AGB 301 Test 1
Card Set Information
AGB 301 Test 1
AGB 301 Food and Fiber Marketing Test 1
What is a commodity?
market sets the price.
partly processed sold to food manufacturers.
usually branded, differentiated.
Monopolistically competitive market.
3 aspects of good ideas marketing change
2. location (space)
Who sets grading standards
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.
: contract to buy
: contract to sell
BUY LOW, SELL HIGH
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
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
: cheese, poultry, oils, sugar (high fructose corn sugar) fruits and vegetables, fish (as much farmed as caught in wild)
: 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.
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?
Many co-ops have converted to
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
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
: a tax put on import
Public revenues-tax, raises price
: -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
: eg, pesticides.
->crop and other insurance.
Will you get paid.
->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
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
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
-poultry industry (do everything)
-Arms-length transactions on open market
-Contracts, partnerships, co-ops
Food manufacturing for consumers
Selling to consumers
Primary and secondary commodity supply
Selling to food manufacturers
Selling to businesses
Technical information and help
Price and payment options
Top exports & and imports
an economy with no trade
"Trade Policy” is a misnomer
Domestic policy affects our trade relations
-US sugar policy.
-Japanese car quota
Trade with friends and neighbors
: Confederation of States
: EC 6, expanded into EC 12, now EU
% of disposable income spent of food
Hierarchy of why people buy food
health & convenience
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
4 p's of marketing
2. Place (sold)
3 C's of pricing
1. cost of production
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
consumer market segmentation
identify your market so you can:
measure your potential market
target your advertising & promotion
satisfy their words
Consumer market segments
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
seven types of brand stories
1. overcoming the monster
2. rebirth, story of renewal
4. journey and return
5. rags to riches
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
vs. pull promotion
Push: product through the market channel using trade promotions, personal selling, price incentives to wholesales & retailers
Grocery distribution: push vs
: 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
: non standardized, high unit value, technical, purchased infrequently, needs demonstration, high emotional value
: geographically concentrated, few customers, price is negotiable
Personal selling vs.
: standardized, low unit value, nontechnical, purchased frequently, simple to use, low emotional evolvement
: geographically dispersed, lots of customers, price is set
Price setting methods
(perceived) value pricing
discounts (cash, quantity, seasonal)
promotional (loss-leader, special event, cash rebates)