
can also be productive. They can create utility which is defined as the power of goods or services to
satisfy human wants. There are four classes of utility, these include:

A. Form utility- is the utility that occurs due to the changing of product forms through processing into
more desirable and useful products.
Inputs (farmer’s side) more desirable
-Seed
- Fertilizer -wheat flour bread
- Land they can change into - teff
- Labor - cereals
- Tractors etc - beef cattle meat
B. Place utility:- the utility that a product has due to its location, as for instance, when coffee is
transported from surplus areas to deficits areas, it means creating place of utility.

C. Time utility:- refers to the utility created by changing the time of use of the product, E.g., storing
during excess surplus and moving into trade channels during the period of scarcity. Agricultural products
are mostly seasonal in the Ethiopian condition because it is like 4 months surplus and 8 months deficit.
Thus storing grain or freezing meat for instance, adds time utility which is more desirable and useful.
D. Possession utility:- utility is created by moving finished products into the hands of the consumers.
This meant for changing ownership at different chain
Farmers assemblers wholesalers Retailers Consumers Farmers
Processors wholesalers Retailers Consumers

Generally, people realize productivity of marketing is an act of farmers and processors, creating visible
change in the chain of marketing. However, other individuals who render productive services are
considered as non-productive for they do not create visible change in the product. Nevertheless, both
groups are necessary for the creation of the final products that is used for consumption.

1.3.1. Factors leading to the growth of agricultural marketing

Specialization: The tendency towards increasing specialization by persons in certain jobs has resulted in
an increase in their efficiency and the breakdown in the self sufficiency of the family unit. Specialization
has resulted in an increased production, which is the base for the growth of marketing and in turn of the
economy.

Urbanization: Urban people are the main buyers of agricultural surplus. The growth of the Ethiopian
population in to 80 million has currently necessitated a faster growth in the area of agricultural marketing.

Transportation and communication: An improved system of transportation and communication facilities

have widen the market opportunity for farm products. The length and breadth of the market to which a
product is taken from the production areas can be increased.

Technological change in agriculture: Technological development in agriculture such as, the evolution of
higher yielding varieties of seeds, increase use of modern inputs and better cultivation practices in the
agricultural sector can lead to an increase in farm production, marketing surplus and growth of the
marketing system.
Chapter Two: Marketing Functions and Marketing Mixes

2.1. Approaches to the Study of the agricultural Marketing

Marketing is a subject, which bristles with wide and varied problems. It includes the services and
functions of different specialized institutions and middlemen. Different commodities have special
marketing problems therefore the results of the study of one commodity may not be applicable to other
commodity. Also the same commodity will have different problems in different regions. Various
approaches have been suggested and used to study marketing problems. These are functional,
institutional, commodity and behavioral approaches.

2.1.1. Functional Approach

Agricultural marketing involves in its simplest form the buying and selling of agricultural produce. In
olden days when the village economy was more or less self-sufficient the marketing of agricultural
produce presented no difficulty as the farmer sold his produce to the consumer on a cash or barter basis.
One method of classifying the activities that occur in the marketing processes is to break down the
processes in to functions. A marketing function may be defined as a major specialized activity performed
in accomplishing the marketing process. Any listing of functions must be recognized as an arbitrary one.

In modern marketing, the agricultural produce has to undergo a series of transfers or exchanges from one
hand to another before it finally reaches the consumer. A marketing function is an act, operation on
service by which the original producer and the final consumer are linked together. Marketing consists of
many operations and an operation may be performed several times in the marketing process.

The functional approach splits down the field of marketing into a few functions. This method analyses in
detail the specific functions of marketing such as buying, selling, transportation, storage, standardization,
grading, financing, risk taking and marketing research. Any listing of marketing functions is an arbitrary
one. The functions falling under the scope of marketing may be listed one after the other or grouped under
certain major cases or categories. Marketing functions can be broadly classified as following:-

A. Exchange Functions 1. Buying

2. Selling
3. Storage
4. Transportation
B. Physical Functions
5. Processing
6. Packaging
7. Standardization
C. Facilitating Functions 8. Financing
9. Risk Bearing
10.Market intelligence
A. Exchange Functions
The process of passing goods into the consumer's hands is called function of exchange. As goods move
through many hands before reaching the final user, title changes several times. The exchange functions of
marketing are the heart of marketing. It includes buying, assembling and selling.

 Buying and Assembling

The marketing concept holds that the needs of the customer are of paramount importance. A producer can
be said to have adopted a market orientation when production is purposely planned to meet specific
demands or market opportunities. For example, a contract farmer, who wishes to meet the needs of a food
processor, manufacturing wheat flour and pasta, will produce only improved bread wheat variety seeds
which can attract his potential customers.

Buying is the first step in the process of marketing. Buying involves careful planning and needs setting up
of policies and procedures. The following points are considered before a particular product is bought.
i) What to buy (Product)?
ii) When and how much to buy? (Time and quantity)
iii) From whom and where to buy? (Source)
iv) On what terms and conditions and prices? (Price)
 Assembling starts after the goods have already been purchased. It is a function separate from
buying. Buying involves transfer of ownership of the goods where as assembling involves creating
and maintaining of stock of goods purchased from different sources. The problems encountered in
assembling of agricultural products are:
i) Seasonal production
ii) Difficulties in controlling quantity and quality
iii) Non- availability of information about sources of supply
iv) Low quantity of marketable surplus

 Selling
The function of marketing is to ensure that the right product is made available at the right place, in the
right quantity, at the right price, at the right time and under the right impressions to the consumer. All
these righteousness is made possible by performing the sales function. Through selling function desires
are created hence it is called as creative function. Selling is also often referred to as distribution function
because distribution makes goods move from the place of production to the place of consumption.

Thus buying, assembling and selling functions are directly concerned with change in the ownership of
goods. They are complementary in nature. For every sale there is a purchase and for every purchase there
must be sale. And, assembling precedes a sale and assembling follows buying.
Each of these functions adds value to the product and they require inputs, so they incur costs. As long as
the value added to the product is positive, most firms or entrepreneurs will find it profitable to compete to
supply the service.

Physical Functions
The physical functions are those activities which involve handling and movement of the actual
commodity itself. They are involved in solving the problems of when and where to do the marketing.
These include:

Storage

Virtually all agricultural products are biological and seasonal. While the demand for agricultural products
are generally continuous throughout the year. Many of the outputs of agriculture are harvested during
relatively short period of the year. The grains, cotton, tobacco, fruits, and vegetables are all highly
seasonal in nature. Even the production of livestock, egg, and dairy products, though continuous
throughout the year, has wide variations between the high and low periods of production. The desire for
these products by consumers, however, is often quite constant throughout the year.

Hence the need for storage to allow a smooth and preferably, uninterrupted flow of product into the
market is very essential. Dealing with a biological product, the grower does not enjoy the same flexibility
as the manufacturing counterpart in being able to adjust the timing of supply to match demand. It would
be an exaggeration to suggest that a manufacturer can turn production on and off to meet demands.
Manufacturers have also constraints but they have more alternatives than does the farm producer. A
manufacturer can for example, work overtime, sub-contract work, and can also increase or decrease
productive capacity to match demands.

Both growers and consumers gain from a marketing system that can make farm produce items available
when needed. A farmer, merchant, cooperative, marketing board or retailer who stores product provides
services. That service costs money and there are risks in the form of wastage, slumps in market demand
and prices as the provider of storage is entitled to a reward in the form of profit.

Transportation

Products must be moved from where they are produced in to the area where they will be processed and
consumed. The transport function is one of the means that make the product available where it is needed.
For an effective and efficient function of transportation, it is required to consider alternative routes to
meet timeliness, maintain product quality and minimizing shipping costs.

The wide variety of food available in our grocery stores at all times of the year would not be possible
without modern transportation. Effective transport management is critical to efficient marketing. Whether
operating a single vehicle or a fleet of vehicles, transportation has to be carefully managed, including cost
monitoring - operations on different road types, fuel and lubrication consumption and scheduled and
remedial maintenance and repair.

Processing

Most agricultural products are not in forms suitable for direct delivery to the consumer when they are first
harvested. Rather they need to be changed in some form before they can be used. The task of processing
is sometimes not included to the list of marketing because it is a form of changing activity. However,
processing need to be included as a marketing function. The form of changing activity is one way that
adds value to the product. Changing E.g., green coffee beans into roasted beans, cotton into cloth, wheat
into flour and bread, sugarcane into sugar etc. increases the value of the product because the converted
product has greater utility to the buyer. The form the produce is to be changed and the methods to be used
in bringing about such changes are marketing decisions. Some years ago for instances, when Ethiopia was
looking to expand its tea plantation business, a prototype manufacturing plant was established. The plant
was capable of curing the tea and packing it in individual tea bags. At that point, tests were undertaken
and compared with others already on the market, found encouraging results.

In the course of the marketing research however, it was discovered that ninety percent of the black tea
consumed is blended and not the pure variety placed in the tea bags by the Ethiopians. Timely marketing
research would have contributed a great deal to inform and control of such illegal acts. In the past decades
ago, Ethiopia did not have the acreage of tea, nor the resources to develop a tea blending facility.
Similarly, a producer of fresh fruits may have pulping and/or canning facilities but if potential buyers
want the flexibility of using the fruits in a variety of ways, then these stages of processing serve to reduce
utility and value.

Processing food products is becoming more important as societies culture and feeding habits changes
over time and as the country enters more into the international market. Today, as a result of high growth
rate of urban population, there is an increase of marketing activity in general and the processing functions
of farm products in particular.

i) Packaging
Packaging is enclosing commodity in a container. This is a requirement for nearly all farm products, in all
stages of marketing. It is an activity of designing and producing the container or wrapper for a product.
The container used in different stages of marketing may be quite different, and the three general types of
packages or containers may include:
 Containers for handling from the farm to and through assembly and processing facilities.
 Shipping containers
 Consumer packages
Technological developments in packaging of bulk foods such as meats, dairy products, and fruits and
vegetables have important implications in reducing the costs of transportation. Packaging contributes to
more efficient marketing by:
i) reducing bulk (e.g. cotton balling and compression);
ii) facilitating handling;
iii) reducing shrinkage and spoilage (canned meats, fruits);
iv) facilitating quality identification and product selection by consumers (eggs in cartons);
v) assisting in advertising and better merchandising (cheese in cartons);

Packaging can improve profitability and efficiency of the physical distribution functions. The design of
packaging is capable to contribute to an improved performance of the supply chain in a variety of ways
and some of these include: By altering the shape and dimensions of the packaging more product can be
displayed on retailers' shelves (e.g. changing from round to square containers or glass jars helps maximize
the use of limited retailing space since far more square glass jars can be placed on a given area of retail
display space than can round shaped jars).
The package must be capable of performing under all the temperature and humidity conditions as it
passes through different channels of distribution. This means that to select or design an appropriate
packaging for particular for farm produce items, the chosen distribution channel and its environmental
conditions must be thoroughly analyzed and understood.
Product packaging also has a role in helping differentiate products of the brand names who compute in
the same market segment. Distinctive product packaging, may be in the form of shape, size, coloring, or
print can help in differentiating.

ii) Facilitating Functions

The facilitating functions include product standardization, market promotion, financing, risk bearing and
market intelligence. Facilitating functions are those activities which make the exchange process possible.
Marketing, in simple terms, is the act of supplying products to someone in exchange for something
perceived to be of equal or of greater value, (Mostly in a given sum of money). Facilitating functions are
not direct parts of either the exchange of title or the physical movement of produce.
Standardization and grading:- concerned with the establishment and maintenance of uniform
measurements of produce quality and/or quantity. This function simplifies buying and selling as well as
reducing marketing costs by enabling buyers to specify precisely what they want and suppliers to
communicate what they are able and willing to supply with respect to both quantity and quality of
product. In the absence of standard weights and measures trade either becomes more expensive to
conduct or impossible altogether. Among the most notable advantages of uniform standards, are:

- price quotations are more meaningful

- the sale of commodities by sample or description becomes possible
- small lots of commodities, produced by a large number of small producers, can be
assembled into economic lots if these supplies are similar in grade or quality
- Faced with a range of graded produce the buyer is able to choose the quality of product
he/she is able and willing to purchase.

Quality differences among agricultural products arise for several reasons. Quality differences may be due
to production methods and/or because of the quality of inputs used. Technological innovation can also
give rise to quality differences.

In addition, a buyer's assessment of a product's quality is often an expression of personal preference.

Thus, for example, in some markets a small banana is judged to be in some sense ‘better’ than a large
banana; and white maize is ‘easier to digest’ than yellow maize. It does not matter whether the criteria
used in making such assessments are objective or subjective since they have the same effect in the
marketplace. What does matter in marketing is to understand how the buyer assesses ‘quality’. If an
objective standardization is not perceived by consumers, it is the same as those items which are not
graded.

iii) Financing

In almost any production system there are inevitable lags between investing in the necessary raw
materials (e.g. seeds, fertilizers, packaging, flavorings, etc.) and receiving the payment for the sale of
produce. During these lag periods some individual or institution must finance the investment. The
question of where the funding of the investment is to come from, at all points between production and
consumption, is one that marketing must address.

A common marketing problem that exists in many developing countries is the low level of income
leading to low levels of demand for many farm products. The challenge is to marketing because it is the
income availability that influences demand.
Marketing is also concerned with the financing of the enterprise itself. Here again some creative solutions
can be developed, can look to several alternatives such as:
- development banks
- commercial banks
- shares issues
- credit co-operatives and/or credit unions
Where these sources of finance are considered inappropriate, or are simply not available or not sufficient
to a particular enterprise, a strategic alliance in the form of a joint venture could be the answer. These are
partnerships formed to exploit market opportunities more effectively and efficiently than either party can
on its own. An enterprise, in a developing country, may engage in a joint venture with either an
indigenous partner and/or with a foreign partner. The agreement between parties to a joint venture
normally specifies their respective contributions of resources, share of management control, profit and
risk.

Whatever the source of finance under consideration, marketing has a role to play in searching for
appropriate sources of finance. Moreover, the marketing department together with other departments or
specialties should prepare and analyze such marketing projects that will expand the activity of the
enterprise. Those responsible for developing these proposals are best placed to evaluate the compatibility
between the market opportunity under consideration and the alternative modes of financing it.

Risk bearing

In both the production and marketing of produce the possibility of incurring losses is always present.
Physical risks include the distraction or deterioration of the produce through fire, excessive heat or cold,
pests, floods, earthquakes etc. Market risks are those of adverse changes in the value of the produce
between the processes of production and consumption. Changes in demand structure E.g., due to change
in consumer tastes, one if the many reasons that affect marketing demand. Risks can also arise in the
input market when input prices increase to a high level in way that can affect the affordability of the
items. There could also be shortage and delay in the supply of raw materials and other inputs. All of these
risks are borne by the organization and consumers.

Risk bearing is often a little understood aspect in marketing of farm products. For example, when making
judgments as to whether a particular price is a ‘fair price’ the usual reference point is the producer or
supplier's costs. However the risks created are rarely taken into account by those passing judgment and
yet, almost inevitably, there will be occasions when the risk taker incurs losses. Stocks will spoil, markets
will fall, cheaper imports will enter the country, and consumer tastes will change, and so on.
Risk from the time an agricultural product is harvested until it is in the hands of consumers; there is risk
of financial losses because of destruction, quality deterioration, price declines. This risk is a cost, which
must be paid for by some one. Risk is relatively more important in agricultural sectors in contrast to other
sectors. Agricultural products are biological and are highly affected by natural conditions as weather,
rainfall, natural hazards, etc. Moreover, agricultural products are perishable and to maintain their quality
for long time it may be costly and sometimes become impossible. Thus, the danger of loss due to quality
deterioration is very high.

Another reason why agricultural marketing is more risky is because agricultural product prices are likely
to fluctuate substantially and hence prices are highly volatile to different conditions. The main reason
may be that for most agricultural products the price elasticity of demand and income elasticity of demand
are below one inelastic. The presence of such substantial risk contributes to higher margins and other
unsatisfactory conditions as a direct cost factor, such as cost of insurance premium.

Market intelligence

As far as possible, marketing decisions should be based on accurate information. The process of
collecting, interpreting, and disseminating information relevant to marketing decisions is known as
market intelligence. The role of market intelligence is to reduce the level of risk in decision making.
Through market intelligence the seller finds out what the customer needs and wants. One means is to find
out through sales, and/or marketing researches to find out which products are right for the market, which
channels of distribution are most appropriate, how best to promote products and what prices are
acceptable to the market. As with other marketing functions, intelligence gathering can be carried out by
the seller or another part such as a government agency, the ministry of agriculture, or some other
specialist organizations.

2.1.2. Institutional Approach

The institutional approach of marketing problems implies a study of agencies and institutions, which
perform various functions in the marketing process. The nature and character of various middlemen and
other related agencies involved in the movement of the product must be studied. The agencies and
institution which perform various marketing functions are classified as follows:-
A) Merchant middlemen
 Retailers
 Wholesalers
B. Agent middlemen
 Brokers
 Commission men
C. Speculative middlemen
D. Facilitative organizations
These agencies vary widely in size and ownership. They get their reward in the form of marketing
margins. This approach helps us to find answers to the problems of 'who does what' in the marketing
process, whether the marketing and markets margin of the agency is commensurate with the services
rendered, which government regulations are necessary so that their unlawful activities may be minimized
or stopped. There has to be adequate understanding of marketing systems. The ''institutional,'' approach is
based on an examination of the different kinds of middlemen or agencies or institutions involved in the
marketing system, as follows:-
Middlemen are those individuals or business firms that specialize in performing the various marketing
functions involved in the purchase and sale of goods as they are moved from producers to consumers.

A) Merchant middlemen
These middlemen have properties in common in that they take title to, and therefore own, the
products they handle. They buy and sell for their own gain. Merchant middlemen can be divided into
two:
B) Retailers – are those merchant middlemen that buy products for resale directly to the ultimate
consumer of the goods. He/she is the producer's personal representative to the consumer. From the
functional viewpoint, the retailer may perform all of the marketing functions. They are mostly large
in number.
C) Wholesalers – are those merchant middlemen or manufacturers that sell to retailers, other
wholesalers, and/or industrial users but do not sell a significant amount to ultimate consumers.
Wholesalers make up a highly heterogeneous group of varying sizes and characteristics.

One group of wholesalers are the local buyers or countryside assemblers who buy goods in the producing
area directly from farmers and transport the products forward to the larger cities where they are sold to
other wholesalers and processors. For example, an assembler may buy barley from farmers in rural areas
and transport the product in bulk to Addis Ababa and sell it to other wholesalers in the city. These
wholesalers/assemblers/ can handle different agricultural products or can specialize in handling a limited
number of products. They may be cash-and-carry wholesalers or service wholesalers who will extend
credit and offer delivery and other services.

Some wholesalers provide credit to producers for the purchase of input and even some times give
consumption credit by entering the farmer into contractual agreement to provide his product at the time of
harvest. It is a form of selling his product before harvest. Though such agreements could minimize risk,
the farmer, may also lose the opportunity of benefiting from price rise.

D) Agent Middlemen
Agent middlemen, as the name implies, act only as a representative of their clients. They do not take title
to and therefore do not own, the products they handle, while merchant middlemen (wholesalers and
retailers) secure their income from a margin between the buying and selling prices, agent middlemen
receive their income in the form of fees and commissions. Agent middlemen in reality sell services to
their principals, not physical goods to customers. In many instances, the power of agent middlemen is
market knowledge and "know-how" which they use in bringing buyers and sellers together. Though the
names may differ somewhat, agent middlemen can be broken down into two major groups, commission-
men and brokers.
E) Commission-men are usually granted broad powers by those who consign goods to them. He
normally takes over the physical handling of the product, arranges for the terms of sale, collects,
deducts his fee, and remits the balance to his principal.
F) Brokers: - usually does not have physical control of the product. He usually follows the directions
of his principal closely and has less discretionary power in price negotiations than commission-men.
 He just acts in between the sellers and buyers. Brokers link sellers and buyers and assist in
negotiation. In agriculture, livestock commission firms and grain brokers on the grain exchanges are
good examples of those commission-men and brokers, respectively.

G) Speculative middlemen
Speculative middlemen are those who take title to products with the major purpose of profiting from
price movements. All merchant middlemen, of course, speculate in the sense that they must face
uncertain conditions. Usually, however, wholesalers and retailers attempt to secure their incomes
through handling and merchandizing their products and to hold the uncertain aspects to a minimum.
Speculative middlemen seek out and specialize in taking these risks and usually do a minimum of
handling and merchandizing. They often attempt to earn their profits from the short-run fluctuations in
prices. Purchases and sales are usually made at the same level in the marketing channel. For example,
livestock speculators buy goats or sheep today and sell them back today or tomorrow in the same yards.
Speculative middlemen often perform a very important job as a competitive force in the maintenance of
an adequate pricing structure.

H) Facilitative organizations
Facilitative organizations assist the various middlemen in performing their tasks. Such organizations do
not, as a general rule, directly participate in marketing process as either merchants or agents. One group
of these organizations furnishes the physical facilities for the handling of products or for the bringing of
buyers and sellers together. They take no direct part in the buying and selling of the products themselves.
However, they establish "the rules of the game" which must be followed by the trading middlemen, such
as hours of trading and terms of sale. They may also aid in grading, arranging and transmitting payment
and the like. They receive their income from fees and commissions from those who use their facilities.
Another group of organizations falling in this general category is the trade associations. The primary
purpose of a large majority of these organizations is to gather, evaluate, and disseminate information of
value to a particular group of trade. They may carry on research of mutual interest.

Each type of middlemen that participate in the movement of goods from producers to consumers falls in
one of the above category of middlemen. These middlemen are very important and without them it would
be impossible to perform marketing activities. This module uses the first and the third approaches to
describe agricultural marketing concepts, strategies, principles, etc.

2.1.3. The Commodity Approach

Another way of treating the subject is by describing the marketing of a specific commodity from farm to
consumers. This is called the ''commodity'' approach. The problems of marketing of agricultural products
differ from commodity to commodity mainly because of the seasonality of production, the variations in
its handling, storage, processing and the number of middlemen involved in them. By this approach,
similar commodities are sometimes grouped together and described as grain marketing, fruit marketing,
livestock marketing, vegetable marketing, etc, or even sometimes each grain crop can be described
independently as; wheat marketing, maize marketing, barely marketing, etc, each fruit as; banana, orange,
etc. each vegetable as; potato, tomato, etc marketing. This necessarily involves a considerable amount of
duplication because of many similarities among commodities with respect to marketing processes. The
main advantage of this approach is that it is concrete since all work relates to a specific product but it is a
time consuming 'process and often results in excessive repetitions.

1.2.4. Behavioral System Approach

This approach refers to the study of behavior of firms, institutions and organizations, which exist in the
marketing system for different commodities. The marketing process is continually changing in its
organization and functional combinations. There are many possible ways to satisfy the needs of target
customers. A product can have many different features and quality levels where service levels can be
adjusted. The package can be of various sizes, colors, or materials. The brand name and warranty can be
changed. Different advertising media – newspapers, radio, television, and billboards may be used. A sales
force or other sales specialists can be used. Different prices can be charged. Price discounts may be given,
and so on.

2.2. Marketing Mixes

To organize all these decisions, it is useful to reduce all the variables into what are called the four
marketing mix. The marketing mix is the set of marketing tools the firm uses to pursue its marketing
objectives in the target market.

These marketing mixes are sometimes called the ‘four P’. Note that the four P’s represent the
seller’s view of the marketing tool available for satisfying and influencing buyers. From the buyer’s
point of view, each marketing tool is designed to deliver a customer benefit.
Robert Lanrter born suggested that sellers’ four P’s correspond to the customer’s four C’s
Four P’s Four C’s
Product Customers solution
Price Customer cost
Place Convenience
Promotion Communication

All the marketing mixes are for better customer satisfaction. Based on the marketing concepts, the whole
activities of marketing are centered on customer value. Hence, customer is not part of the marketing mix.
The customer is surrounded by the four Ps as shown in Figure 2.1 below.

Product Place

C C

Price Promotion

Figure 2.1 Marketing mixes

Some learners assume that the customer is part of the marketing mix-but this is not so. The customer
should be the target of all marketing efforts. To show this the customer is placed in the center of the
diagram. It describes the different elements that must be considered in the design of each marketing mix.
Product: The product is concerned with developing the right “Product” for the target market. This
offering may involve physical goods, a service, or a blend of both. Thus, product is not limited to the
“physical goods”. The important thing in the product is that the goods and/or service should satisfy some
customers’ needs.

Product means the needs-satisfying offering of a firm. The idea of “product” as potential customer
satisfaction or benefits is very important. Many business managers focus on the technical details of a
product. They think of product in terms of physical components, like protein content and size of egg.
These are important to them, but components have little effect on the way most customers view the
product. Most customers just want a product that satisfies their needs.

Product – is anything that can be offered to a market for attention, acquisition, use, or
consumption that might satisfy a want or need.

Quality and satisfaction depend on the total product offering. If potato chips get stale on the shelf because
of poor packaging, the customer will be dissatisfied. A broken button on a shirt will disappoint the
customer even if the laundry did a nice job cleaning and pressing the collar. A powerful computer is a
poor quality product if it won’t work with the software the customer wants to use – or if the seller doesn’t
answer the phone to respond to customer’s questions about how to turn it on.

The central point in understanding and designing a product is we have to think of a product in terms of
the needs it satisfies. If a firm’s objective is to satisfy customer needs, services can be part of its product –
or service alone may be the product – and must be provided as part of a total marketing mix.

The other strategic decision in the product is branding. But what is branding? Branding - means the use of
a name, form, symbol or design or a combination of these to identify a product. It includes the use of
brand names, trademarks, and practically all other means of product identifications.

Branding can add value to a product and is, therefore, an important aspect of product management. For
example, most farmers would perceive a given herbicide brand as a quality product from a reliable
company; but the same chemical formulation in an unmarked drum is unlikely to gain the same level of
farmer confidence. Branding can also provide the basis for non-price competition. In fact, branding is not
common in agricultural products as compared to most non-agricultural products. But as the market for
agricultural products develops, branding becomes important component of product development. Brand
names tell the consumer something about the product's characteristics and assure them that if they buy the
same brand they will get the same product characteristics each time. As the number of competing
products increases branding can increase the shoppers' efficiency by helping them to differentiate between
products and identify that which best meets their needs. Brand names also help draw consumers' attention
to new products which might meet, or better meet, their needs.

There are also potential disadvantages attached to branding, for both producers and consumers. In the
case of the consumer, there are at least two possible disadvantages. These are:
 1. Higher prices: In most cases branded products carry higher retail prices than their generic
equivalents. In part, the higher price is explained by the additional production costs and marketing
expenditures incurred by the supplier in developing and supporting the brand. The higher price
sometimes also carries a premium for the unique benefits and/or features of the brand. Whether or
not these higher prices can be justified depends on the customer's perception of the added value
he/she receives in return for the price premium.
2. Brand proliferation: Whilst consumers generally like to have a degree of choice when buying
products, does encourage a proliferation of products. There is a real danger that so many brands are
on offer that the consumer becomes confused thus negating some of the benefits of branding
mentioned previously, especially shopping efficiency aiding to product differentiation. The dangers
of brand proliferation are only realized when the differences between brands are either marginal or
are not meaningful to the consumer and yet, the supplier continues to support the brand rather than
let market forces dictate that it ought to be deleted from the organization’s product portfolio.

The possible disadvantages of branding for manufacturers, producers or suppliers include;

1. Higher costs: Branded products tend to require heavy promotional support and more stringent
quality control to ensure the consistency of the brand. Moreover, both production and marketing
costs are higher where several brands of a product type are offered rather than a single product.
However, if the brand is truly distinctive and offers potential buyers benefits and/or features which
they value, then additional costs can usually be recovered through premium pricing.
2. Adverse publicity: The relationship between the product and the enterprise which produces and/or
markets it is all the more apparent when that product is branded. Brands which fail in the market
place can place a stigma on an organization which makes distributors and consumers cautious about
handling or purchasing new products/brands which that organization subsequently launches. It is
for this reason that pre-market testing must be all the more rigorous in the case of branded products.
i) Place - reaching the target
Place is concerned with all the decisions in view of getting the “right” product to the target market’s
place. A product isn’t much good to a customer if it isn’t available when and where it’s wanted.

A product reaches customers through a channel of distribution, refers to any service of firms (or
individuals) from products to final user or consumer. Sometimes a channel system is quite short. It may
run directly from a producer to a final user or consumer. This is especially common in business markets
and in the marketing of services. Often the system is more complex involving many different kinds of
middlemen and specialists. And if a marketing manager has several different target markets, several
different channels of distribution might be needed. Most producers do not sell their goods directly to the
final users; between them stands a set of intermediaries which constitute a marketing channel. Some
intermediaries such as wholesalers and retailers - buy, take title to, and resell the merchandise; they are
called the merchants. A merchant buys different agricultural products from producers, processed products
from processing factory and sells it to consumers.

Others brokers, manufacturing firm representatives, sales agents search for customers and may negotiate
on the producer’s behalf but do not take title to the goods; they are called agents. Agents in big towns
play an important role in the distribution of agricultural products. Agricultural products supplied from
small towns pass on to wholesalers and retailers through these agents. These agents are important in
channeling products from the point of production to the point of consumption.
Still other transportation companies, independent warehouses, banks, advertising agencies assist in the
distribution process but neither take title to goods nor negotiate purchases or sales, these are called
facilitators. They are not directly involved in the selling and buying processes but mainly facilitate the
activity.

Marketing channels are set of interdependent organizations involved in the process of making a product
or service available for use or consumption. Marketing channel decisions are among the most critical
decisions facing management. The channels chosen intimately affect all the other marketing decision.

Marketing distribution is a set of interdependent organizations involved in the process of

making a product available for use or consumption by the consumer or business user.
Intermediaries mostly achieve superior efficiency in making goods widely available and accessible to
target markets. Through their contracts, experience, specialization, and scale of operation, intermediaries
usually offer the firm more than it can achieve on its own.
Intermediaries are the major sources of cost savings by reducing the number of contact necessary in
channeling products from producer to consumer. Figure 2.2(a) and 2.2(b) compares the number of
contacts necessary when there are intermediaries and when there is no intermediary.
Figure 2.2(a) No Intermediary Figure 2.2(b) Distributor intervener
M1 C1
M1 C1

M2 C2
C2
M2
D
M – Manufacturer
M3 C – Consumer C3
M3 C3
Fig (a) shows three producers (M 1, M2 and M3), each using direct marketing to reach three customers (C 1,
C2 and C3). This system requires nine different contacts. Thus, if the numbers of producers are M and
number of consumers are C, then the number of contacts will be M times C.
Fig (b) shows the three producers working through one distributor, who contacts the three consumers.
This system requires only six contacts, i.e., it only requires M plus C contacts. In this way, intermediaries
reduce the number of contacts and the work.

Price: Price is the amount of money charged for a product or service. More broadly, price is the sum of all
the values that consumers exchange for the benefits of having or using the product or service. Price refers
to the amount of money charged for a product or service, or the sum of the values that consumers
exchange for the benefits of having or using the product or service. Price of products is important
variables in the product mixes. Traditionally price has operated as the major determinants of buyer
choices. This is still the case in poorer nations and with commodity-type products. When you see
something attractive, you will be interested to know its price. As you remember from microeconomics
course, price is probably the first and most important determinant of demand from consumers’ viewpoint.
From consumers’ side, price represents consumers’ cost. Conversely, price is important variable for the
firm as it is the main determinant of the firm’s revenue. A consumer buys a product if she expects to
derive satisfaction that is equal to the cost of appropriating the product. price is one of the most important
decision variables for a firm. Due to this, firms usually design different pricing strategies. These different
strategies will be discussed in detail in the next unit. Price is also one of the most flexible elements of the
marketing mix. Unlike product features and channel commitments, price can be changed very quickly. At
the same time, pricing and price competition is the number-one problem facing many marketers.

Although non-price factors have become more important in recent decades, price still remains one of the
most important elements in determining market share and profitability of firms. price is set independent
of the rest of the marketing mix rather than as an intrinsic element of market. It is not also varied enough
for different product items, market segments, distribution channels, and purchase occasions.

Promotion

Even though a firm’s marketing strategies satisfy all these three conditions, it cannot be effective in
getting its product sold if the firm does not effectively communicate with consumers. Modern marketing
calls for more than developing a good product, pricing it attractively, and making it accessible.
Companies must also communicate with present and potential stakeholders, and the general public.
Promotion is communicating information between seller and potential buyer or others in the channel to
influence attitudes and behavior. The marketing manager's main promotion job is to tell target customers
that the right product is available at the right place at the right price.
What the marketing manager communicates is determined by target customer's main needs and attitudes.
How the messages are delivered depends on what blend of the various promotion methods – the
marketing manager chooses.

There several promotion methods. The following promotion methods are the most common ones.
Personal selling:- Personal selling - involves direct spoken communication between sellers and potential
customers. Face-to-face selling provides immediate feedback which helps salespeople to adapt. Although
salespeople are included in most marketing mixes, personal selling can be very expensive. So it is often
desirable to combine personal selling with mass selling and sales promotion.
Mass selling:- Mass selling - is communicating with large numbers of potential customers at the same
time. It is less flexible than personal selling, but when the target market is large and scattered, mass
selling can be less expensive.
Advertising is one of the main forms of mass selling. Advertising is any paid form of non-personal
presentation of ideas, goods, or services by an identified sponsor. It includes the use of such media as
magazines, newspapers, radio, TV, internet, and direct mail. While advertising must be paid for, another
form of mass selling - publicity -is ''free''.
Publicity:- This is an unpaid form of non-personal presentation of ideas, goods, or services. Of course,
publicity people are paid. But they try to attract attention to the firm and its offerings without having to
pay media costs. For example, book publishers try to get authors on TV talk shows because this generates
a lot of interest - and book sales - without the publisher paying for TV time.
Sales promotion:- refers to promotion activities other than advertising, publicity, and personal selling that
stimulate interest, trial, or purchase by final customers or others in the channel. Sales promotion may be
aimed at consumers, at middlemen, or even at a firm's own employees.

Advertising:- In addition to setting prices or quantities, choosing investments, and lobbying

governments, firms engage in many other strategic actions to boost their profits. One of the most
important is advertising. Advertising any paid form of non personal presentation and promotion of ideas,
goods, or services by an identified sponsor. Advertising is only one way to promote a product. Other
promotional activities include providing free samples and using sales agents. Some promotional tactics
are subtle. For example, grocery stores place sugary breakfast cereals on lower shelves so that they are at
children's eye level. According to a survey of 27 supermarkets nationwide by the Center for Science' in
the Public Interest, the average position of 10 child-appealing brands (44 sugar) was on the next-to-
bottom shelf, while the average position of 10 adult brands (10 sugar) was on the next-to-top shelf.

 Strategic advertising:- in a duopoly, deals with a firm advertise to attract customers from its
rival.

 Monopoly advertising:- A monopoly advertises to raise its profit. A successful advertising

campaign shifts the market demand curve by changing consumers' tastes or informing them about
new products. The monopoly may be able to change the tastes of some consumers by telling them
that a famous athlete or performer uses the product. Children and teenagers are frequently the
targets of such advertising.

If the advertising convinces some consumers that they can't live without the product, the monopoly's
demand curve may shift outward and become less elastic at the new equilibrium, at which the firm
charges a higher price for its product. If the firm informs potential consumers about a new use for the
product, for example, "Vaseline petroleum jelly protects lips from chapping" - demand at each price
increases.
The decision whether to advertise:- Even if advertising succeeds in shifting demand it may not pay for the
firm to advertise. If advertising shifts demand outward or makes it less elastic, the firm's gross profit
ignores the cost of advertising. The firm undertakes this advertising campaign, however, only if it expects
its net profit (gross profit minus the cost of advertising) to increase.

In short, the rule for setting the profit-maximizing amount of advertising is the same as that for setting the
profit-maximizing amount of output. This shows the set advertising or quantity where the marginal
benefit (the extra gross profit from one more unit of advertising or the marginal revenue from one more
unit of output) equals its marginal cost.

Chapter Three: Marketing Environment

3.1. Definition of Market

The word market comes from the Latin word “marcatus” w/c means merchandise or trade or a place
where business is conducted.
 The word “market’ has been widely and variedly used to mean:
 A place or a building where commodities are brought & sold. E.g. super market.
 Potential buyers & sellers of product. E.g. wheat market, coffee market;
 Potential buyers & sellers of a country or region. E.g. china market, Ethiopia market;
 An organization w/c provides families for exchange of commodities. E.g. Tokyo stock exchange

Components of market

For a market to exist certain conditions must be satisfied which are both necessary and sufficient. These
conditions are known as components of a market. These are:
 The existence of buyers and sellers;
 the existence of Product and services for exchange;
 there should be business relationship between buyers and sellers
 Demarcation of area/place, region, country and or coverage.

There are various dimensions of a specified market on the basis of:-

1. Location 7. Degree of competition
2. Area or coverage 8. Stage of marketing
3. Time span 9. Extent of public intervention
4. Volume of transactions 10. Type of population served
5. Nature of transactions 11. Accrual of marketing margins
6. Nature of commodities
Some of these dimensions are discussed below:

3.2. Market classifications

Market classification based on location

On the basis of the place of location or operation, markets are the following types;
i) Village market: Are markets where transactions take place between buyers and sellers of the
same village. Limited business activity, limited number of commodity, function also limited.
ii) Primary market: Located in big villages or small towns near the centers of production of farm
commodities
- Transaction takes place between producer and traders
- Greater than 70% of perishable produces taken from this market.
- In these markets, a major part of the produce is brought for sale by the producers-farmers
themselves.
iii) Secondary market also know as wholesale market: These markets are well equipped with
marketing facilities- transport, storage, and communication and with functionaries like
commission agents, brokers, weigh man, etc.
- Located in important trade centers, big towns or cities.
- A bulk of commodities arrival in to 20 markets is from primary market via traders.
- Producers contribution here is <10%.
 - All business activates are taken place here
- The major transaction takes place between traders and wholesalers (transaction of
commodities takes place normally in bulk. In this case there are specified market agencies
handling different
iv) Terminal market – also known as ‘consuming centers.’

These are markets which are usually located in large cities or sea ports where the product is
disposed to consumers or processed and or assembled for export purposes. Transaction takes place
between wholesalers or processors or consumer’s or assembled for export.

 Classification based of area of coverage:-

A market can be classified in to two general categories, these are:
 Domestic markets: These are markets where items are supplied for domestic consumption
only. Here transaction is performed with in a single country.
 International markets: these are markets where items are sold cross border or
internationally.

 Market classification based on time span

Based on time span, markets can be classified into three which are discussed as follows:

Short-period Market: These are markets, which are held for very short period of time, usually held for a
day, or some few hours. The products of short period markets are perishable in nature such as milk,
tomato, fish etc. here, the price the of the product is influenced by demand rather than the supply of a
product in the market place

Long period market: These are held for a longer period of markets than short period markets. Products
which are dealt here are food grains or oil seeds. Prices are governed by supply and demand forces

Secular-Period market: These are markets of a permanent nature. They are relatively durable in nature.

 Market classification based on volume

On the basis of volume of transactions, markets can be classified into:

Wholesale Market:- These are markets where the products handled in large lots/bulk. These markets
generally located in big towns or cities and are well equipped in terms of storage, transportation,
communication & other required marketing facilities. Transactions are takes place among traders/ link
between primary market and terminal markets.
Retailer market:- These are markets where the product is finally disposed to the final consumer. In these
markets, products are bought by consumers in small quantity as per their requirements. Obviously, these
markets are near to consumers, and the transaction is between traders and consumers.

 Classification based on competition

On the basis of competition, markets can be classified into perfect and imperfect.
a) Perfect competition market- it is a market where:
 - Large no of buyers and sellers;
- All have perfect knowledge about the market;
- No restriction on entry & exit;
- Products are homogeneous;
- Price variation at pt of time is almost uniform

b) Imperfect market: One or more features of perfect Competition are lacking.

Monopoly, oligopoly, duopoly, monopolistic

 Market classification based on public intervention

The classification of market on the basis of the effect of public intervention is:
Regulated markets: these are markets where business activities are carried in accordance with the rules
and regulations formed by the statutory market organization. Here, costs are standardized and marketing
practices are regulated. How the price is fix, method of pricing of the wholesalers. E.g. in India almost
99% is regulated market.

Unregulated market: in this case, business is conducted without any set of rules and regulations.
Traders frame their own rules for the conduct of business.

 Market classification based on the nature and durability of goods

Based on the nature and durability markets can be classified into four.
i) Consumables markets: are those markets where products that have shorter lifespan are sold. In these
markets largely items that people use in their day to day life are sold.
ii) Durable markets are such as consumer goods that have a relatively longer lifespan are sold. They can
serve for longer period and consumers can use repeatedly.
iii) Disposable markets are inexpensive durables that people use them only once for a very short period
and then disposed them off.

 Nature of transaction

Based on the nature of transaction markets can be classified as follows:

i) Spot or cash market: These markets are markets in which goods are exchanged for money
immediately after the sale is called the spot market.
ii) Forward /Future market: These markets are markets in which the purchase and sale of a commodity
is negotiated much before the actual physical transactions of the commodity.
Negotiation takes place at least once and transactions take place in the future deliberately.

 Growth of Market
Following the economic development of a country or nation, there is a tendency for market growth.
The market development, takes place both quantitatively and qualitatively. There are two dimensions
of market development: these are
i) Functional growth: Initially, a market is a multi commodity market characterized by small volume
business; and such a market is known as general market. However, through time there is a tendency
for this market to specialize in a certain commodity. Here specialization leads to increasing in volume
 of business where deals take place through inspection of samples rather than complete lots. Hence,
the function of growth will be from general markets to specialized markets.
ii) Spatial growth: Initially buyers and sellers in a limited area interact without linkages to outsiders in
the local markets. But increase in the quantity of commodity to be handled has led the geographical
growth of markets from local to regional to national and to international boundaries.

3.3. Factors affecting the growth of market development

Marketing has developed in importance and complexity as economic development and specialization has
increased productive capacity and separated food producers from consumers. The following are some of
the factors affecting the rate of market development:
 Nature of demand: goods which have relatively regular demand develop faster than those with
seasonal demand.
 Nature of the product: the markets for durable goods grow at a faster rate than the market for those
which easily became defective. That is perishable goods.
 Transportation and communication facilities: markets which are connected by a good transportation
network grow at a faster rate than markets where such facilities are lacking
 Quantity of supply and demand: markets in highly producing and highly consuming areas develop at
a faster rate than in other areas.
 Banking facilities: in areas where banking infrastructure is well developed, the market grows at a
faster rate than in areas where such infrastructure is poorly developed.
 Peace and security: in countries where political and social disturbances are infrequent the market
grows at a faster rate than other

Chapter Four: Marketing Channels, Costs and Margins for Farm Products

4.1. Marketing Channels

There are different definitions for marketing channels based on the breadth and width of interest of
analysis.
1. According to Moore “The chain of intermediaries through whom the various food grains pass from
producers to consumers constitutes their marketing channels”.
2. Kohls and Uhl have defined marketing channels as alternative routes of product flows from producers
to consumers.

Factors affecting length of marketing channels in agricultural marketing

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 in the
form of bread.

Marketing channels of distribution

The course taken in the transfer of the title of a commodity constitutes its channel of distribution. It is the
route taken by a product in its passage from its first owner i.e. producer to the last owner, the ultimate
consumer.
Important channels of distribution are:
1. Producer or manufacturer – Retailer – Consumer.
2. Producer or manufacturer – Consumer.
3. Producer or manufacturer – Wholesaler – Retailer – Consumer.
4. Producer – Commission agent.

Dear learner, the followings are also highlights of some factors determining choice of channels.

1. Nature of the product.

2. Price of the product.
3. No. of units of sale.
4. Characteristics of the user.
5. Buyers and their buying units.
 Low priced articles with small units of sale are distributed through retailers.
 High price special items like radios, sewing machines etc are sold by manufactures and then
agents.
 Public services like gas, electricity and transport are usually sold directly to the consumer.

4.2. Concept of Marketing Margins

Marketing margin may be defined in 2 ways: (1) as the differences between consumer retail price and
what farmers receive; (2) as the price of marketing services provided.
1. Price Difference between Two Marketing Stages: The difference between what the consumers pays for
food and what the farmer receives - i.e. a marketing margin is simply the difference between the primary
and derived demand curves for a particular product. Primary demand is determined by the response of the
ultimate consumers and this is usually based on the retail price and quantity purchased by consumers.
Primary demand is in some sense a joint demand for all the inputs in the final product. Thus a food
product at the retail (i.e. the primary demand) may be divided into two inputs: the farm-based components
and the processing-marketing components. The derived demand for the farm product can be obtained by
subtracting the cost of all marketing components from the primary demand (i.e. D D = PD - MC). It can
therefore be seen that the farm level function or primary supply (P S) represents the derived demand for the
farm component of the final product (D D). Thus the derived demand is based on price-quantity relations
that exist either at the point where products leave the farm or at intermediate point, where they are
purchased by wholesalers or processors.
The primary supply (PS ) represents the price-quantity relationship at the producer level. The derived
supply (DS) at the retail level is derived from the primary supply (P S ) by adding an appropriate margin.
Thus, a retail price is established at the point where the primary demand (P D) intersects the derived supply
(DS) as shown in the figure.
Price PS
DS
The farm-level price is
Retail PR
based on derived demand (DD) Margin
and primary supply (PS ).
The difference in the two Farm PF
prices is the marketing margin or PD
Absolute Marketing Margin: M= PR - PF DD

Quantity

Absolute Marketing Margin (AMM): This is

the gap between prices at different marketing PR C
M2
levels (farmers, wholesalers, retailers). Thus PW M1
M3 B
M1= PR - PF is AMM at farmer level PF
M2= PR - PW is AMM at retail level
M3= PW - PF is AMM at wholesale level A DR

DF DW

Qd
Relative Marketing Margin (RMM) It is the ratio of AMM to price at which the product is bought. RMM
= AMM/ PB. The relative margin from farmer to retailer is RMM FR = M1/ PR.
Gross Marketing Margin
This is obtained by multiplying the AMM by the quantity marketed. GMM is represented by area P FAC
PR or GMM= Qd (PR - PF ).
Net Marketing Margin (NMM)
Here the concept takes account of fixed cost, taxes and subsidies - i.e.
NMM = GMM - FC - T + S
2. Differences in Prices Due to Cost of Services: The marketing margin may also be defined as the
price or cost marketing services. Marketing costs are the return to factors in the marketing
process: profits, wages, interest rents. The marketing services include items such as assembly,
processing, transportation and retailing. These services are the time, place, form utilities provided
by the marketing system. That is, the marketing margin is the price of all utility added by
 marketing firms, and this price includes marketing firm’s expenses and profits. The supply
relation for these marketing services is defined in terms of the marginal cost curve for the
services, which in turn depends on input prices. However, marketing services also have demand
relation. A marketing margin will thus depend on the particular demand and supply relations for
the services, and in this regard, changes in margins may be the result of shits in the supply or
demand relations for services as shown in the figure below.

The demand curve D is the M2 S1

market demand for services; the supply Margin
S2
for services are S1 and S2. As a result of M1
higher input prices, or service prices,
marketing margins will increase from
M1 to M2 and quantity of services purchase
by consumers will decrease from Q1 to Q2. D

Q2 Q1
Quantity
Production cost has fallen, while marketing costs have increased of services/unit
over the past1/4 century due to:
1. Production is more specialized in location - fall in production Cost but increases transport cost.
1. Away from home eating increases marketing cost.

Marketing margin of a Middleman: There alternative measures may be used. The three alternative
measures which may be used in estimating market margins are.
(a) Absolute margin of ith middlemen (Ami) = PRi (PPi + Cmi)
(b) Percentage margin of ith middlemen (Pmi) = PRi - (PPi + Cmi) X 100
PPi
(c) Mark-up of ith middleman (M2) = PRi - (PPi + Cmi) X 100
PRi
Where,
PRi = Total value of receipts per unit (sale price)
Ppi = Purchase value of goods per unit (purchase price)
Cmi = Cost incurred on marketing per unit.
The margin includes profit to the middlemen and returns to storage, interest on capital, overheads and
establishment expenditure.

Example Table; - Price of Honey in the market channel

Market chain participants selling price
Producers’ price --------------------------------------------------3.26br/kg
Rural assemblers price ------------------------------------------4.5br/kg
Wholesalers’ price -----------------------------------------------5br/kg
Retailers’ price ----------------------------------------------------6 br/kg
Consumers’ price -------------------------------------------------6br/kg
GMMRA= Assembler price-producer pricex100
 Consumer price
= 4.5-3.26 x 100 =21%
6
GMMw= Wholesaler price – Assemler price x100
Consumer price
= 5-4.5 x 100
6
= 8%
GMMr = Retailers price-wholesalers price x 100
Consumers’ price
= 6-5 x 100
6
= 17%

Total Gross marketing margin= GMMra+GMMw +GMMr=21%+8%+17%=46%

Gross marketing margin of producers ( GMMp) =100%-46%= 54%
So from the above calculation, it is clear that 21%, 8%,17% and 54% of the final consumers price is
shared by rural assemblers, wholesalers, retailers and producers respectively.
Dear learner, however it is evident that market participants in a given market chain do not only get profit
from the transaction. They also incur a cost in the marketing activities. The most important marketing
costs which could possibly be incurred by the different market participants in a market chain can be
described as follows.
The food marketing margin or bill has been increasing or decreasing. The major factors for such an
increase are:

1. Population Growth: As a result of population growth, the quantity of food that is marketed has
increased, raising the total expenses of food.
2. Cost of Food Marketing Inputs: Rising labor and energy costs in food marketing have added to
the rising cost of marketing food.
3. Rise in Food Services: Consumers desires for more marketing services (e.g. convenient foods)
have further increased the food marketing bill
Cost Components of the Marketing Bill/margin
The cost component is also important in evaluating the marketing bill. Some of these costs are labor,
packaging, transportation, profits, energy and ads.

1. Labor Costs: Labor cost has been the large component of the food marketing bill in marketing. These
include wages, employment benefits, earnings of proprietors etc.. Wage rates in food marketing have for
example increased steadily over the years.
a. Food marketing bill closely follows the rate of increase in labor cost.
b. Rising labor costs have forced marketing firms to improve operational efficiency by
substituting machinery for labor especially in processing (labor saving)
2. Profits in Marketing: The profit portion of the FMB is very controversial. Businessmen see profit as a
reward for efficient behavior, and profit is a force for seeking low cost operations and improved products.
But economists view profit as another cost of doing business. The fact is where profits result from
monopolistic or anti-competitive behavior, the corrective action is justified.
Profits in the food marketing industry have been rising over the years. Profits as percentage of
shareholders equity has also increasing. This has attracted capital into the food industry and therefore
improved plant and marketing efficiencies. However, profit rates for different industries depend on their
competitive structure and degree of product differentiation. For example, historically, sugar, meat, edible
oil, milk and grain mill processors have had lower profits than foods breakfast cereals and beverages.
Profits cannot easily be used as indicator of market performance. Although high or rising profits may
reflect superior management or efficient operations, high profits may also result from such market
imperfections as concentration, product differentiation and barriers to entry.

The Farmers Share

The difference between the retail price of food and the marketing margin is the FARMER’S SHARE.
This is the proportion of consumer’s food dollar that the farmers receive. There are 2 ways of measuring
the farmer’s share:

i. Marketing Bill Approach: Calculates farmer’s share as a ratio of the farm value of all domestically
produced farm foods to the dollar value of consumers expenditures. e.g. In if the consumers spent $361
billion on food produced domestically. Farmers received $86 billion, so farmers share was 25%.

ii. Market Basket Approach: Is calculated by taking the ratio of the farm value of 74 domestically
produced food items to their retail food value. e.g. If the market basket of the 74-items cost the average
family $3,125 and the farm value was $938. the farmer’s share is 30%.

Farmer’s share By Commodity

The farmer’s share varies from commodity to commodity, depending on the amount of form, place and
time utility added by the farmer and the marketing firm respectively. Commodities for which the farmer
provides most of the value-added utilities have a higher farmer’s share and those on which the marketing
firm provides large share of the utility have smaller farmer’s share. Therefore farm products marketed
directly to the consumers in relatively unprocessed or fresh form have higher farmer’s share than those
processed. For this reason, animal products tend to have higher farmer’s share than crops. Similarly, the
extent of transportation, storage, protective services such as refrigeration result in lower farmer’s share.

Misconception of the Marketing Margin

i. Marketing Efficiency: Many people, especially farmers and consumers believe that a small margin
denotes marketing efficiency and this is more desirable than large margin. If this were true, then, direct
sales from farmers to consumers or roadside sales by farmers where the market margin is zero, will
denote high marketing efficiency. But the fact is, efficiency cannot be judged solely by the size of the
marketing margin.

ii. Elimination of Middlemen: There is also the belief that there are ‘too many’ middlemen in the
marketing chain causing high margins, and that margins can be reduced by eliminating middlemen. The
fact is, middlemen can be eliminated but not their marketing functions which are the direct cause of high
margins.
iii. Large Margins Cause Low Farm Prices: There is also the misconception that large marketing
margins causes lower farm prices. The fact is , marketing functions add both value and cost to the farm
products. Thus an increase in marketing margins can increase retail value and prices of food as a result of
cost of marketing functions. But of course, some ads, and promotions obviously increase retail prices
which may not be necessary.

iv. Are Margins Profits?: There is also the belief that marketing margins are profits to marketing firms,
and these profits can be captured by farmers and consumers. As a result, both farmers and consumers
cooperatives have been established in anticipation of reducing margins and profits. But the fact is,
marketing margins consist of both cost and profits, and there is no guarantee that farmers or consumer
cooperatives will perform without cost or perform marketing functions as efficiently as marketing firms.

4.3. Marketing costs

The movement of products from the producers to the ultimate consumers involves costs which are called
marketing costs. These costs vary with the channels through which a particular commodity passes
through.
Eg: - Cost of packing, transport, weighting, loading, unloading, losses and spoilages.
Objectives of Studying Marketing Costs:
1. To ascertain which intermediaries are involved between producer and consumer.
2. To ascertain the total cost of marketing process of commodity.
3. To compare the price paid by the consumer with the price received by the producer.
4. To see whether there is any alternative to reduce the cost of marketing.
Reasons for High Marketing Costs:
Dear learner, these are among the major reasons contributing for high marketing cost:
1. High transportation costs 2. Consumption pattern – Bulk transport to deficit areas.
3. Lack of storage facilities. 4. Bulkiness of the produce.
5. Volume of the products handled. 6. Absence of facilities for grading.
7. Perishable nature of the produce. 8. Costly and inadequate finance.
9. Seasonal supply. 10. Unfair trade practices.
11. Business losses. 12. Production in anticipation of demand and high prices.
13. Cost of risk. 14. Sales service.

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.

A) Packaging costs:
Most produce needs packaging. Exceptions are generally larger fruits and vegetables such as pumpkins
and water melons which may be transported in bulk. Leafy vegetables, such as cabbages, are also often
transported in bulk. Here the outer leaves themselves act as a form of packaging by protecting the inner
leaves. There is no packaging cost but it should be remembered that the outer leaves are often thrown
away before sale and thus there is a cost in terms of product loss. Packaging serves three basic purposes.
Firstly, it provides a convenient way of handling and transporting produce. Costs would certainly be
much higher if everything had to be carried and moved without any form of packaging. Secondly, it
provides protection for the produce. The efforts which are continually being made to improve bulk
packaging are designed mainly to improve the protection offered rather than to increase the convenience
of the packaging from a handling point of view. Finally, packaging can be used to divide the produce into
convenient units for retail sale and to make the produce more attractive to the consumer, thus increasing
the price at which it can be sold. The more sophisticated the packaging, the greater the cost.

Calculating packaging costs

Assume that oranges are packed 20 kg at a time in wooden boxes which, with occasional repairs, can be
used for 10 trips. A box costs $10, repairs and cleaning during its life costs $2 and each time transporting
back the empty box to the producing area costs $1.
Then the packaging cost per trip is...
[(original cost + repairs) ÷ no. of trips] + transport when empty or
($10 + $2) ÷ 10 trips + $1 = $2.20 per 20 kg and
$2.20 ÷ 20 kg = $0.11 per kg

B. Transport costs
Transport costs are incurred by farmers when they take their produce to the market and by traders as they
move the produce down the marketing chain to the consumer. Sometimes transport costs are very obvious
because they involve the direct payment by a farmer or trader to a truck owner or, in some cases, boat
owner on a per piece basis. In other cases such costs are less direct, for example when the trader, or even
the farmer, owns and operates his own vehicle.

Calculating transport costs

Assume that there are 40 m3 of space available in the truck to be used and that it costs $500 to hire the
truck. A container of 0.2 m3 holds 8 kg of tomatoes and a container of 0.4 m3 holds 10 kg of green
peppers.
Then the transport cost for tomatoes per container and per kilogram is...
$500 ÷ (40 m3 ÷ 0.2 m3) = $2.50 per container
And $2.50 ÷ 8 kg = $0.3125 per kilogram
While the transport cost for green peppers per container and per kilogram is...
$500 ÷ (40 m3 ÷ 0.4 m3) = $5.00 per container and $5.00 ÷ 10 kg = $0.50 per kilogram

C. Product losses
If a trader buys one kilogram of produce from a farmer, how much of that one kilogram will he actually
end up selling? And what will be the average price of what he sells? Post-harvest losses of produce,
particularly fresh produce, can be quite considerable, both in terms of quantity and quality and
considerably affect the selling price.
Calculating the cost of product losses
Assume that, at 10 percent loss levels, 1 kg of tomatoes purchased by the trader from the farmer results in
900 grams (0.9 kg.) available for sale to consumers. The trader buys tomatoes from the farmer at $5 per
kilogram and marketing costs are $2 per kilogram for the tomatoes originally purchased. The selling price
of tomatoes is $8 per kilogram.

Then the costs are...

1 kg purchased at $5 per kg = $5.00
1 kg packed and transported at $2 per kg = 2.00
_________________________________________
Total Costs = $7.00
Sales Revenue or $8 x 0.9 kg = 7.20
Thus the margin to the trader = $0.20
Below is an example of the more usual and wrong, method of calculation.
1 kg purchased at $5 per kg = $5.00
1 kg packed and transported at $2 per kg = 2.00
10 percent losses or $5 x 0.1 = 0.50
__________________________________________
Total Costs = $7.50
Sales Revenue or $8 x 1 kg = 8.00
Thus the margin to the trader = $0.50
The second calculation is clearly wrong because here the trader is seen to be obtaining revenue from
produce which has already been "lost".

D. Storage costs
Storage is carried out in order to extend the period of availability of a crop to a consumer. In the case of
staple food crops long-term storage is, of course, essential. The harvest period may be just a few months
but the staple has to be consumed throughout the year. Storage can be carried out by the farmer, the trader
(or marketing board) or by the consumer. With regard to more perishable crops, storage can be used to
extend what is often every short period of availability.

Calculating storage costs

Assume that a warehouse is hired for 120 days of the year at a total cost of $600 and that the weighted
average contents are 250 bags of potatoes.
Then the storage cost is...
$600 ÷ 120 days = $5.00 per day
$5 ÷ 250 bags = $0.02 per bag/day

Calculating storage costs over time

Assume that a trader buys potatoes at $10 per bag and keeps them in store for 4 months. To do this he has
to borrow money at 12 percent per year.
Then the cost of bank interest is...
$10 x 0.04 (12% p.a. over 4 months) = $0.40 per bag
Thus a realistic calculation of storage costs per bag for our consignment of potatoes is...
Storage charge for 120 days at $0.02 per day = $2.40
Interest charge of $0.40 per bag = 0.40
__________________________________________________
Total cost per bag = $2.80