Decision Making in Agri
Decision Making in Agri ABM 100
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Exam 1 Notes Wednesday February 25 2015 713 PM Overview of Food Systems Producers Firms who produce raw food and agricultural products Assemblers Firms who buy raw commodities from producers in order to sell to others Store amp Transport Don39t Change It Initial Processors Process the raw commodities into food ingredients A o l wmjl Nil 5 mm Ml L5 MM Mul Food Manufactuer Buys the food ingredients and turns them into final product 0 Marketers 1s too general a term Wholesalers Firms who buy final products in order to sell to others not directly to consumer HRI Industry Hotel Restaurants and Institutions Grocery Wholesalers Primary customers are food retailers is o l 39 Firms where consumers buy food 0 Retail Food Stores 0 Food Service Retailers 0 Specialty Retailers Consumers spend nearly 16 trillion on food and alcohol Consumers spend about 12 of food cost on food away from home Consumers waste about 13 of food Examples 0 Ag Input Supplier 0 Feed Kent Feeds 0 Fertilizer ADM 0 Equipment John Deer 0 Financial Greenstone Farm Credit 0 Producer 0 Ranchers amp Farmers 0 Nursery amp Greenhouse Owners 0 Assembler 0 Initial Processors 0 ADM O Cargill 0 Food Manufacturer 0 Campbell s O Kraft Exam 1 Page 1 S s HRI s O Sysco 0 US Foods 0 Gordon Food Service GFS 0 Grocery Wholesalers O SpartanNash O Supervalu 0 Retailers 0 WalMart l O Kroger 2 O Costco 3 0 Target 4 O Meijer 5 Intro to Food Marketing amp Value Added Marketing is a value adding process Each level is an economic stage and involves a valueadding process Time Value created by storage Place Value created by transport from A to B quot Form Value created by change in physical form 3 Possession Value created by exchange between buyers amp sellers Storage 0 Assembler 0 Wholesaler 0 Producers Transportation 0 Assembler 0 Wholesaler Form 0 Manufacturer 0 Processor 0 Producer 0 Food Retailer Possession ALL PLAYERS Value Added Measured Economic Research Service ERS tracks the cost of getting food from farm to table ERS collects data from grocery stores and eating establishments to build data series takes 2 years Food Bill Value of total food and alcohol expenditures in a year 3 0 Mn l illt ll l l M 0 With alcohol 5100 Exam 1 Page 2 0 Without alcohol 4500 Food Dollar Total annual market value for all purchases of domestically produced foods 0 No alcohol or imports Farm Share Value added by the Ag Input Supplier and Farmer 0 Typically about 55W of the total Food Bill Effects on Farm Share 0 Degree of Processing 0 Differing Seasonality in Production and Consumption 0 Transportation Cost Does the Food Bill and Food Marketing Bill have to increase or decrease together Since the FIVTB takes up about 55 of the FB they will increase and decrease together Which is likely to have a higher farm share milk or ice cream Milk will have a higher farm share because it will be processed less beyond the farm than the ice cream Consumption Trends What share of income do US consumers spend on their food 0 1950 206 o 1975 138 o 2000 99 o 2013 98 0 1 1 31 1 39lmzm39ln 311 331 ELK 1 1 3 TV Lower income consumers spend a higher share of income on food US spends the lowest amount of income on food Spent on food and alcohol 0 925 billion in 2000 0 13 trillion in 2007 0 16 trillion in 2013 0 Trend Rising expenditures Why have food expenditures been rising 0 Population Increase in food needed because of increase in population 0 Price Higher food cost labor and energy 0 Preference Change in food taste 0 7 J wail Lute m 7 u 1111 Biggest driver of consumer food expenditures is energy cost fuel oil and labor cost wages 12 food expenditures occurs quotaway from homequot 13 food quantity is consumed quotaway from homequot Exam 1 Page 3 What else is shaping food expenditures 0 More mature consumers 0 Consumers under the age of 18 will decrease 0 Rising incomes 0 Increased emphasis on quality convenience organics environmental functional 0 More diversity Functional Foods Foods which are believed to provide a medical benefits beyond traditional nutritional benefits 0 Vitamin D amp Iodized Salt 0 Cherry Juice amp Soy Milk Consumer is the driving force in the agricultural food system Consumers effective demand in uences all players in the agricultural food system Understanding and predicting consumer trends is critical for decision making in the agricultural food system Agricultural Food System Unigue 0 Geographical Factors 0 Everything can t be grown everywhere 0 Biological Factors 0 Production lags length of time from the decision to produce occurs until the production reaches the market 0 Short Chickens 57 weeks 0 Long Fruit 57 years 0 Risk Weather Pests Disease 0 Capital Factors Money 0 Large capital requirements 0 Narrow profit margins 0 High degree of quotAsset Specificityquot I High investment in something that does a specific job 0 Technological Factors 0 Substitution of machinery 0 New technologies in farming 0 Seasonal Factors 0 Seasonality of Supply 0 Seasonality of Demand 0 People Factors 0 Food is Special Emotional Cultural Religious and Health I Religious Holiday I Comfort Food I Demands high level of safety in food Farms are special 0 Culturally 0 Esthetically Exam 1 Page 4 0 Environmentally 0 2022 crops 0 2528 grassland pasture rangelands Agricultural Production Technology Impact Impacts of Increased Productivity and Technological Advances 0 Changes in Farm Structure 0 Increased Specialization 0 Increased Globalization 0 Tighter Coordination 0 Increased Concentration Farmers account for less than 2 of the populations Approximately 2 million farms in the U S A farm is defined by sales of 1000 or more in agricultural products crops and livestock 9798 of US farms are owned and operated by a family member Only about 2 of all farms are nonfamily farms Corporate farming is a LLC Nonfamily farm A farm not owned by a family majority share Small Scale Farms Sales less than 250000 0 90 of farms 0 23 of all farm assets 0 16 of agricultural output Large Scale Farms Sales more than 250000 0 12 of farms 0 80 of farm production E O Specialization not diversity Export Destinations 0 China 0 Canada 0 Mexico 0 Japan Import Destinations 0 Canada 0 Mexico 0 EU 28 0 China Geographic Concentration Production and allied industries locating in close proximity to one another Market Concentration Smaller number of firms or players in the industry Market Power Ability to in uence price CR4 is a red ag but not a smoking gun CR4 Total moneyapprox sales x 100 Exam 1 Page 5 ABM 100 Chapter 5 Book Notes Introduction to Market Price Determination 7 pg 73 88 Market pg 73 0 An interaction between potential buyers and potential sellers Marketplace 0 A physical facility where buyers and sellers can come together Perfect Competition 0 A market in which there are so many buyers and so many sellers that no one of them can in uence the market by his or her actions Price Takers pg 74 0 Potential buyers and potential sellers in a perfectly competitive market who face a take it or leave i situation at the prevailing market price Only decision that the buyer or seller makes is whether or not to trade at given price of the market Demand pg 75 o The quantities of a good that buyers are willing to purchase at a series of alternative prices in a given market during a given period of time ceteris paribus The most important part of this definition is that demand is a relationship between quantities and prices different prices different quantities will be demanded Demand is a series of these possible pricequantity combinations Demand refers to the desires or intentions of buyers rather than their actual purchases Demand shows how much buyers are willing to purchase at various prices ceteris paribus whether or not those prices are actually observed in the market The impact of time and place dimensions in the definitions of demand is of obvious importance 0 Demand is a 2dimensional concept 7 price amp quantity The relationship between these two dimensions is demand 0 Quantity Demanded pg 76 ldimensinal concept which refers to how much of a good or service a buyer is willing to purchase at a single specified price in a given market at a given time ceteris paribus 0 Demand Schedule A schedule identifying speci c pricequantity combinations that exist in a demand relationship 0 As ground beef gets more expensive ceteris paribus consumers will react by either switching from ground beef to some other meat or giving up meat altogether for one or two meals per week I Notice that for a change in price the quantity demanded changes but the demand relationship remains unchanged Demand refers to the price 7 quantity relationship illustrated in the demand schedule A change in price causes a jump to a different point on the schedule but it does not change the schedule itself I So a change in price does not cause a change in demand but it does cause a change in the quantity demanded I Demand is a relationship but not a point on that relationship I Quantity Demanded is not a relationship but a point on that relationship 0 The ceteris paribus assumption that everything else other than the price and the quantity demanded of ground beef remains constant Demand Curve 0 A 2Dimensional graph illustrating a demand relationship Once a dot is entered for each pricequantity demanded combination shown on the demand schedule The dots can be connected by a smooth line to produce a demand curve The advantage of a demand cure is that it provides a visual presentation of the demand relationship and it allows for easy interpolation of prices between those listed in a demand schedule Supply pg 77 o The quantities of a good that sellers are willing to offer at a series of alternative prices in a given market during a given period of time ceteris paribus I Notice that this relationship is identical to that of demand except that supply is a relationship between the prices and quantities that sellers are willing to offer 0 Supply describes a relationship not a quantity Quantity Supplied o How much of a good or service a seller is willing to offer at a single specified price in a given market at a given time ceteris paribus Supply Schedule 0 A schedule identifying specific pricequantity combinations that exist in a supply a relationship Supply Curve 0 A 2Dimensional graph illustrating a supply relationship As we would expect when the price of ground beef increases sellers willingly offer greater quantities for sale This direct relationship between prices and quantities supplied is expected for several of the following reasons If prices are relatively low some suppliers might be induced to sell their ground beef in another market and then as the price of ground beef falls ceteris paribus the quantity of ground beef that will be offered will also decline 0 Suppliers will react to relatively low prices by building up their inventories of ground beef thus 7reducing the quantity supplied at the low prices I Conversely if suppliers feel the price of ground beef is relatively high they will draw down inventories causing the quantity supplied to increase 0 Both the time and space dimensions are an important part of the concept of supply 0 The upward slope of the supply curve shows a positive relationship between prices and the quantity supplied Movement along a supply curve causes a change in the quantity supplied but it does not change the supply relationship Movement along a demand curve causes a change in the quantity demanded but it does change the demand relationship Price Determination pg 79 o The interaction of demand and supply is fundamental to the process of price determination and market cleaning So long as a perfectly competitive market is allowed to operate with no external controls and no regulations on trading the market price will adjust so as to clear the market of goods by equating the quantity demanded with the quantity supplied Equilibrium Price 0 The price at which the quantity supplied in a market is equal to the quantity demanded 0 aka 7 market clearing price I The market is cleared by the quantity willingly demanded is equal to the quantity willingly supplied 0 For free and competitive markets the market price will always move toward the equilibrium price until a stable equilibrium that just clears the market is attained pg 80 7 The basic principle in a free market is the existence of a surplus which creates a downward pressure on market price Therefore if for some reason the market price is above the equilibrium or market clearing level there are automatic forces that will tend to push the market price lower 0 The same sort of automatic adjustment mechanism takes place if the market price should wander below the equilibrium price level In this case a shortage will develop and consumer each acting in his or her own selfinterest will bid against one another for the limited quantity available 0 ie 7 Butchers will be encouraged to raise prices as signs of shortages 7 such as declining inventories customer lines and panic buying 7 appear The quantity being taken off the market quantity demanded is greater than the quantity coming onto the market quantity supplied So at that price inventories are being depleted 0 As sellers see their inventories being drawn down it only natural that they would increase the price because they perceive that the market could bear a higher price A pressure for price to move back toward an equilibrium is thus ensured I The important point here is that large numbers of buyers and sellers each acting out of selfinterest will automatically drive prices to their equilibrium levels I Price determination in a price allocation system is an automatic self correcting process Changes is Supply amp Demand pg 81 0 When the market price is pushed to the level of a new equilibrium price a stable equilibrium will again prevail until such time as some force external to the market again causes a change in the equilibrium price Demand Supply Shift 0 A change in the demand supply relationship caused by a change in one of the ceteris paribus conditions I There will be an initial disequilibrium because the new equilibrium price will be either higher or lower than the previous market price This initial disequilibrium will result in a surplus or shortage that will generate pressures on the market price to move to a new level where a stable equilibrium can again be attained The existence of a surplus will automatically force retail outlets to lower the prices until a new equilibrium price is found So we see that the nal effect of decline in the price of chicken on the ground beef market is to cause the equilibrium price and the quantity traded of the product to decline as a result of a shift in the demand relationships of that product ie The product X market was in equilibrium a price of 215 then a change in one of the ceteris paribus conditions caused a shift of the entire product demand curve This in turn caused the equilibrium price of the product X to decline to a new equilibrium level 190 It is important to realize that the decline in the price of Product X is the result of a change in the ceteris paribus conditions This is an illustration of the simple principle of economics that market prices are the result of the interaction of supply and demand rather than the cause of supply and demand It is supply and demand that determine price An equilibrium price will not change unless there is a shift in either the supply or demand for the ABM 100 Chapter 4 Book Notes Agricultural Production amp Marketing 7 pg 53 73 pg 53 7 Market first then produce the product 0 This is a very important concept in today s business environment and many farmers neglect to market before they begin to produce a product The Agricultural Plant 7 pg 55 0 Uses of Land in the United States I N 46 9 Used to produce food amp ber 0 N 20 9 Crops o N 26 9 Grassland Pasture Range I N 28 9 Forests I N 26 9 Recreation Urban Roads Swamp Desert 0 Technology not land is the reason for US agriculture s productive success I The output per unit of input of US farms increase 23 per year during the 19802000 period as a result of new farming technologies better educated farmers and the substitution of machinery chemicals and other inputs for labor on the farm 0 1 farmer could feed more than 100 people in 1990 compared to I 1 farmer could feed 5 consumers in 1900 and 26 consumers in 1960 o In 1997 9 2 of all farms produced 50 of the value of all agricultural products I Compared to the 17 of farms producing 50 of farm product sales in 1900 I Many of the newer improvements in technology are yieldenhancing 0 Great improvements have been made in seed variety livestock nutrition fertilization and a multitude of other areas making agriculture more productive o It requires that more and more inputs be purchased from offfarm suppliers The Structure of U S Agriculture 7 pg 5 7 60 0 The dominant characteristic of American agriculture is the prevalence of large numbers of relatively small owneroperated farms I These small production units buy and sell in a world of large organizations Because of their size numbers and competitive positions farmers have limited in uence in the marketplace and generally make fewer marketing decisions than others in the system 0 There was an estimated 72 million US Farms in 1997 I Compared to 68 million in 1935 0 There is a tendency for a growing share of our agricultural output to come from a declining number of very large farms I In 1999 7 farms with annual sales below 50000 accounted for N 74 of all farms but only 7 of total farm sales I In contrast the N 4 offaims with sales exceeding 500000 were responsible for N 57 of all farm sales 0 Thus there are really 2 different farm sectors today I 1 Very large commercial faims 0 Few in but account for most of the total farm output I 2 Very small farms 0 Very large s but account for a very small portion of total farm supplies or sales Ownership and operation are not always the same in US Agriculture I There are 3 forms of business organizations 0 1 Individual Proprietorships o 2 Partnerships o 3 Corporations I The individual proprietorship is by far the most common in US Agriculture 0 These farms are typically smaller than partnership and corporations farms but nevertheless they dominate farming in most parts of the country I Family Farm 0 De ned as a production unit in which family members provide most of the labor management and nances Publicly held farm corporations represented less than 1 of US farms and acreage in 1997 but because of their larger size accounted for N 6 of total farm sales I These corporate farms are concentrated in California Florida and Texas and are frequently engaged in cattle feeding fruit vegetable and sugar cane production forestry and the growing of nursery and greenhouse plants I Less than 1 of US Land is owned by foreign individuals Farmers are increasingly specialized today Specialization I Involves restricting the scope of economic activity and concentrating on doing a few tasks well I Farmers may specialize by commodity by personnel or by the number of processes performed Marketing Considerations I 1 Much of our production is made available to the food marketing system in relatively small lots from a large number of specialized farms 0 A food marketing rm must often assemble supplies from a great many individual sellers scattered over arelatively large area The marketing system must serve a wide variety of farmers and their differing needs I The relatively small volumes marketed by a single farmer may also encourage group marketing efforts of farmers such as marketing cooperatives I 2 The Fa1mer is by nature and probably by necessity a person primarily interested in production often with less time and interest in marketing 0 As marketers they either sell very small amounts at a time or very few times a year This often means that farmers are less informed and skilled in marketing than in food production naturally 3 Changes are taking place and Larger more specialized farm units are developing and in some areas and products they are developing very rapidly 0 Accordingly the interest of the farmer in marketing is increasing 0 In addition the assembly and buying methods of marketing firms are changing I ie 7 a processor may find it feasible to buy more supplies directly from large specialized producers instead of utilizing the services of country buyers who specialize in assembly of products from many small producers I 4 The food marketing system must serve 2 very different agricultural groups 0 A few large farm owners who sell the majority of fa1m products and a large number of small farmers who have much less to sell I Many feel that the marketing system serves the larger farms better than the smaller farms Characteristics of the Product pg 60 62 Raw Material The output of agriculture is largely a raw material used for further processing The marketing system completes the production process begun on the farm and provides much of the final food value that consumer s desire There are increasing opportunities for fa1mers to add more value to their products I This can be done by altering the production process to differentiate the product as when farmers engage in lowinput organic natural conservation sustainable or animalfriendly agriculture I Producers can also sometimes receive price premiums for specialty products such as highoil or white corn or breeds of animals in high demand Here the rule holds however producers can eliminate the middlemen only by assuming their functions and costs Bulky amp Perishable Products Compared to most other products agricultural product are both bulkier and more perishable Bulk I Affects the marketing functions concerned with physical handling I Products that occupy a lot of space in relation to their value are expensive to transport and store Perishability I In uences the marketing of farm and food products because all biological products ultimately deteriorate Bulkiness requires large storage capacities Perishable products require speedy handling and perhaps special refrigeration Quality control often becomes a real and costly problem When products are ready they must move to the market they cannot be stored Quality Variation The quality of agricultural commodities varies from year to year and from season to season Farmers and food marketing firms rely on standardization and grading to sort out and price farm products of differing qualities Variations in quality may also change the marketing patterns necessary for sale Increasingly the quantity of farm products may be controlled by following certain production practices I Some control over quality is possible through the control of the breeds and kinds of parent stock used Crop spraying and other production practices can be used to affect quality As such developments are perfected the marketing system may have to contend with less variation in the quality of agricultural products Genetically Modified Organisms GMOs have the potential to lower costs of production increase yields and change the characteristics of farm products to better meet the needs of processors and consumers Some governments have denied imports of GMOs required segregation of these products from others or mandated labeling of foods containing GMOs I As a result separate marketing systems are developing for nonGMO and GMO food products I This has increased the costs of marketing these products and created a 2 tiered pricing system with premium prices for nonbiotech products This means that overall buyers have little reason to prefer one farmer s product over another Characteristics of Production pg 62 65 The longterm trend in Us production is upward In the developed world food output has generally grown more rapidly than the population resulting in increased per capita food supplies and a higher standard of living Annual Variability in Production Aggregate farm output varies from year to year These variations are caused by farmer responses to prices government programs and uncontrollable factors such as weather and disease The annual output variability of individual farm commodities is even greater than that of total farm output Seasonable Variability in Production Much of agricultural production is highly seasonal Some farm products are produced more or less continuously yearround Their marketing differs accordingly to the production of each product or commodity Some progress has been made towards reducing the seasonal variability of production for some commodities I Larger more specialized fa1ms often plan for evenly distributed production to fully utilize labor and facilities I New developments in management breeding and nutrition are making more uniform levels of production possible for the market The United States has a wide range of climatic conditions I By employing improved transportation methods different geographic areas can be used to extend the season of availability for many commodities Geographic Concentration of Production Although a variety of farm products is produced in all states there is increasing geographic specialization of farm production Each region tends to in the r J quot of J quotiv for which its resource base is best suited I California Texas Florida 9 Fruits amp Vegetables I Great Plains 9 Wheat I Southeast 9 Poultry amp Eggs I Combelt 9 Grains amp Livestock r o This specialization has lengthened the food marketing channel and increased the importance of the transportation marketing function Varying Costs of Production 0 Farmers costs of production are affected by climate technology farm size and individual managerial skills 0 Further studies have suggested that most production efficiencies can be attained at relatively modest farm sizes except for such commodities as poultry cattle feeding and lettuce production The Farm Supply Industry 7 pg 65 0 Farmers are both buyers and sellers They participate in procurement as well as product markets 0 Feed Livestock and seed of course are purchased from other farmers but more than 12 of farm cash receipts are now spent on farm supplies purchased from the nonfarm sector I With increased farm size and enterprise specialization farmers are purchasing more of their supplies from offfarm sources 0 This means that increasingly farmers costs and profits are being determined by forces outside the farm economy 0 Farm income can be increased by skillful buying of supplies just as by skillful sale of farm commodities I The farm capital or money markets in turn have financed mechanization modernization and expansion of farming The Farm Marketing Problems pg 66 68 0 The farm problem is usually associate with unstable and relatively low farm prices and incomes o The following are some of the farm marketing problems today I Farmers do not have control over the output of their production activities to the same degree as nonfarm firms 0 Agricultural output comes from many different small units operated independently Aside from such shortrun adjustment problems it takes long periods to change the production of some commodities 0 Fruit trees are planted years in advance to their coming into production 0 The market situation may change during this time period This inability to adjust quickly to changing conditions creates a highrisk element in agriculture Changes in consumer tastes may find agricultural resources being devoted to the production of something that is no longer so greatly desired This relative unpredictability and uncontrollability of output creates many farm marketing problems Farmers are adopting new risk management strategies to cope with their increasing volatile markets such as diversi cation futures market hedging and contracting A related component of the farm marketing problem is the difficulty farmers face in improving their prices through independent or group activities Farmers are for the most part pricetakers ithey cannot individually in uence the price of their products through their output decisions 0 In order to raise prices through the control of supplies or advertising programs farmers must act as a group 0 However the large number of farmers and their differing economic circumstances frequently frustrate any attempts to organize and market jointly The freerider problem often plagues farmers when they do attempt to organize to in uence farm prices 0 Freeriders hamper any group effort that requires each member to sacrifice for the overall welfare of the group Many of these con icts exist in agriculture where what is in the best interests of a single farmer may differ from the interests of farmers as a group The CostPrice Squeeze o Is another component of the farm marketing problem where the competitive conditions of agriculture tend to keep farm prices close to the costs of production 0 The increased dependence of farmers on offfarm produced supplies leaves farmers little leeway in adjusting to falling farm prices To many the superior bargaining power of the buyers or farm products as compared with that of farmers is the most serious farm marketing problem Food marketing fums are usually larger and because of their national and intemational activities normally have better market information than the farmers from whom they buy the products or commodities from Changing food market pricing ef ciency is still another element of the farm marketing problem 0 Perhaps at one time farmers did not need to be concerned with food marketing because competitive conditions assured all farmers a fair 7 or at least equal price Exam 1 Notes Wednesday February 25 2015 713 PM Overview of Food Systems Producers Firms who produce raw food and agricultural products Assemblers Firms who buy raw commodities from producers in order to sell to others Store amp Transport Don39t Change It Initial Processors Process the raw commodities into food ingredients A o l wmjl Nil 5 mm Ml L5 MM Mul Food Manufactuer Buys the food ingredients and turns them into final product 0 Marketers 1s too general a term Wholesalers Firms who buy final products in order to sell to others not directly to consumer HRI Industry Hotel Restaurants and Institutions Grocery Wholesalers Primary customers are food retailers is o l 39 Firms where consumers buy food 0 Retail Food Stores 0 Food Service Retailers 0 Specialty Retailers Consumers spend nearly 16 trillion on food and alcohol Consumers spend about 12 of food cost on food away from home Consumers waste about 13 of food Examples 0 Ag Input Supplier 0 Feed Kent Feeds 0 Fertilizer ADM 0 Equipment John Deer 0 Financial Greenstone Farm Credit 0 Producer 0 Ranchers amp Farmers 0 Nursery amp Greenhouse Owners 0 Assembler 0 Initial Processors 0 ADM O Cargill 0 Food Manufacturer 0 Campbell s O Kraft Exam 1 Page 1 S s HRI s O Sysco 0 US Foods 0 Gordon Food Service GFS 0 Grocery Wholesalers O SpartanNash O Supervalu 0 Retailers 0 WalMart l O Kroger 2 O Costco 3 0 Target 4 O Meijer 5 Intro to Food Marketing amp Value Added Marketing is a value adding process Each level is an economic stage and involves a valueadding process Time Value created by storage Place Value created by transport from A to B quot Form Value created by change in physical form 3 Possession Value created by exchange between buyers amp sellers Storage 0 Assembler 0 Wholesaler 0 Producers Transportation 0 Assembler 0 Wholesaler Form 0 Manufacturer 0 Processor 0 Producer 0 Food Retailer Possession ALL PLAYERS Value Added Measured Economic Research Service ERS tracks the cost of getting food from farm to table ERS collects data from grocery stores and eating establishments to build data series takes 2 years Food Bill Value of total food and alcohol expenditures in a year 3 0 Mn l illt ll l l M 0 With alcohol 5100 Exam 1 Page 2 0 Without alcohol 4500 Food Dollar Total annual market value for all purchases of domestically produced foods 0 No alcohol or imports Farm Share Value added by the Ag Input Supplier and Farmer 0 Typically about 55W of the total Food Bill Effects on Farm Share 0 Degree of Processing 0 Differing Seasonality in Production and Consumption 0 Transportation Cost Does the Food Bill and Food Marketing Bill have to increase or decrease together Since the FIVTB takes up about 55 of the FB they will increase and decrease together Which is likely to have a higher farm share milk or ice cream Milk will have a higher farm share because it will be processed less beyond the farm than the ice cream Consumption Trends What share of income do US consumers spend on their food 0 1950 206 o 1975 138 o 2000 99 o 2013 98 0 1 1 31 1 39lmzm39ln 311 331 ELK 1 1 3 TV Lower income consumers spend a higher share of income on food US spends the lowest amount of income on food Spent on food and alcohol 0 925 billion in 2000 0 13 trillion in 2007 0 16 trillion in 2013 0 Trend Rising expenditures Why have food expenditures been rising 0 Population Increase in food needed because of increase in population 0 Price Higher food cost labor and energy 0 Preference Change in food taste 0 7 J wail Lute m 7 u 1111 Biggest driver of consumer food expenditures is energy cost fuel oil and labor cost wages 12 food expenditures occurs quotaway from homequot 13 food quantity is consumed quotaway from homequot Exam 1 Page 3 What else is shaping food expenditures 0 More mature consumers 0 Consumers under the age of 18 will decrease 0 Rising incomes 0 Increased emphasis on quality convenience organics environmental functional 0 More diversity Functional Foods Foods which are believed to provide a medical benefits beyond traditional nutritional benefits 0 Vitamin D amp Iodized Salt 0 Cherry Juice amp Soy Milk Consumer is the driving force in the agricultural food system Consumers effective demand in uences all players in the agricultural food system Understanding and predicting consumer trends is critical for decision making in the agricultural food system Agricultural Food System Unigue 0 Geographical Factors 0 Everything can t be grown everywhere 0 Biological Factors 0 Production lags length of time from the decision to produce occurs until the production reaches the market 0 Short Chickens 57 weeks 0 Long Fruit 57 years 0 Risk Weather Pests Disease 0 Capital Factors Money 0 Large capital requirements 0 Narrow profit margins 0 High degree of quotAsset Specificityquot I High investment in something that does a specific job 0 Technological Factors 0 Substitution of machinery 0 New technologies in farming 0 Seasonal Factors 0 Seasonality of Supply 0 Seasonality of Demand 0 People Factors 0 Food is Special Emotional Cultural Religious and Health I Religious Holiday I Comfort Food I Demands high level of safety in food Farms are special 0 Culturally 0 Esthetically Exam 1 Page 4 0 Environmentally 0 2022 crops 0 2528 grassland pasture rangelands Agricultural Production Technology Impact Impacts of Increased Productivity and Technological Advances 0 Changes in Farm Structure 0 Increased Specialization 0 Increased Globalization 0 Tighter Coordination 0 Increased Concentration Farmers account for less than 2 of the populations Approximately 2 million farms in the U S A farm is defined by sales of 1000 or more in agricultural products crops and livestock 9798 of US farms are owned and operated by a family member Only about 2 of all farms are nonfamily farms Corporate farming is a LLC Nonfamily farm A farm not owned by a family majority share Small Scale Farms Sales less than 250000 0 90 of farms 0 23 of all farm assets 0 16 of agricultural output Large Scale Farms Sales more than 250000 0 12 of farms 0 80 of farm production E O Specialization not diversity Export Destinations 0 China 0 Canada 0 Mexico 0 Japan Import Destinations 0 Canada 0 Mexico 0 EU 28 0 China Geographic Concentration Production and allied industries locating in close proximity to one another Market Concentration Smaller number of firms or players in the industry Market Power Ability to in uence price CR4 is a red ag but not a smoking gun CR4 Total moneyapprox sales x 100 Exam 1 Page 5 ABM 100 Chapter 2 Food Marketing From Stable to Table 717g 1 I 3 5 pg 11 300000 retail food stores and 600000 eating and drinking establishments around the nation A typical large modern supermarket has about 40000 UPCs universal product codes or bar codes on its shelf This marvelous system that ties the consumer and the farmer together is usually referred to as the food marketing system and the study of that system is called food marketing Food Marketing 0 All of the activities and services that occur between the producersproviders of the food and foodstuffs and the consumer Food marketing creates utility for the consumer Farm Service Marketing 7 pg 12 o All of the activities and services that are brought to the farmer rancher or producer in the form of purchased inputs I Nowhere near as large in terms of dollar volume as the food marketing system but the farm service marketing system is equally critical in achieving the ultimate goal of getting food to the consumer Agribusiness 0 Firms engaged in farm service marketing agricultural production food processing food distribution and consumption Food marketing firms buy inputs at one price enhance those inputs in one manner or another which adds utility to the inputs and then sell the output at a higher price re ecting the additional utility So in a very real sense food marketing is about creating or producing utility Food Marketing produces utility 7 utility for which the ultimate consumer is willing to pay 0 4 utilities produced by Food Marketing I lTime I 2 Place I 3 Form I 4 Possession Time Utility 0 Utility created by storage activities I ie the agribusiness firm that stored wheat or our for later use created a time utility allowing production and consumption to occur at different points of time Place Utility 0 Utility created by the transportation function I ie moving the product to the consumer creates place utility and adds to the value of the good as perceived by the consumer Form Utility ipg 13 0 Utility created by the processing function changing the physical form of product I ie they change the form of the product into something that the consumer wants In doing so they add utility to the product 7 additional utility that the consumer is willing to pay for Possession Utility 0 Utility created through exchange in the marketing system value created by facilitating exchange between buyers and sellers I ie the possession of the bun on the shelf belongs to the Burger Barn and the consumer can t eat it When the marketing system changes the possession of that bun to our consumer the consumer s utility immediately increases It was the expected increase of possession utility that encouraged her to exchange some green slips of paper for the right to claim possession ofthe bun Why do Food Marketing Firms Produce Utility 0 Utility is produced in the search for profits in the creation or production of time place form and possession utilities is a continuous dynamic process that is part of what makes food marketing such an exciting area 0 The dynamic price system and the profit motive are like a giant integrated information system that continually sends out signals about what is needed where and in what form by whom I That is information about the demand for time place form and possession utilities is conveyed by the dynamic price system Choices 0 The food marketing system amp competition within that system create choices for the consumer Choice is one of the foundations of economics without choice there is no need to allocate those scarce resources Having choices allows consumers to express their preferences in the marketplace 7 maximizing utility from a given budget or minimizing the cost of obtaining a given level of utility The food marketing firm that can give the potential consumer what he wants form when he wants it time where he wants it place and at the lowest price possession is the firm that will make the sale and prosper Approaches to the Study of Food Marketing 7 pg 14 Functional Approach 0 The study of marketing systems emphasizing how each particular activity like transportation is accomplished I Complexity of the system is divided into speci c tasks that must be performed and each task is studied independently transportation and storage are two of the most important functions to be analyzed Institutional Approach 0 Study of marketing systems emphasizing the role of different participants such as commodity brokers in the marketing chain and their relationships to each other as well as the role of governmental and regulatory agencies Market Level Approach 0 Study of marketing systems that views the systems as a series of stages or levels through which the food passes Marketing may be thought of as a chain in which food passes from link to link The market level approach emphasized the study of each link independent of the other links I The analysis looks at the different stages as steps in the process and evaluates the contributions to the creation of utility at each of these steps Commodity Approach 0 The study of all aspects of the marketing system for a single commodity I The entire marketing chain of a single product is examined functional and institutional aspects are studied in an integrated fashion I One of the most studied commodities is dairy Food Bill pg 15 0 Value of total expenditures on food in any given year I Includes domestic amp imported food I Includes alcohol 0 N 925 billion in 2000 o N 106 trillion in 2003 0 N 133 trillion in 2008 0 Trend increasing Consumers spend N 925 billion on food in 2000 food bill work out to almost 3280 per person in the United States 0 About 11 of total food expenditures are for alcoholic beverages 0 With the elimination of alcoholic beverages total 2000 food expenditures in the United States amounted to N 822 billion or about 2913 per person I This represented only N102 of disposable after tax personal income I In 1984 this stood at 134 of I The cost of health care has now increased and exceeded the share for food Away From Home 0 Expenditures on food that is not prepared at an individuals residence I N 47 of our total food expenditures are for food consumed away from home Of all meals eaten away from home approximately 1 in 6 is eaten in a car or other vehicle Trend steady increase in the of food expenditures eaten away from home Since 1960 the of away from home has increase by 7 78 points each decade Food Marketing Bill 7 pg 16 That portion of the food bill that is created by the marketing system Food Marketing Bill Food Bill Farm Value Consumer Expenditures on domestic food minus Farm Value of food The total expenditures going to food marketing rms to pay for all marketing activities past the domestic farm gate Step 1 Step 2 Step 3 FMB 540 billion in year 2000 Trend Increasing Finding the Food Market Bill FMB from the Food Bill FB Subtract Alcohol from the Food Bill to nd what consumers are really spending on food Without alcohol the valueadded drops from 925 billion to 822 billion 2000 About 10 of disposable income spent on alcohol 1034 billion 7 Alcoholic Beverages 3854 billion 7 Food Away From Home 4365 billion 7 Food At Home refer to pie chart for visual representation Next subtract Imported Food and Non F arm Food to nd what consumers are really spending on Domestic Food Without imports and nonfarm food the value drops to 660 billion l608 billion imported and nonfarm value 2000 66ll billion domestic farm foods Next subtract Farm Value to nd what consumers are really spending on valueadded past the farmgate Without farm value the value drops to 540 billion 7 a bit more than half of the value of the bigger Food Bill 1233 billion 7 Domestic Farm Value 5378 billion 7 Food Marketing Bill These values are reversed in the book7 heads up Components of the Food Marketing Bill 2000 N pg 18 0 Labor 2529 billion I Labor category includes everything from the driver of the truck to the butcher to the cashier at the supermarket Each of these people enhances the utilityvalue of what you buy and you the consumer ultimately pay for that additional utilityvalue 0 Packaging 535 billion 0 Transportation 264 billion 0 Energy 231 billion 0 Pro ts before taxes 311 billion 0 Other 1508 billion I Other category includes expenses such as advertising depreciation interest rent repairs and taxes No one of these items exceeds 30 billion 2 largest components of the FMB are 0 1 Labor N 50 o 2 Packaging N 10 We have seen that the Food Marketing Bill for domestic farm food is 81 of the total retail price and that the Farm Share is 19 0 Over time the marketing bill has grown much faster than the farm share I This re ects an increasing demand for convenience foods further processed foods and food away from home 8020 Ratio 0 How each dollar spent is distributed 0 Food Marketing Firms 80 0 Farm Share Farm Value 20 I Ofthis 20 Farm share 0 12 goes to the input supplier for inputs purchased by farmers o 8 is the valueadded by the farmer N this 8 is the farmer s share Farm Share Npg 18 0 Value of farm production as a percentage of the retail price of food N 1920 I Over time the marketing bill has grown much faster than the farm share This re ects an increasing demand for convenience foods further processed foods and food away from home Examples of Farm Share 0 Beef and eggs have the highest farm share amp lowest marketing bill That is the utility added to the farm product is quite low for beef and eggs I The time value added is minimal and consumers cause a high rate of turnover with these products There is also very little place value added in the egg and beef business as well as normally a low transportation cost for these products I The form value is also minimal as all that is required is a cleansing and packaging o the eggs before the consumer receives the nal product The possession value is also very low because the supermarket buys eggs directly from the farmer and the consumer buys them from the supermarket so there are only 2 changes of possession 0 Normally a product will go through 57 changes of possession before the consumer owns the product Food Market Levels 7 pg 21 o The study of food market levels examines the different middlemen that a typical product will move through to get to the consumer The first postharvest activity is Assembly 0 The collection of small amounts of product from many farmers to create a large enough amount of product for efficient shipment 0 Grain Elevator I A grain storage facility that buys grain from farmers by the truckload and sells it to processors by the railcar load 0 Another example is in the marketing of fresh vegetables I The first market level for most fresh vegetables is the local broker Local brokers buy numerous small shipments from local fa1mers combine them into truckload lots and arrange for shipping So the local broker buys by the box and sells by the truckload Commodity Processors 0 Firms that buy raw agricultural commodities such as corn and soy beans and wheat and process them into ingredients for food products I ie 7 Archer Daniels Midland ADM Cargill CPC Intemational or ConAgra 0 These are companies that buy wheat by the trainload and produce our for sale to the bakeries and these are the companies that buy corn by the trainload to make high fructose corn sweetener that is sold to soft drink bottlers by the tanker carload Food Processors 7 pg 22 0 Manufacturers of final food products I Heinz Kellogg s Quaker Oats 0 These companies buy both raw agricultural products from assemblers and r J 39 J39 Jquot r and convert them into finished food products ready for the shelf from Distributors o Wholesalers and other firms who buy large lots of food from processors and distribute it to many retailers in smaller lots The importance of food wholesalers is diminishing Today most wholesalers serve independent supermarkets and small chains of convenience stores Most supermarket chains do their own wholesaling which is one reason the large chains can usually underprice the independents their being one fewer possession change 0 In some cases for example with food which has a short shelf life the processor is also the distributor Retailers 0 Supermarket and other vendors from whom the public consumer buys food I The last level in the food chain which is a ercely competitive business in which stores attempt to attract customers on the basis of convenience and price I Look over trends in retail ipg 22 23 Veltical Integration 7 pg 23 o The combination of different businesses at different stages of the production marketing sequence under a single management I The coordination of between the levels is accomplished by management directive rather than through market sending price signals In a more typical situation the dairy farmer sells raw milk to a processor Then the processor sells milk to the convenience store By vertically integrating The Milk Store is able to eliminate these 2 changes of possession and the costs associated with those exchanges Industrialization o The use of modern industrial concepts of production routinization procurement through strategic alliances coordination and contracting in the food marketing system Facilitating Functions 7 pg 24 Grades amp Standards 0 The sorting of diverse products into uniform groups based on attributes such as quality and size 0 Markets operate more efficiently if buyers and sellers can agree on a price without a physical examination of the product Financing 0 The creation of Time Value implies storage costs but is also implies a financial cost for the time value of money for whoever has ownership of the commodity while it is in storage I So financing the ownership of a commodity during the marketing period of that commodity becomes a part of the marketing cost that the consumer must eventually pay Risk Bearing 0 During the marketing process there are 2 significant risks that the owner of the commodity product faces I 1 Physical Risk 0 The risk that a product in the marketing system will be accidentally destroyed I 2 Price Risk 0 The risk that while a product is moving through the marketing chain its market value may change Market Information 0 For markets to work efficiently and effectively both the buyers and sellers need full information about prevailing prices and quantities of goods that are moving at those prices Most market information in the food marketing system is created by the federal government and reported over information services of private providers Marketing Margin 7 pg 25 o The difference between the prices of a product at any two points in the marketing chain 0 The marketing margin is equal to the marketing costs between those two points The law of demand stipulates that as the price of the good goes up ceteris paribus the quantity demanded will in turn go down Derived Farm Level Demand 7 pg 26 o The primary retail level demand minus the marketing margin Market demand is expressed at the retail level where consumers make their purchases For this reason retail level market demand is called primary demand For any given Quantity demanded Q the retail price minus the marketing margin will give the farm level price which is the point on the derived farm level demand curve We assume that the marketing margin is constant for all output levels then the farm level demand is parallel to the retail level demand but shifted down by the amount of the marketing margin Shifts in the primary demand ceteris paribus will result in shifts in the derived farm level demand Changes in the marketing margin will shift the derived farm level demand but not change the primary retail demand Derived Retail Level Supply 0 The primary farm level supply plus the marketing margin The primary supply originates at the level of the producer or farmer based on the costs of production From this primary supply the marketing margin is added on to obtain the derived retail level supply For any given Quantity demanded Q the farm level price is determined from the primary supply curve and the retail level price is equal to the farm level price plus the marketing margin Marketing Ef ciency 7 pg 29 o A measure of the costs of performing marketing tasks The lower the costs ceteris paribus the greater the efficiency 0 ie 7 The development of the grain elevator eliminated the need for expensive sacks and eliminated the backbreaking labor of offloading and reloading individual sacks This greatly reduced the marketing costs associated with grain handling Elasticities by Market Level 7 pg 30 o In any given market for any given commodity the elasticities of supply and demand will always be more inelastic at the farm level than at the retail level Because the marketing margin drives a price wedge between retail prices and farm prices we nd that the elasticity of demand and supply at the retail level is different from the farm level I Small price adjustments at the retail level produce much larger price adjustments at the farm level I i e 7 small price variations the retail level become very substantial price variations at the farm level The same is also true for the elasticity of supply it is more inelastic at the farm level than at the retail level The combination of relatively inelastic supply and demand at the farm level compared with the retail level ensures the kind of price variability Food Marketing Regulations 7 pg 32 33 0 The Jungle In 1906 led Congress to pass the Meat Inspection Act and the Pure Food and Drug Act I Together these acts gave the Us Department of Agriculture the responsibility for ensuring food safety In 1962 7 Rachel Carson s Silent Spring 7 argued that as a result of the increasing use of insecticides primarily DDT we were slowly poisoning our ecosystem and as the poisoning moved up the food chain we were slowly poisoning ourselves she later died in 1964 due to cancer I As a result of the issues raised in Silent Spring Congress created the Environmental Protection Agency EPA and passed the Federal Insecticide Fungicide and Rodenticide Act FIFRA in 1972 o FIFRA gave the EPA the power to regulate the chemicals that farmers use on their crops based on the toxicity of those chemicals The most recent manifestation of federal regulation of chemical use in food crops is the 1996 Food Quality Protection Act FQPA ABM 100 Chapter 3 Book Notes Food Consumption amp Marketing 7 pg 3 7 52 pg 3 7 7 These food consumption patterns are in uenced by physiological needs social conditions and economic factors Food Preferences 7 pg 38 39 0 Each society develops common patterns of dealing with food which we refer to as foodways These foodways govern how food is acquired prepared and eaten o Foodways I Complex behavioral patterns that from the standpoint of food marketing have four important characteristics I 1 No 2 societies have identical foodways I 2 Standardized foodways result in somewhat similar and stable food preferences and eating patterns within a society I 3 Foodways defining how to eat add social significance to the diet and are taught to each succeeding generation I 4 Foodways adapt to socioeconomic changes such as urbanization education income technology and changing lifestyles 0 American Foodways are the result of 5 in uences I l The functional physiological values of foods their nutritional contributions to health and survival I 2 The sociopsychological values of foods status religion aesthetics and lifestyle I 3 Economic values of foods I 4 The availability of foods I 5 The consumer knowledge and information about foods 0 In highincome af uent urbanized societies food consumers purchase much more than physical farm products Modern consumers don t want only farm products they want food and increasingly they don t want just food they want a meal I The modern consumer purchases a whole bundle of attributes which includes along with farm products time form space and possession utilities I Even the store where the food is purchased and the setting in which it is served contribute to consumer s satisfaction and must be considered part of the product bundle I The task of food marketing firms is to discover the product bundle of attributes that will appeal profitably to consumers This search results in large expenditures for product innovation and design packaging merchandising and advertising Food Consumption amp Expenditure Patterns 7 pg 39 40 From 19301999 9 Total spending and per capita food expenditures rose signi cantly over this period However because food spending rose less rapidly than th e consumers income the share of consumers income spent for food declined from 24 to 10 Consumers food expenditures are rising for 3 reasons 1 Increased population and quantities of food eaten 2 Rising food prices 3 Consumer preferences for more expensive foods and marketing services In recent years rising retail food prices have accounted for most of the increase in consumer s food bills The second most important reason for this rise has been the result of consumers substituting more expensive foods into their diet and eating away from home more frequently Only a small portion of the rise has been due to increased quantities of food eaten Trends in Consumption 0 Per Capita Consumer Food Expenditures 9 Increasing 0 Total Food Spending as of disposable income 9 Decreasing Spending on food eaten away from home 9 Increasing Retail Food Prices 9 Increasing Calories Consumed Per Day 9 Increasing fluctuated through 1930 7 1960 period but began increasing againfrom 1970 7 2000 I Low point of caloric intake at 1957 then has been increasing ever since These changing consumption patterns are of enormous importance to food producers and marketing rms Considerable money is spent monitoring these trends and attempting to in uence them through new product development and promotional efforts what p Demographics of Food Consumption 7 pg 4 Demography is the study of populations These trends in uence food marketing by affecting the number of mouths to feed eople eat where food is sold and how people buy their food Mobility of the population in uences the food marketing machinery 720 of Americans move each year but only 3 move to another state This alters the food distribution network Urbanization is another important demographic trend In 1997 7 80 of the r r 39 quot A with 56 in 1956 The age and education of the population also in uence food consumption live in r quot areas r With the aging of baby boomers and reduced family sizes the percentage of the population under 18 years of age is declining 0 Recent declines in milk consumption and increases in red meat cheese and potatoes have been attributed to the changing age distribution of the population 0 Food marketing rms have developed special foods packages and promotional messages for different target market age groups Household Food Consumption 7 pg 43 The of households rose from 40 million in 1950 to NlOl million in 1997 Increasing of femaleheaded households the prevalence of working wives in wifehusband households and an increasing of households headed by unmarried men as well as a growing number of individuals with more than one job Only N 6 of households resemble the traditional household of a married couple with 2 or more children and only one earner in the workplace Household appliances also in uence food consumption Social psychology has been helpful in aiming food fads and fashions food and diet attitudes food symbolism and the concept of consumer lifestyles Income amp Food Consumption pg 44 47 Historically population and income growth have been the 2 major sources of growth in food consumption I The of people determines the total need for food whereas their income determines their ability to pay for it I Consumer incomes in the United States have grown as a result of technological change increased worker productivity and general economic growth Effective Food Demand I Consists of both needs and the ability and willingness to satisfy those needs with income A need does not register in the marketplace unless it is backed up with purchasing power from the consumer I Highincome countries such as the United States are generally characterized by a strong effective demand for food Income Elasticity I The responsiveness of food consumption to an increase in income 0 The more responsive consumption is to an increase in income changes the greater the income elasticity Normal Good I If the quantity of a food rises along with income the product is a normal good 0 Livestock products are usually normal goods and have a higher income elasticity than crop products The income elasticity of raw farm products is lower than the income elasticity of the utilities added in the marketing process o This means that the demand for food marketing services grows more rapidly than the demand for farm products 0 Rising consumer incomes affect food consumption patterns in several ways I 1 Consumers do not buy many more pounds of food as income rise Instead they upgrade their diet by substituting more expensive foods often meats for staple items I 2 2quotd result of rising consumer incomes is to reduce the consumers share of income spent for food Food expenditures do not normally increase as rapidly as income so the ratio of food spending to income falls with rising income 9 This is Engel s Law I 3 broadening of the product bundle of attributes most valued by consumers 0 At low income levels price and perhaps nutrition are paramount concerns As incomes rise consumers add quality variety convenience and service to the desired productattribute bundle More recently consumers have become concerned about the impacts of food production and marketing on the environment and the welfare of farm animals I Thus in highincome societies and populations the product bundle of attributes becomes more complex I 4 Perhaps most importantly rising consumer incomes increase the value of consumers time and expand the demand for convenience foods with builtin maid service 0 Convenience Food I A product that reduces the amount of time effort or additional ingredients required of the consumers in preparing food 0 The consumers are buying time with money at this point However there is evidence that some convenience foods are less expensive than their homeprepared counterparts and that highly processed foods are not necessarily more expensive sources of nutrients than unprocessed foods Rising incomes and educational levels intensify consumers concern with the quality of food markets and the social impact of the food industry A luent consumers have been in the vanguard in supporting such consumer causes as unit pricing nutritional labeling and open code dating I These informational programs allegedly import consumer food choices and contribute to more competitive food markets Diet Health and Food Marketing 7 pg 4 7 48 0 In recent years many Americans have become more concerned with their food choices There is a growing awareness of the connection between diet and health 0 This has changed the demand for some farm products I Notably 9 Grains fruits vegetables eggs dairy products fats and oils sugar and meat types It has also affected the marketing programs of food firms 0 Functional Foods I Foods which are believed to provide medical or health benefits including disease prevention or treatment beyond the general health benefits of any foods Sometimes Functional Foods are also called Falmaceuticals Functional Foods include 9 products with improved nutritional contents ie 7 vitamin forti ed altered food values ie 7 lowfat diet low cholesterol sugarfree leaner meats and changed ingredients ie 7 poultrybased hot dogs soymilk o The trend towards more healthy eating is resulting from the gaining population of baby boomers and a growing American lifestyle which places greater responsibility on the individual for personal health Away From Home Food Market pg 48 49 0 Increased consumer incomes working spouses and changed lifestyles have contributed to a rapid growth in the awayfromhome food market sometimes referred to as the institutional or foodservice market Food eaten away from home accounted for 50 percent of all food expenditures in 1999 o The foodservice sector includes restaurants schools factories and hospital cafeterias hotel and motel eating places government foodservice operations and military feeding establishments 0 For many restaurants 745 to 765 of the price changed to consumers represents nonfood costs of service and profits whereas 780 of supermarket price represent food costs I Because of the higher ratio of marketing services to food farmers receive a smaller share of the awayfromhome food dollar than they receive for food purchased at grocery stores 0 The eatingout trend has markedly affected sales of hamburgers chicken pasta potatoes and ketchup Public Food Programs 7 pg 50 ABM 100 Decision Making in the AgriFood System Chapter 1 The Food Industry pg 110 It is estimated that N 23 of all jobs in the United States are related to some aspect of the food industry even though farmers represent only 2 of the population 0 In many developing countries more than 12 of the labor force is engaged in agriculture Food Industry 0 All rms large and small engaged in the production processing andor distribution of food ber and other agricultural products 0 Can be divided into 4 major sectors I 1 Farm Service I 2 Producers I 3 Processors I 4 Marketers o For every 100 spent at the supermarket I Farm Service Sector 13 I Producers Sector 8 I The remaining 79 goes to processors of agricultural commodities and the marketing system that brings food to your table Farm Service Sector 7 pg 1 39 0 Those rms that produce and distribute the goods and services which farmers producers buy as a part of their business activities 0 Aka 7 Agricultural Input Suppliers 0 Provide the producer with the inputs heshe needs such as feed fertilizer equipment and chemicals I Many of these rms are household names such as John Deere or Dupont I There are also numerous rms that provide farmers with services such as banking accounting insurance legal advice and agronomic consulting Producers Sector 7 pg 2 0 Those rms engaged in the production of raw food ber and other agricultural products such as farmers ranchers grove owners and nursery owners I Producers buy from the farm service sector and sell to the processor sector or sometimes sell to an intermediate assembler Assemblers 0 Firms who buy raw commodities from producers directly from farmers in order to sell to others Assemblers will buy lots of small quantities and will eventually sell large quantities of these commodities o The customer is normally the Processor and the Assemblers do not change the form of the commodity of the product Processors Sector 0 Those rms that convert raw agricultural products into food products in the form that the consumer eventually buys The processor creates value by converting these raw commodities into those products that consumers want I Processors change the form of food and create value in the process Processors can be divided into 2 groups I l Commodity Processors 0 Processors who buy raw agricultural products that have not been processed amp turn them into a food ingredient such as wheat cattle our milling which turns wheat into our and raw milk The commodity processor will then sell these ingredients in bulk not nal food products I ie Staley Cargill CPC Archer Daniel Midland ADM I 2 Food Product Processors 0 Processors who buy food ingredients and combine them to produce the food that the consumer buys in the store or eats at a restaurant The food will be in the form where they are ready for sale to the consumer nal food product iaka ProcessorManufacturer I Many of these companies are common household names such as Campbell s Heinz Hershey s and Nabisco I Sometimes many separate food brands are produced under one speci c food processor ie Kraft produces JellO and KoolAid CocaCola Company 7 buys high fructose corn sweetener from a commodity processor such as ADM and other ingredients from other processors and combines them using their secret formula to produce Coke Marketers Sector 7 pg 3 o The set of rms that distributes food products from Processors to the nal consumer when and where the consumer wants it This nal consumer may be a retail shopper or someone eating at an away from home dining facility 0 Marketer Sector also creates value in the food industry by changing the time and place of food 0 The distribution system that ties the producer and consumer together is the marketing system Farmers constitute less than 2 of the population and only 1 l2Lh of the farms really produce the food that we eat Farm Structure o The study and analysis of farm characteristics such as the physical an economic size of farms ownership of farms and characteristics of the farm manager and his or her family There are N 2 million farms in the United States 7 quoted from the USDA 7 United States Department of Agriculture Farm 0 De ned by the USDA as any establishment that has or should have had at least 1000 worth of sales of agricultural products during the given year I These agricultural products include food ber turfgrass omarnentals owers and a variety of other specialty crops Excluded are seafood and forestry There are roughly 290 million Americans and the average American farmer feeds himself and 145 other Americans Agricultural exports account for an additional 50 or so mouths to feed so the average American farmer actually feeds 7 200 people 0 Of the 2 million farms within the US 7 more than 90 of these farms are sole proprietorships meaning that the farm operator is selfemployed 0 Family corporations and partnerships account for most of the remaining 10 of farms 0 Nonfamily corporations only account for 1 or approximately 20000 of all of the farms within the US Typology pg 4 o A system developed by the USDA that classifies farms based on economic size and characteristics of the farm operator Food Service 7pg 5 o The segment of the food industry that processes for and distributes to the away from home market for food Concentration 7 pg 6 0 An economic concept that refers to the degree which a small number of firms control a large share of the market 0 Represents the dominance of an industry by a few firms I The most common method for measuring concentration is the of total market accounted for by the four or any other of largest producers I ie N 85 of all beefis processedslaughtered by 4 companies that have been rapidly buying out smaller competitors as the industry consolidates Market Power 0 The ability of a firm or group of firms to control price and or quantity traded in a market because of the dominance of the firms in the market I Processors say that by consolidating into fewer larger processors they are able to cut costs which benefit the customers in pricing but opponents argue that the concentration provides processors with an unusual amount of this market power which will allow them to but from farmers who have little market power prices that border on exploitation of the farmers Globalization 0 The expansion of firms across national boundaries I In most instances food processors tend to be on the forefront of this globalization because the demand for processing technologies is truly global 7 we all need food to survive I Among the commodity processors most of the successful processors are very internationalized with processing facilities all over the globe To fail to behave globally in the commodity processing business is a recipe for corporate failure Marketers 7 pg 7 39 o The companies that tie the final food consumer to the processor Their job is to make certain that whatever the consumer wants is there when and where the consumer wants it o Wholesale RetailMarketers I N 12 of expenditures on food is for food to be prepared at home I Traditionally most retail stores purchased food from wholesalers who purchased food in bulk from processors and sold it in smaller batches to retailers I Many retailers particularly the smaller ones still use this system However many of the larger chains combine the wholesale and retail functions into a single rm thereby reducing transaction costs 0 The largest food retailer in the Us in terms of sales volume is Kroger 7 it sells N 50 billion of food per year through 2300 retail outlets many of which carry the Kroger name 0 Like most larger retail chains Kroger is not only into wholesaling but also food product processing with 42 manufacturing plants producing some 3000 products that are sold through the Kroger chain Vertical Integration 0 The combination of different businesses at different stages of the food system chain of productionmarketing sequence under a single management 0 Vertical integration allows the rm to coordinate different stages in the food system through management whereas without integration that coordination is accomplished through the ebb and ow of markets and market prices I So with vertical integration as a dominant trend we are seeing a rise in the role of management and a decline in the role of markets in the food system Food Service System 7pg 8 0 tlonsXpress sawvmmmusm summon Wmemmm unmr crpurr cm a mu Cr cm nnns mummy y crn 750 man How To Read Your Futures Statement FORMM Ouv a emen uvmat has We mam secuuns ans rs 2 hsung ur 2H future and uman transzdmns made as ur the date mdmzted 1 Con rmation A hang Dr EM czmransmmnsznemrgtne 2mmum s edger bzbnce A hang Dr EM upen puauunswnntrme prmes current smuement prmesznd unrezhzed pru ts ur usses Securmes un depusn and rnzrkeq vzme are 2 su s uwn 5 Accounlsummzrv AH re evznt nznmz tute szre surnrnznzed by mdmduz currency and cunverted u s Dqurvz ue Tnese We semuns uyenay a quotamewuvk m deswmwe cu umns A B C D E F G H TRADERsErn AT BUYSELL CONTRACI39DBCRIPTION Ex TRADEPRICE cc DEBITCREDIT A TRADESEI39I l Trade date ufthetrznszdmn 3 AT AccuuntType Denutesrsgmzted unregu zted ur Secured accuunt c nuvsm Denutesquznuty buught ursmd D coumAcr A descnptmn ufthefuturesurumunscuntrzd DESCRIPTION E EX Theexchzngewherethecuntrad wastrzded 1 TRADE pm Prme perumt ufthefuturesuruptmn cumrad a CC Currency cudeThe undenyrng currency nude H DEBITCREDIT Thetatz dew urcredruu the accuunt bzbnce mthe Curv rmztmn and Purchase amp Sa es sedmn and the unrezhzed we L m upen pusruuns Semun Nuts Dem nzye DR afterthe zmuums SECTION 1 CONFIRMATIONS The number of contracts bought or sold as of the date indicated generally the statement date with all pertinent information listed underneath the columns AH described above Beginning quotAquot on the left TRADE SETI39L and moving horizontally ending with quotHquot DEBITCREDIT on the right quot denotes totals CONFIRMATION THE FOLLOWING TRADES HAVE BEEN MADE THIS DAY FOR YOUR ACCOUNT AND RISK TRADE AT BUY SELL CONTRACT DESCRIPTION EX SE39I39I39L 72406 Fl 5 NOV 06 SOYBEANS 01 59872 US Fl 5 ECBOT TRADE COMMISSION US Fl EXCHANGE amp CLEARING FEES US Fl NFA FEES US Fl TOTAL COMMISSIONS amp FEES US 72406 Fl 5 CALL DEC 07 CORN 400 01 13 US Fl EX112007 COMMISSION US Fl EXCHANGE amp CLEARING FEES US Fl NFA FEES US Fl BROKERAGE US Fl TOTAL COMMISSIONS amp FEES US Fl OPTION PREMIUM US 72406 MU 2 SEP 06 EUREX DAX INDEX 27 555700 EU F3 2 COMMISSION US F3 EXCHANGE amp CLEARING FEES US F3 NFA FEES US TRADE PRICE CC DEBITCREDIT 17500DR 18415DR 10DR 18415DR 125000 17500DR 330DR 10DR 625DR 18465DR 125000 7000DR 144DR 04DR Page 2 of 5 TOTAL COMMISSIONS amp FEES US 7148DR SECTION 2 PURCHASE amp SALE This section reflects positions being closed by offset or settlement Trades executed that have resulted in a realized profit or loss are matched Gross and net profitjloss are indicated A detailed listing of those contracts and any associated option costsproceeds with the resulting profitjloss is provided NET PROFT OR LOSS FROM TRADES includes commission and all fees charged Options that have expired been exercised or assigned are also listed This does not include commissions and fees charged on the entry of this position PURCHASE amp SALE TRADE AT BUY SELL CONTRACT DESCRIPTION EX TRADE PRICE CC DEBITCREDIT SE39I39I39L 72106 Fl 5 NOV 06 SOYBEANS 01 601372 US 72406 Fl 5 NOV 06 SOYBEANS 01 598372 US 5 5 GROSS PROFITLOSS FROM TRADES US 75000 SECTION 3 JOURNAL ENTRIES All financial transactions affecting the balance of the account including all receipts andor disbursements related to cash margin deposits securities cash adjustments etc THE FOLLOWING JOURNAL ENTRIES HAVE BEEN POSTED TO YOUR ACCOUNT TRADE SEI39I39L AT JOURNAL DESCRIPTION CC DEBITDRCREDIT 72406 Fl BRANCH BANK DEPOSIT US 1000000 SECTION 4 OPEN POSITIONS All positions that remain open and not offset are shown These are active positions reflected in the same format as in the CONFIRMATION and PURCHASE AND SALE sections of the account statement The debitcredit column provides unrealized profit or loss as of the statement date Options positions are presented at gross market value as is the corresponding delta and futures equivalent values OPEN POSITIONS TRADE SEI39I39L AT LONG SHORTCONTRACT DESCRIPTION EX TRADE PRICE CC DEBITCREDIT Page 3 of 5 71206 F1 5 AUG LEAN HOGS 02 6770 US 40000 F1 5 6870 72406 F1 5 CALL DEC 07 CORN 400 01 13 US 362500DR F1 5 6DQ198 EX 112007 01 14372 US 17500DR 72406 MU 2 SEP 06 EUREX DAX INDEX 27 555700 EU 190000 F3 2 559500 US SECTION 5 ACCOUNT SUMMARY Finally a summary section condenses and translates the four proceeding main sections into all possible dollar and foreign breakdowns required to balance and value your account Starting with the beginning balance then net profitJloss from trades plus commissions fees cash amounts and option premium resulting in the ending balance for that day Open trade equity is added which then follows the total equity and account value at market Initial and maintenance margin requirement are given as well as excess equity or margin deficit If there is foreign trading in the account we will also show the currency conversion rate to U 8 dollars and the converted account value at market to each currency and a converted total to U 8 dollars for the account usS usS EUR CONVERTED To SEGREGATEDF1 SECUREDF3 SECUREDMU USD BEGINNING BALANCE 1237500 102224 30000 5128874 COMMISSIONS 350000RA 7000DR 0 42000DR EXCHANGE amp CLEARING FEE 1235DR 144DR 0 1379DR BROKERAGE FEE 625DR 00 0 625DR NFA FEE 20DR 04DR 0 24DR TOTAL COMMISSIONS amp FEES 36880DR 7148DR 0 44028DR GROSS PROFITLOSS FROM 75000 00 0 75000 TRADES OPTION PREMIUM 325000 00 0 325000 NET PROFITLOSS FROM 363120 7148DR 0 355972 Page 4 of 5 Introduction to Food Marketing Key Questions So Far Know what the AgriFood System is 0 Know who the Players are gt Now gt What is Food Marketing gt What does ValueAdded mean and how is it created Farm ServiceAgInput Supplier l4 Proucers Initial Food Processors l Food Manufacturers 1 r 39 39 39 39 39 39 391 39 T Grocery Wholesalers r Institutional Wholesalers Small Retail 5 y Food Stores Large Retail Ftores a l Q Food Serv N Retailers JUJMER 39v l ll What is Marketing What is Marketing l Means different things to different D D people The performance of all business activities involved in the flow of food products and services from the initial agricultural production until they are in the hands of the consumerquot A ValueAdding Processquot Moving Product Through the System b Each level in the agri food system can be thought of as economic stage gt Each economic stage involves a valueadding process that moves product closer to final consumption Examples of Players and Stages Player Activity gt Growing wheat gt Transporting grain to the local elevator I gt Milling wheat into flour gt Making Wheat Thins at the manufacturing plant I p Selling Wheat Thins to the consumer How is ValueAdded at Each Stage Economic Stage ValueAdded gt Growing Wheat b Transporting grain to the local elevator gt Processingmilling I wheat into flour gt Making Wheat Thins at the manufacturing plant gt Selling Wheat Thins to the consumer i Value added refers to the difference between the cost of goods purchased and the price for which the firm ses those enhanced goods i Players in the agri food system create value by changing an input s 3 TIME a PLACE EFORM POSSESSION Time Value b Time value created by storage activity allows production and consumption to occur at different points in time b What types of agri food firms are involved in storage Place Value D Place value created transporting the commodity or product to a location desired by the next player b What types of agri food firms are involved in transportation Form Value b Form value created by changing the physical form of the product into something the next player wants b What types of agri food firms are involved in physical transformationquot Possession Value D Possession value created by facilitatinci exchancie between buyers and sellers 9 What types of agri food firms or what types of activities are involved in facilitating exchangequot