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What is a commodity?
- Homogeneous good
- market sets the price.
partly processed sold to food manufacturers.
- usually branded, differentiated.
- Monopolistically competitive market.
3 aspects of good ideas marketing change
- 1. form
- 2. location (space)
- 3. time
Who sets grading standards
- Trade organizations
- Producer boards.
- Processor groups
food produced and consumed by the same people
- Exchange between at least two parties.
- Some level of processing.
- Change as production and processing technologies change
(why do farmers enter the market)
- farmers enter futures market to reduce risk - like insurance
- A futures exchange or derivatives exchange is a
- central financial exchange where people can trade standardized futures contracts;
- that is, a contract to buy specific quantities of a commodity or financial instrument at a
- specified price with delivery set
- at a specified time in the future.
BUY LOW, SELL HIGH
- Long Position: contract to buy
- Short Position: contract to sell
- Producers (users) of commodities can offset lower (higher) than expected prices through
- gains from the futures market.
- Farmers who sell on the cash market take a short position.
- People who buy commodities on the cash market take a long position.
Cash-futures (mostly negative)
Futures higher than cash because of time, storage, location (cash is now, today)
The difference between the local cash price and the futures price
3 axioms of behavior
- 1. limited behavior
- 2. more preferred to less (unlimited wants)
- 3. rank preferences
Inelastic vs elastic demand
- E > 1 is elastic should lower price to increase revenues
- E < 1 is inelastic should rise price increase revenues
Cross price elasticity
- <0 = complement
- >0 = substitute
- <0 = inferior
- >0 = normal good
- >1 = luxury good
Movement along demand curve
change in quantity demanded
to find surplus take area of the triangle
#1 factor that determines what we eat
- 1. Nationality
- 2. Ethnicity
- 3. Income
- all other factors
What determines what we buy?
- Transport - how you get food home
- Preparation - reheat or cook
- Where and how buy - grocery store or convenience store
- Eating – an event, a celebration, or a
- single diner
- Eat more: cheese, poultry, oils, sugar (high fructose corn sugar) fruits and vegetables, fish (as much farmed as caught in wild)
- Eat less: fluid milk, lamb
Food safety concerns
- more labeling and regulations
- Microbial – e. coli, salmonella.
- Natural toxins – shellfish, aflotoxins in pistachios.
- Additives – guar gum, colors
- Ag Chemicals – pesticides, insecticides,
- Hormones in animals.
- Animal welfare.
- Physical contaminant – rocks in rice
Food marketing system
- channels farmer ->farmers market
- channels farmer ->middlemen -> store
- Facilitates information flows – what consumers want
- Changes ownership of goods
- Brokers (don't take possession)
- Market middlemen (take posession)
- One member, one vote
- Problems with co-ops:
- -Raising capital – the horizon problem.
- -Retain earnings or disperse them?
- -Quality control
- Many co-ops have converted to
- investor-owned firms
How many food products are introduced every year>
How much of our food do we get at the grocery store?
94% of food from grocery store
- 1. Wal-Mart
- 2. 1/4 size of Wal-Mart
Affects of a quota
- Consumers pay more.
- Consumer surplus decreases.
- Price to domestic producers increases.
- Producer surplus increases.
- The importer makes an economic rent (buys at world price, sells at a higher price).
- A small dead weight loss
The difference between a tariff and a quota:
- Consumers pay more under both.
- Domestic producers receive higher prices under both.
- Both produce a dead weight loss.
- Tariffs are public revenues.
- Quota rents go to the importer
- Phyto-sanitary regulations that limit trade.
- Are restrictions on GMOs a non-tariff barrier?
- Do Mexican avocados put CA avocados at risk?
Effects of Tariffs
- Raise price to consumers.
- Decreases consumer surplus.
- Increases price received by domestic producers.
- Increases domestic producer surplus.
- Tariff revenues are public funds.
- Small dead weight loss
Tariff vs. Quota
- Tariff: a tax put on import
- Public revenues-tax, raises price
- Quota: -revenues go to importers-control amount imported
- Both raise price to consumers increases consumer surplus
Trends in international food trade
- Has changed shipping with shipping containers
- use of shipping containers
- shipping lines have bigger ships
- Prices can be established for each grade.
- Commodities can be sold on description.
- ->increases efficiency in marketing
- Biological processes.
- Stochastic processes.
- ->risk-reducing inputs: eg, pesticides.
- ->crop and other insurance.
- Will you get paid.
- Interest rates.
- Exchange rates.
- ->letters of credit, long-term financing, forward contract.
- Can you buy low and sell high?
- Will output prices cover cost of production?
- Will input prices stay low enough to allow a profit?
Initial Futures Margin
- the amount of money that is required to
- open a buy or sell position on a futures contract
added money needed to keep your margin high enough to cover expected losses.
notice from your broker that you need more money to maintain your margin.
- A consumer “reveals his/her preferences” according to the 3 axioms of behavior.
- The consumer is indifferent between different combinations of goods along the curve.
- Total utility is the same at any point on the curve.
- effect reg. price change with income effect
- relative price goes down as income effect changes in price.
- If price of gas goes down can spend more on others
- A change from one indifference curve to another due to a price change is called
- the income effect
- A price decrease (increase) allows me to move to a higher (lower) indifference
- curve, resulting in an increase (decrease) in utility.
Increase in demand is due to
- income goes up
- tastes and preferences
will only go up with change in price
Law of Demand
- Demand is a negative price/quantity relationship.
- Consumers buy more (less) of a good as its price decreases (increases).
- The “Veblen Effect” of conspicuous consumption exists, but is very rare.
- Market demand is the sum of individual consumers’ demands for the good or service.
- Market demand is based on the price of the good, prices of other goods/services
- (competing ends) and limited budgets.
- D = f(prices, income|tastes & preferences)
Change in demand
- A change in demand can be caused by
- -Change in income (or wealth or budget).
- -Change in prices of other goods or services.
- How responsive quantity demanded is to a price change.
- If a firm can set its price, knowing the elasticity of demand for its product can
- help to maximize their revenue
Maximizing Total Revenue
- Total revenue = P * Q
- If demand is elastic, lowering price raises total revenue.
- %DQd > %D P.
- The increase in sales is greater than the
- decrease in price.
Note the reverse: raise price and TR decreases.
Good/services with elastic demands
- Lots of substitutes
- Luxuries, or at least not necessities.
- Takes a large budget share
Inelastic goods or services
- Few good substitutes
- Usually a small budget share – drugs and health care can be exceptions
Conditions for Perfect Competition
- 1.Homogeneous products.
- 2.Lots of consumers.
- 3.Lots of producers.
- 4.Freedom of entry and exit.
- ->Buyers and sellers acting independently to maximize their utility and profits,
- Lots of buyers and sellers
- Branded products
- Relatively easy entry and exit
- Either homogeneous or heterogeneous products.
- Just a few sellers.
- Definite barriers to entry
- Homogeneous or heterogeneous product.
- Only one seller.
- Clear barriers to entry
- Lots of producers.
- Only one buyer
- The difference between the farm price and the consumer price
- A higher marketing margin indicates more value added
Vertical and Horizontal Linkages
- Degree of vertical coordination:
- -poultry industry (do everything)
- -Contracts, partnerships
- -Arms-length transactions on open market
- Degree of horizontal coordination
- -Perfect competition
- -Contracts, partnerships, co-ops
Food manufacturing for consumers
Selling to consumers
- Shelf life
- Primary and secondary commodity supply
Selling to food manufacturers
Selling to businesses
- Technical information and help
- Delivery schedules
- Price and payment options
- Personal sales
Top exports & and imports
an economy with no trade
"Trade Policy” is a misnomer
- Domestic policy affects our trade relations
- -US sugar policy.
- -Cotton subsidies.
- -Japanese car quota
- Trade with friends and neighbors
- -1787: Confederation of States
- United States.
- -1957: EC 6, expanded into EC 12, now EU
% of disposable income spent of food
Hierarchy of why people buy food
- survival (nutrition)
- health & convenience
- living well
- show off status causes
Perfectly completive markets are:
Merchant Middle Man vs Broker
Middle hand takes ownership
USDA and trade
- is non biased 3rd party grading system. can be done by trade organization
- -facilitates trade
4 p's of marketing
- 1. Product
- 2. Place (sold)
- 3. Price
- 4. Promotion
3 C's of pricing
- 1. cost of production
- 2. competition
- 3. consumer
Branded product marketing
Competitive premise: how do you profit
- commodity producer-lower costs
- differentiated product - higher quality or out of season)
- Niche market - one of a kind
- synergy - greater when combined with others
- Pre-emtive mover - first on the scene
Who selling to in a target market
- food service
consumer market segmentation
identify your market so you can:
- measure your potential market
- target your advertising & promotion
- satisfy their words
Consumer market segments
- user behavior
group characteristics: location, size, type of processing
company characteristics: buying process, technical expertise, product needs
- undifferentiated - mass market
- concentrated - single segment
- differentiated - several products aimed at specific target markets
Secondary market research
making use of existing data
the added value endowed on products are services, reflected in how consumers think, feel, and act with respect to the brand, as well as prices, market share & profitability
Five dimensions of brand personality
- 1. sincerity
- 2. excitement
- 3. competence
- 4. sophistication
- 5. ruggedness
seven types of brand stories
- 1. overcoming the monster
- 2. rebirth, story of renewal
- 3. quest
- 4. journey and return
- 5. rags to riches
- 6. tragedy
- 7. comedy
Reasons for multiple brands in portfolio
- increase self presence & retailer dependence
- attract consumers seeking variety
- increase internal competition
- yield economies of scale
Product life cycle
- may be month, years, decades
Grocery distribution: Push vs. pull promotion
Push: product through the market channel using trade promotions, personal selling, price incentives to wholesales & retailers
Grocery distribution: push vs Pull promotion
- Pull: get consumers to pull the products through the marketing channel using advertising consumer promotions
- In practice, most use a mix of both
Gross Rating points
1 grp is 1% of the universe being measured
- continuous - constant level over time
- flighting - on then off over time in bursts
- pulsing - continuous but at varying frequencies
Personal selling* vs advertising
- products: non standardized, high unit value, technical, purchased infrequently, needs demonstration, high emotional value
- market is: geographically concentrated, few customers, price is negotiable
Personal selling vs. Advertising*
- products: standardized, low unit value, nontechnical, purchased frequently, simple to use, low emotional evolvement
- market is: geographically dispersed, lots of customers, price is set
Price setting methods
- market pricing
- taret-return pricing
- (perceived) value pricing
- going-rate pricing
- auction-type pricing
- Geographical pricing
- discounts (cash, quantity, seasonal)
- promotional (loss-leader, special event, cash rebates)