The Food Marketing Sector - Essay Example

The food marketing sector purchases the raw agricultural commodities and transfers those commodities into finished products which are finally consumed by consumers. This results in different cost to be associated with the product like storage, transportation, and processing. This is matched by the fact that the food passes through different hands belonging to different places like retailers, wholesalers, producers and so on. This results in additional cost to be associated with the product as people tend to ensure that they get a share of profit from the transactions that has been entered. This will require that the process will only be facilitated if the price is determined between the buyer and the seller which thereby increases the importance of marketing margins while looking to determine the price of a product or services. This paper looks towards examining the manner in which marketing margins helps to determine the price of the product that will be charged in the market. It has been identified that high retail prices are mostly attributed due to excessive profits, unnecessary margins and continuously increasing cost. The consumer food expenses which are made by the customer consist of marketing component cost and firm component cost which has to be analyzed so that it can be kept low which will ensure lower prices in the market. The change in the share of marketing and farm component results in a change in the share of cost, profit and share which has an impact on the final price that is charged to the customers (Pick, Karrenbrock and Carman, 2000). The amount of share or proportion of money which goes towards the food marketing firm is being termed as marketing margins. Reduction in the marketing margins will ensure that the cost for the firm reduces and the organization will be able to develop a process through which the final cost for the product and services reduces so that the excessive cost which is incurred in marketing can be reduced. Marketing margin can thereby be defined in two ways. Firstly, is the difference between the price which the consumer pays and the price which the farmer receives and secondly, the price which is paid for the different marketing services. The difference between the price which the consumer pays and the price which the farmer receives can also be determined through a process which looks to find out the difference between the primary demand and the derived demand curve for the product or service (Ward, 2002). Primary demand is basically calculated based on the demand for the final goods and services which is desired by the customer and looks towards ascertaining the demand at different prices. Primary demand thereby aims towards determining the total demand for the different goods and services put together. In case of farm products the total demand can thereby be differentiated and broken into two components like farm based component and process marketing component. The derived demand then thereby can be calculated by subtracting the total cost of the entire marketing component from the primary demand and is represented as DD = PD - MC. This clearly highlights that derived demand is based on the price quantity relationship which starts at the point when the product leaves the farmland and the point at which the product is finally consumed by the consumer (Shonkwiler and Taylor, 2008). The graph below helps to understand the manner in which marketing margins are created. The primary supply is represented by the Ps curve which represents the price quantity relationship for the producers. Similarly, Ds is the derived supply which is developed from the primary supply (Ps) by adding the required margin for the retailer. This helps to find out the retail price which is established at the juncture of primary demand and derived supply as shown by the point Pr. The farm level is determined at the juncture of primary supply and derived demand as shown by the point Pf. The difference between the two i.e. (Pr - Pf) helps to find out the marketing margin which is involved in the product or services. Another method which will help to ascertain the gap and identify the marketing margin is the absolute marketing margin. This is more detailed that the above stated one and helps to find out the marketing margin at different levels which includes wholesale, retail and farm. The above chart helps to highlight the manner in which marketing margins are established at different levels and helps to find out the marketing margin at all levels i.e. farm level which is denoted by Pf; wholesale level which is denoted by Pw; and retail level which is denoted by Pr. The gaps and the different objects based on which marketing margins are created are highlighted and helps to understand the manner in which different factors contribute towards the increase in the prices. Marketing margins can also be estimated from the perspective of cost which aims at determining the different cost which are associated with marketing services and tend to include wages, profits, interest and rent. The marketing services further tend to include different services and cost factors like assembly, processing, transportation and retailing. The marketing margin thereby tends to include the different utilities which are used by the marketing farm to add utility in the product and tends to thereby include profits and the expenses (Wohlgenant and Mullen, 2007). The supply relationship on the other hand is developed by the marginal cost curves which help to find out the cost of the object and develops the price for the farm product. The marketing margin is thereby dependent on the demand and supply curve and a shift in the demand and supply curve results in a change in change in the supply of services which thereby has an impact on the marketing margins as shown below The above graph highlights the demand curve through D and the supply curve through S1 and S2. In case of higher input prices which results in shift in supply curve from S1 to S2 results in an increase in marketing margin from M1 to M2 and a decrease in quantity from Q1 to Q2. This has an impact on the price of the product which gets affected and is reflected through the shift in marketing margins pushing the gap between the farm prices and the prices to consumers to move up. The same can be analyzed and interpreted from the Gardner Model which looks towards ascertaining the marketing margins and helps to determine the prices of the goods and commodity in the market. The model states that the farm industry uses two input i.e. farm input and marketing inputs. The different inputs help to develop a product which is then sold to the final consumers through a retailer (Wohlgenant, 2009). The difference between the price i.e. PQ – PA which is determined after subtracting the price to the consumer and the farm inputs helps to arrive at the marketing margins. The model developed by Gardner further looks towards using of a number of results from neoclassical production theory and an assumption of constant returns which has helped to consolidate the findings and helps to determine the manner in marketing margins have an impact on the final price and results in the creation of differentials between the farm and consumer prices (Gardner, 1975). This finding from Gardner further looks towards using different method of elasticity’s which helps to find out the retail farm price ratio. This elasticity shows the percentage change in the ratio following a change in one of the three markets and allowing for the new equilibrium to be reached. This thereby provides the opportunity through which changes in the demand and supply curve will help to understand the manner in marketing margins gets affected and will help to develop the required layout for estimating the prices (Gardner, 1975). Gardner shows that the percentage change in the farmers’ share of the food dollar in response to an increase in retail demand is positive where farm supply is less elastic than the supply of marketing services and the elasticity of substitution between a and b in producing q is less than unity (Gardner, 1975). This is a true as the changes in the prices for farm is relatively low compared to the other marketing inputs which are incurred. This thereby results are a process of substitution and ensure that the supply remains less elastic compared to the marketing input cost which are incurred. This brings to an important juncture of identifying the reasons which leads towards a change in marketing margins which has an impact on the price of the products. Some of the prime reasons which have been identified and constitutes towards the marketing margins are as follow Firstly, is the labor cost which has increased manifolds and have resulted in widening the gap between the farm price and the retail price. The increased burden of rising labor cost is borne by the retailer or the wholesaler or the different marketing objects and is finally passed on to the consumers through an increase in marketing margins which has an impact on the price (Wohlgenant, 2005). Secondly, is the profit which acts as a major constituent in the marketing margins. Businessman considers profits as a reward for efficient functioning where they look to deliver quality products at the lowest cost. Economist on the other hand considers profit as a cost for doing business which has to be accounted for. It is witnessed that there has been a considerable shift in the profit margins which was 8% in the 1950s and increased to 16% in the 1990s (Heien, 2000). This is true that the increase in margins has helped to attract capital investment due to good returns and has developed a competitive structure which requires product differentiation. The overall impact thereby has been addition to the overall cost which has resulted in an increase in marketing margins and determines the different behavioral factors which lead towards increase cost. Thirdly, is the manner in which the farmer’s shares have considerably increased over the years. This has widened the gap and has resulted in an increase in price as the different raw inputs used in farm land have gone up. This has pushed up the prices resulting in a shift in the demand and supply curve which thereby fosters an environment which makes it difficult to ascertain the process of determining the price for the product or services. This is supported by the fact that the demand curves has grown fasted as compared to the supply curve resulting in a change in price due to excess demand as shown below (Frederick, 2004) The culmination of different factors which are considered as inputs for the marketing services has resulted in pushing the price of a product and has created an extra burden on the consumers. This has affected the overall component of cost sharing and has increased the prices of different products and services. The paper thereby looks towards highlighting the manner in which different components of the marketing services results in creating a gap between the farm prices and the prices to the final consumer thereby creating a marketing margin. Reduction in the marketing margins will ensure that the cost for the firm reduces and the organization will be able to develop a process through which the final cost for the product and services reduces so that the excessive cost which is incurred in marketing can be reduced. This will help to develop a process which will look towards controlling cost and will reduce the gap between farm prices and prices for the customers. The price of a product is thereby determined based on the different components of the marketing margin which a product goes through. References Frederick V. (2004). Margins in Marketing. Journal of Farm Economics, 16 (2), 233-245 Gardner, B. (1975). The Farm-Retail Price Spread in a Competitive Food Industry. American Journal of Agricultural Economics, 57 (3), 399-409 Heien, D. (2000). Markup Pricing in a Dynamic Model of the Food Industry. American Journal of Agricultural Economics, 62 (10, 10-18. Pick, D., Karrenbrock, J. and Carman, H. (2000). Price Asymmetry and Marketing Margin Behavior: An Example for California—Arizona Citrus. Agribusiness, 6 (1), 75-84. Shonkwiler, J. and Taylor, G. (2008). Food Processor Price Behavior: Firm-Level Evidence of Sticky Prices. American Journal of Agricultural Economics, 70 (2), 239-244. Ward, R. (2002). Asymmetry in Retail, Wholesale, and Shipping Point Pricing for Fresh Vegetables. American Journal of Agricultural Economics, 64 (2), 205-212. Wohlgenant, M. (2005). Competitive Storage, Rational Expectations, and Short- Run Food Price Determination.” American Journal of Agricultural Economics, 67 (4), 739-748. Wohlgenant, M. and. Mullen, J. (2007). Modeling the Farm-Retail Price Spread for Beef. Western Journal of Agricultural Economics, 12 (2), 119-125. Wohlgenant, M. (2009). Demand for Farm Output in a Complete System of Demand Functions. American Journal of Agricultural Economics, 71 (2), 241-252. Read More