As individuals within a society become more specialised in their economic activities, they come to rely upon others to supply at least some of the products and services which they need. Thus begins a process of exchange between buyers and sellers. For a while buyers and sellers remain in immediate contact and each party is able to determine what the other needs and values and, therefore, will be willing to exchange. As the economy develops the number and types of exchanges expand, there is a concomitant need for increasingly specialised marketing services such as physical distribution, storage, grading, market information gathering and so. The number of participants also increases with many of the specialised services being provided by intermediaries between the seller and ultimate buyer. Few buyers and sellers are in direct contact with one another and communication between them is channelled through a complex marketing system. This introductory chapter is devoted to exploring the nature of marketing and marketing systems.
This chapter is intended to help the reader understand:
The relevance of marketing to the agricultural and food sectors in developing countries
The meaning of the marketing concept
Why it is necessary to implement the marketing concept throughout food and agricultural marketing systems
The functions of marketing, and
The modes of operation of some of the major types of agricultural and food marketing enterprises
The opening section pursues and argument as to why marketing is of increasing importance to the food and agricultural sectors in developing countries. This leads into an explanation of the concept of marketing. The nature of marketing systems is also discussed. This is followed by a description of the principal functions of marketing and suggestions as to how these can be conducted in a customer orientated fashion. Consideration is then given to the changes that development will bring to the food industries of developing countries and the implications for agriculture as the supplier of raw materials to these industries. The remainder of the chapter is devoted to an overview of the operations of the principal forms of agricultural and food marketing enterprise to be found in developing countries. In addition to private enterprise, the operations of marketing boards and co-operatives are discussed.
In many countries, and virtually every less developed country (LDC), agriculture is the biggest single industry. Agriculture typically employs over fifty percent of the labour force in LDCs with industry and commerce dependent upon it as a source of raw materials and as a market for manufactured goods. Hence many argue that the development of agriculture and the marketing systems which impinge upon it are at the heart of the economic growth process in LDCs. Moreover as Kriesberg1 points out; in LDCs the consumer frequently spends in excess of fifty percent of the household's income on basic foodstuffs - much of which is inadequate both in quality and nutritional content. By contrast Americans spend approximately twelve percent of their total disposable income on food. In Western Europe the figure ranges from about sixteen to nineteen percent of disposable income. Furthermore, whereas in developed countries the poor are relatively few in number, and therefore it is economically possible to establish special food distribution programmes to meet their needs, the scale of poverty in most LDCs is such that the commercial marketing system must be relied upon to perform the task of food distribution to poor and not-so-poor alike. This being so, it is imperative that the marketing system performs efficiently.
Economic development itself provides the impulse towards more sophisticated and more efficient marketing systems. Dixie2 suggests that as countries experience economic growth, their rate of urbanisation tends to increase substantially. Whereas the rate of population growth, in developing countries, averages around three percent per annum, their cities and towns are increasing their populations at about four percent per annum. In essence, this means that the number of people, in urban areas, needing to be fed by rural people, will double within sixteen years. This has clear implications for agricultural production and the marketing systems that direct that production and distribute the output to the points of its consumption. Subsistence farming is likely to diminish in importance as farmers respond to the increased opportunities that development and urbanisation create; farms are likely to decrease in number whilst increasing in size; and agriculture will probably become less labour intensive and more capital intensive.
Dixie also highlights the potential contribution of agricultural and food marketing, towards attempts to improve rural incomes in developing countries. The inequality of incomes between the rural and urban areas draws people away from agricultural production and places great stress upon the infrastructure and social services of a country's towns and cities. Nowhere was this more dramatically demonstrated than in Nigeria when petroleum oil was discovered and then exploited in the 1970s. A large number of jobs were created in the urban areas and people abandoned agricultural production in large numbers. Nigeria became a net importer of many agricultural products of which it had formerly been a net exporter. For as long as the world price for petroleum remained high the economy thrived and could well afford the food import bill. However, as soon as the world price for oil fell, the food import bill became a serious burden. Nigeria would only have avoided this scenario if it had been able to motivate people to continue in agriculture and this would only have been possible if the disparity between urban and rural incomes had been reduced. Rurally based enterprises, including small-holdings, can greatly improve their earning potential by adopting a market orientation. They can be encouraged to add value to commodities by adding to their utility. Value added products normally carry a higher margin than raw commodities.
Another development which has in recent times increased interest in marketing practies is the trend, in many developing countries, towards market liberalisation as part of economic structural adjustment programmes (ESAPs). The view that direct and indirect government participation in production and distribution had brought about structural distortions in economies has become widely accepted. Measures intended to correct these distortions include a return to market prices for all products and resources, the encouragement of a competitive private sector and the commercialisation, and sometimes privatisation, of all or some of the functions of marketing parastatals. All of this requires a better understanding of marketing practices and processes within the country implementing ESAPs, in general, and within the agricultural marketing parastatals affected, in particular.
So far this discussion has been set in the context of commercial marketing but social marketing should also be acknowledged. Social marketing identifies human needs in non-competitive economies and/or sectors of society and defines the means of delivering products and services to meet these needs. The marketing mix of social marketing strategies is evaluated using quite different criteria from those employed in assessing purely commercial marketing strategies. Criteria such as the percentage of the target population reached with the technology, products, processes or services, quantities produced and distributed and uptake of the product, service or technology are more often employed. Benefits are measured in terms of development goals, such as improved nutritional status or increased rural incomes. The use of economic criteria is usually limited to the latter and to selecting the least-cost strategy to achieve a quantitative goal. However, the criteria used to evaluate commercial marketing strategies should not automatically be eliminated, because these improve the efficiency of some aspects of social marketing strategy without preventing the attainment of social objectives.
Marketing is not simply an extension of the production process but its only purpose as Adam Smith emphasised when, in his text The Wealth of Nations (1776), he said that:
“Consumption is the sole end purpose of all production: and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”
Dixie2 relates what he describes as a definition of marketing which is:
“The series of services involved in moving a product (or commodity) from the point of production to the point of consumption.”
This is a definition which many organisations, and governments, would recognise as describing their own activities in commodity marketing. Indeed in many developing countries it aptly describes, or in some cases, did in the past describe, the functions carried out by marketing parastatals with respect to staple foods. However, as Dixie himself points out, the definition omits two key elements of any definition of marketing production to effuse the marketing concept, i.e. a customer orientation and inbuilt sustainability. Gaedeke and Tootelian3 offer an alternative definition which overcomes the problems caused by these two omissions:
“… a management orientation focusing all the activities of the organization on satisfying customer needs and wants, thereby helping achieve the organization's long-range objectives.”
This definition promotes a customer orientation and since the organisation's long-term objectives will include it's own continued existence it takes account of the need for sustainability. Moreover, this definition of the marketing concept does not preclude non-profit making organisations. Marketing is just as relevant to development projects, aid agencies, extension service organisations, and the like, as it is to commercial enterprises. Thus the marketing concept is that an organisation achieves its goals through the provision of customer satisfaction. Put another way, marketing is the integrative force that matches production to customer needs and satisfaction. Marketing is not an activity to which an organisation turns its attention at the end of the production phase of operations. Rather marketing needs to be directing production in accordance with clear signals from the marketplace as what is needed by customers.
The marketing concept must be adopted throughout not only the entire organisation, but the entire marketing system. A system is a complex of interrelated component parts or sub-systems which have a defined common goal. Thus, an agricultural and food marketing system comprises all of the functions, and agencies who perform those activities, that are necessary in order to profitably exploit opportunities in the marketplace. Each of the components, or sub-systems, are independent of one another but a change in any one of them impacts on the others as well as upon the system as a whole.
There is a danger that the marketing concept will be adopted by some parts of the system but not others. Thus, for example, a food manufacturer may be trying hard to implement the marketing concept and offer products that meet the precise needs of a target market. If, however, the manufacturer has to rely upon a farming community that is still very much production oriented, for raw material supplies, then the overall marketing objectives may be frustrated. In the same way, if only some functions are performed according to the marketing concept then the system as a whole may not achieve a market orientation. For instance, the marketing department may set out to serve the market for a high quality fruits and vegetables, for which it can obtain premium prices, but if transportation is performed using the same open-topped bulk carrying wagons used to ship grain and other aggregates then it is unlikely that the enterprise will deliver the product in the right condition for the target market.
Figure 1.1 Alternative business philosophies
The lesson from all of this is quite simple. If the decision has been made to adopt the marketing concept, then consideration has to be given to the implications for each of the participants and the functions performed within the marketing system. Where one or more elements of the system are found to be other than market orientated, then either a change towards the marketing philosophy has to be introduced in those elements or a change in the configuration of the marketing system has to be implemented.
Rosson4 conceives of agricultural and food marketing systems as consisting of 4 main sub-systems; production, distribution, consumption and regulatory.
Figure 1.2 The subsystems of a marketing system
The key players in the chain of activities that connect food and agriculture are the farmer, (or other ‘producers’ such as fishermen), intermediaries, the food processors, and the consumer. In practice they each see the agricultural/food marketing system from a perspective of self-interest and these interests are sometimes in conflict. Illustrative examples of some of the conflicts which typically arise are given in table 1.1.
Table 1.1 Conflict of interest in agricultural/food marketing systems
|Farmers||Maximum price, unlimited quantities|
|Manufacturers||Low purchase price, high quality|
|Traders and retailers||Low purchase price, high quality|
|Consumers||Low purchase price, high quality|
The farmer's interest is focused on getting the best return from his produce, which usually equates to maximum price for unlimited quantities. Manufacturers want least cost, best quality produce from the farmer so that he can sell it at competitive, but profitable, prices. Traders and retailers want high quality and reliable supplies from the manufacturer or farmer, at the most competitive prices. Consumers are interested in obtaining high quality products at low prices. Clearly, there are conflicting interests here.
In an ideal world there should be some form of strategic partnership between these key players. It is obvious that, in the long run, any one of the four groups would find it difficult to survive if the others do not. However, in real life, attitudes are not those of the ideal world or of the longer term. It is focused more on the shorter term and in preserving the interests of each group. Only by allowing each group to take care of its interests, can a balanced longer term relationship evolve. This must be borne in mind when considering what the food industry expects from agriculture. Moreover, those expectations will vary according to the level of sophistication of the markets the food industry itself is attempting to serve.
A little earlier it was said that a marketing system has two distinct dimensions. One of those dimensions is the institutions, organisations and enterprises which participate in a market and the second is the functions that those participants perform. Kohls and Uhl6 have classified the functions involved in agricultural and food marketing processes as under three sets of functions of a marketing system
|A. Exchange Functions||1. Buying|
|B. Physical Functions||3. Storage|
|C. Facilitating Functions||6. Standardisation|
|8. Risk Bearing|
|9. Market Intelligence|
Each of these functions add value to the product and they require inputs, so they incur costs. As long as the value added to the product is positive, most firms or entrepreneurs will find it profitable to compete to supply the service.
Buying: The marketing concept holds that the needs of the customer are of paramount importance. A producer can be said to have adopted a market orientation when production is purposely planned to meet specific demands or market opportunities. Thus a contract farmer who wishes to meet the needs of a food processor manufacturing sorghum-based malted drinks will only purchase improved sorghum seed. He/she will avoid any inputs likely to adversely affect the storage and/or processing properties of the sorghum and will continually seek new and better inputs which will add further value to his/her product in the eyes of the customer. In making his/her buying decisions his underlaying consideration will be the effect upon the attractiveness of his/her output to the markets he/she is seeking to serve.
The buyer's motive is the opportunity to maintain or even increase profits and not necessarily to provide, for example, the best quality. Improving quality inevitably increases the associated costs. In some cases the market is insensitive to improvements in quality, beyond some threshold level, does not earn a premium price. Under such circumstances, the grower who perseveres and produces a ‘better product’, is not market oriented since he/she is ignoring the real needs of the consumer. The most successful agribusiness is the one which yields the largest difference between prices obtained and costs incurred.
Selling: Of the nine functions listed, this is probably the one which people find least difficulty in associating with marketing. Indeed to many the terms marketing and selling are synonymous. Kotler7 suggests that:
“Most firms practice the selling concept when they have over capacity. Their immediate aim is to sell what they can make rather than to make what they can sell.”
There is no denying that ‘high pressure selling’ is practiced, where the interests of the consumer are far from foremost in the mind of the seller. This is not marketing. Enterprises adopt the marketing philosophy as a result of becoming aware that their own long term objectives can only be realised by consistently providing customer satisfaction. Whereas selling might create a consumer, marketing is about creating a customer. The difference is that marketing is about establishing and maintaining long term relationships with customers.
Selling is part of marketing in the same way that promotion, advertising and merchandising are components, or sub-components of the marketing mix. These all directed towards persuasion and are collectively known as marketing communications; one of the four elements of the marketing mix.
Figure 1.3 The exchange function
Storage: An inherent characteristic of agricultural production is that it is seasonal whilst demand is generally continous throughout the year. Hence the need for storage to allow a smooth, and as far as possible, uninterrupted flow of product into the market. Because he is dealing with a biological product the grower does not enjoy the same flexibility as his manufacturing counterpart in being able to adjust the timing of supply to match demand. It would be an exaggeration to suggest that a manufacturer can turn production on and off to meet demand - they too have their constraints- but they have more alternatives than does the agricultural producer. A manufacturer can, for example, work overtime, sub-contract work, and over a longer time horizon, the manufacturer can increase or decrease productive capacity to match the strength of demand.
In agriculture, and especially in LDCs, supply often exceeds demand in the immediate post-harvest period. The glut reduces producer prices and wastage rates can be extremely high. For much of the reminder of the period before the next harvest, the product can be in short supply with traders and consumers having to pay premium prices to secure whatever scarce supplies are to be had. The storage function is one of balancing supply and demand.
Both growers and consumers gain from a marketing system that can make produce available when it is needed. A farmer, merchant, co-operative, marketing board or retailer who stores a product provides a service. That service costs money and there are risks in the form of wastage and slumps in market demand, prices, so the provider of storage is entitled to a reward in the form of profit.
Transportation: The transport function is chiefly one of making the product available where it is needed, without adding unreasonably to the overall cost of the produce. Adequate performance of this function requires consideration of alternative routes and types of transportation, with a view to achieving timeliness, maintaining produce quality and minimising shipping costs.
Effective transport management is critical to efficient marketing. Whether operating a single vehicle or a fleet of vehicles, transportation has to be carefully managed, including cost monitoring - operations on different road types, fuel and lubrication consumption and scheduled and remedial maintenance and repair. Skillful management of all aspects of vehicle operations can also make a substantial contribution to efficient marketing especially with respect to optimum routing, scheduling and loading and off-loading; maximisation of shift hours available, maintaining the vehicle fleet at an optimum size, taking account of time constraints on delivery, and collection times and judicious management of vehicle replacement and depreciation. Transport managers also have to weigh the advantages and disadvantages of owning, hiring or leasing transport.
Processing: Most agricultural produce is not in a form suitable for direct delivery to the consumer when it is first harvested. Rather it needs to be changed in some way before it can be used. Kohls and Uhl6 observe that:
“The processing function is sometimes not included in a list of marketing functions because it is essentially a form changing activity.”
However, it is for this very reason that processing ought to be included as a marketing function. The form changing activity is one of that adds value to the product. Changing green coffee beans into roasted beans, cassava into gari or livestock feed, full fruit bunches into palm oil or sugarcane into gur increases the value of the product because the converted product has greater utility to the buyer. How the form of produce is to be changed and the method to be used in bringing about such changes are marketing decisions. For example, some years ago when Ethiopia was looking to expand its tea business, a prototype manufacturing plant was established. The plant was capable of curing the tea and packing it in individual tea bags. At that point, tests were undertaken in which the product was compared with others already on the market. The results were encouraging. However, in the course of the marketing research, it was also discovered that ninety percent of the black tea consumed is blended and not the pure variety placed in tea bags by the Ethiopians. By going past the point of changing green leaf into high quality black tea, the Ethiopians were entering a nice market which is not what they intended at all. Timely marketing research would have directed Ethiopia to stop the form changing activity short of bagging since, at that time, Ethiopia did not have the acreage of tea, nor the resources, to develop a tea blending facility of its own. In the same way, a producer of fresh fruits may have pulping and/or canning facilities but if potential buyers want the flexibility of using the fruits in a variety of ways, then these stages of processing serve to reduce utility and value, rather than increasing them.
Of course, processing is not the only way of adding value to a product. Storing products until such times as they are needed adds utility and therefore adds value. Similarly, transporting commodities to purchasing points convenient to the consumer adds value. In short, any action which increases the utility of the good or service to prospective buyers also adds value to that product or service.
The facilitating functions include product standardisation, financing, risk bearing and market intelligence. Facilitating functions are those activities which enable the exchange process to take place. Marketing, in simple terms, is the act of supplying products to someone in exchange for something perceived to be of equal or greater value, (usually, but not always, a given sum of money). Facilitating functions are not a direct part of either the exchange of title or the physical movement of produce.
Figure 1.4 The facilitating functions
Standardisation: Standardisation is concerned with the establishment and maintenance of uniform measurements of produce quality and/or quantity. This function simplifies buying and selling as well as reducing marketing costs by enabling buyers to specify precisely what they want and suppliers to communicate what they are able and willing to supply with respect to both quantity and quality of product. In the absence of standard weights and measures trade either becomes more expensive to conduct or impossible altogether. In Nepal such was the diversity of weights and measures used with respect to grain within the country, that it was easier for some districts to conduct trade with neighbouring states in India than it was to do business with other districts within Nepal. Among the most notable advantages of uniform standards, are:
price quotations are more meaningful
the sale of commodities by sample or description becomes possible
small lots of commodities, produced by a large number of small producers, can be assembled into economic loads if these supplies are similar in grade or quality
faced with a range of graded produce the buyer is able to choose the quality of product he/she is able and willing to purchase.
Quality differences in agricultural products arises for several reasons. Quality differences may be due to production methods and/or because of the quality of inputs used. Technological innovation can also give rise to quality differences. In addition, a buyer's assessment of a product's quality is often an expression of personal preference. Thus, for example, in some markets a small banana is judged to be in some sense ‘better’ than a large banana; white sugar is considered ‘superior’ to yellow sugar; long stemmed carnations are of ‘higher quality’ than short stemmed carnations; and white maize is ‘easier to digest’ than yellow maize. It matters not whether the criteria used in making such assessments are objective or subjective since they have the same effect in the marketplace. What does matter in marketing is to understand how the buyer assesses ‘quality’.
Financing: In almost any production system there are inevitable lags between investing in the necessary raw materials (e.g. machinery, seeds, fertilizers, packaging, flavourings, stocks etc.) and receiving the payment for the sale of produce. During these lag periods some individual or institution must finance the investment. The question of where the funding of the investment is to come from, at all points between production and consumption, is one that marketing must address. Consider the problem of a food manufacturer who wishes to launch a range of chilled products in a developing country where few retail outlets have the necessary refrigeration equipment. This is a marketing problem. It might be solved by the food manufacturer buying refrigerators and leading these to retailers (or arriving a hire-purchase arrangement with retailers).
A common marketing problem, in developing countries, is the low level of incomes leading to low levels of effective demand for many products. The challenge to marketing is to somehow channel what income is available into effective demand. In the case of agricultural equipment marketing this might involve offering hire-purchase schemes where the prospective buyer makes payment in regular installments. During this time he/she is deemed to have hired the machine. If payments are not forthcoming, the machine can be recovered since its ownership remains with the seller up until the final payment is made, at which point the farmer is considered to have purchased the machine. Alternatively, the seller might set up leasing, rather than purchasing schemes where again the farmer is making regular payments but never takes title to the machine. Where a food item is being marketed, to a low income market, the seller can consider reducing the until price of the product by making the pack or lot size smaller. Another tactic is to make the product more affordable by using cheaper ingredients and/or packaging. Instant coffee can be sold at lower prices by substituting some of the coffee with chicory; the price of meat products is reduced by increasing the percentage of cereals in these products and including less meat and/or making use of less expensive parts of the animal such as entrails, offal, feet and head.
Marketing is also concerned with the financing of the enterprise itself. Here again some creative solutions can be developed. Where internal financing is insufficient for the purposes in view, an enterprise in a developing country can look to several alternatives including:
credit co-operatives and/or credit unions
Where these sources of finance are considered inappropriate, or are simply not available to a particular enterprise, a strategic alliance in the form of a joint venture could be the answer. These are partnerships formed to exploit market opportunities more effectively and/or efficiently than either party can on its own. An enterprise, in a developing country, may engage in a joint venture with either an indigenous partner and/or with a foreign partner. The agreement between parties to a joint venture normally specifies their respective contributions of resources, share of management control, profit and risk8.
Whatever the source of finance under consideration marketing has a role to play in evaluating the appropriateness of that source as well as identifying it in the first place. A common requirement is that marketing proposals include a forecast of the payback period. Those responsible for developing these proposals are best placed to evaluate the compatibility between the market opportunity under consideration and the alternative modes of financing it. Of specific interest is the prospect of the investment payback period matching the repayment schedule. Enterprises which finance long term investments through short term sources of finance are either badly misinformed or have adopted a high risk strategy.
Risk bearing: In both the production and marketing of produce the possibility of incurring losses is always present. Physical risks include the distruction or deterioration of the produce through fire, excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of adverse changes in the value of the produce between the processes of production and consumption. A change in consumer tastes can reduce the attractiveness of the produce and is, therefore, also a risk. All of these risks are borne by those organisations, companies and individuals.
Risk bearing is often a little understood aspect of marketing. For example, when making judgements as to whether a particular price is a ‘fair price’ the usual reference point is the producer or supplier's costs. However the risks borne are rarely taken into account by those passing judgement and yet, almost inevitably, there will be occasions when the risk taker incurs losses. Stocks will spoil, markets will fall, cheaper imports will enter the country, consumer tastes will change, and so on. These losses can only be observed if adequate surpluses were generated in previous periods. Risk bearing must be acknowledged as a cost since what is uncertain is not whether they will occur, but when they will occur.
Market intelligence: As for as is possible marketing decisions should be based on sound information. The process of collecting, interpreting, and disseminating information relevant to marketing decisions is known as market intelligence. The role of market intelligence is to reduce the level of risk in decision making. Through market intelligence the seller finds out what the customer needs and wants. The alternative is to find out through sales, or the lack of them. Marketing research helps establish what products are right for the market, which channels of distribution are most appropriate, how best to promote products and what prices are acceptable to the market. As with other marketing functions, intelligence gathering can be carried out by the seller or another party such as a government agency, the ministry of agriculture and food, or some other specialist organisation. What is important is that it is carried out.
The link between agriculture and food continually evolves. In primitive societies, the farmer and consumer were either the same family or close neighbours who bartered their products and services as we see in figure 1.1, but as societies develop other linkages are added. Commodity traders, processors, manufacturers who convert produce into food items and retailers, among others, are interposed between the producer and consumer. A more recently introduced link into the chain is the scientist. Scientists as breeders, plant biologists, nutritionists and chemists have made an immeasurable contribution to the development of agricultural production and food manufacture over the past 50 years. It would appear that we have passed through the age of machines in agriculture, and the age of chemicals, on to the age of biotechnology in agriculture. Biotechnology has great potential for the developing countries since it is likely to be less capital intensive and more research and know-how intensive. Thus its benefits can flow faster into the poorer countries who do not have the capital. Therefore its impact could be faster, more widespread and more significant.
As the link between food and agriculture continues to evolve, we see the emergence of an agribusiness i.e. where agriculture and food become a continuum. Multinational companies like Cargill, Brooke Bond Liebig, and Del Monte are examples of vertically integrated organisations with links all the way through from agricultural production to retailing. There is a line of argument which says that it makes sense that those who are closest should the consumer should assess his/her needs and interpret them back to the primary producer.
As disposable incomes increase, the food industry will increase the quality and diversity of the products it produces. Food manufacturers will have particular expectations of agriculture as a supplier of their raw materials, including:
Quality: To build a profitable business, food manufacturers seek to establish a preference for their products by differentiating those products in some way which is meaningful to consumers. Then, in order to enable consumers to recognise the differentiated product, manufacturers brand that product. Manufacturers can then work on building consumer loyalty to these brands. Brand loyalty is normally only established by delivering high quality consistently. As disposable incomes rise, the market tends to develop more sophisticated needs and the quality of the raw material becomes even more critical. Where agriculture is seeking to serve a food industry, that itself is seeking to meet these more sophisticated needs and wants, it can expect to face increasing emphasis on quality. Equally well, agriculture can expect to share in the better return for innovative improvements in quality.
Cost: Next to quality will come cost. With an increased capability to search the world for raw materials, the food industry is able to find the lowest cost source for any given level of quality. For the food manufacturer, the country in which he/she manufactures, or markets, need no longer be the source of agricultural produce. Improved transportation and communications mean that the world is becoming his/her source of supply. This is a significant change in the competitive environment of agriculture which the farming community has to realise, because they have, hitherto, been largely concooned in their respective domestic markets.
Non-seasonality: Agricultural products were traditionally seasonal in their production and supply. Modern technology and husbandry practices mean that food manufacturers need not have their production schedules dictated by the seasons. Indeed, the capital intensive food industry cannot afford to incur the high costs of under utilising its capacity. This means that farmers will have to complete in terms of reducing seasonality or fitting into a pattern of social competitiveness.
Reliability: A manufacturer who has invested heavily in building up his brand will be very keen to get reliable supplies in terms of quality, timing and cost. Producers of agricultural produce will be increasingly judged on their reliability in all of these respects.
Processing: Ease of processing will become an increasingly important expectation of the food industry. Like all industries, reductions in the costs of capital equipment, wages and inventories are important objectives. For example, farmers who can deliver on the ‘just-in-time’ principle will contribute towards reducing a manufacturer's working capital and space requirements. Farmers who can do part of the secondary processing and/or performing functions such as the post harvest treatment of the crop or transporting will be adding another advantage. Crops that are specially bred or designed to facilitate processing (e.g. seedless fruits, featherless chickens, coffee beans without caffeine, low cholesterol meats) are another type of advantage that the food industry could expect from agriculture. In short, the competitive advantage will rest with those able to add most value and can differentiate what they are offering from that of other suppliers.
Product differentiation: In competitive brand marketing, the food industry has to innovate continuously to create new products that are different from and superior to existing ones of their own or competitors. The scope of innovation has traditionally been at the processing stage. Whilst this will continue to be an important area for innovation, manufacturers will increasingly tend to look for innovative changes in the agricultural produce itself. This may be in terms of novel tastes, improved texture, more attractive shapes, etc.
Health aspects: We have already said that in the more sophisticated food markets, healthy eating can become a priority among consumers. Therefore, farmers will have to consider the health connotations of what they choose to grow. There are two aspects of health to be taken into account. First, consumers may be interested in the food itself i.e. low fat, low/no sugar or low/no salt. It would be a mistake to think that health issues are confined to the more sophisticated food markets or to the wealthier segments of the community. Nutrition is important in all segments of the market. Even where the poor receive adequate amounts of food to fend off starvation, they are often malnourished. Thus farmers have to be concerned about the nutritional value of the produce they grow. Second, the consumer may be more, or equally, concerned about the food production methods i.e. the avoidance of chemicals like herbicides, pesticides etc. This may mean a change to the farmer's husbandry practices with implications for the costs of production. The consumer and the food industry will expect the farmer to produce without potentially dangerous chemicals, but at no extra cost to them. This will be another challenge for agriculture.
The principal component of any marketing system are the institutions and enterprises of which it is comprised. Three of the principal forms of enterprise to be found in developing countries are discussed in this section. These are: private companies, marketing boards and co-operatives.
Private enterprise has much to commend it, including a much higher level of financial independence from government than public enterprises. Moreover, private enterprise is able to adapt, rapidly, to changing circumstances and opportunities and is usually able to provide what consumers want at a lower cost than public enterprises. Abbott9 highlights several particular strengths of private enterprise, including:
|Low operating costs||Nothing so concentrates the mind on cost control than ownership. The private entrepreneur has every motivation to contain costs since to do otherwise erodes his/her profit margin.|
|High levels of equipment utilisation||Since private enterprise has as its prime objective, profit, everything is done to maximise the use of capital equipment, and thereby lower unit costs e.g. concern is shown to keep factories operating at high levels of capacity utilisation, attempts are made to ensure that the firms' vehicles have economic return loads as well as outward loads etc.|
|Adaptability||Decision making within private enterprise tends to be quicker, because of the absence of a weighty bureaucracy, than in public enterprise equivalents.|
According to Abbott, successful indigenous private enterprises, in agriculture, have several distinguishing characteristics. Those cited by Abbott apply particularly to enterprises that are owner-operated.
|Personal initiative||The entrepreneurial spirit is in evidence when an individual shows a willingness to accept calculated risks.|
|Rapid decision making||Decision making within private enterprise tends to be quicker, because of the absence of a weighty bureaucracy, than in public enterprise equivalents.|
|Independence of spirit and persistence||Entrepreneurs need a good deal of self confidence i.e. they must be prepared to back their own judgements rather than rely on the views and support of others. Moreover, it often takes a fair amount of time before market demand can be built up and new markets penetrated and hence the need for tenacity.|
|Willingness to work hard, for long and/or irregular hours||There is a direct relationship between effort and the level of success in private enterprise. Rarely is the entrepreneur able to rely on others covering for him/her and no-one pursues potential business or seeks to solve management problems with as much vigour as the owner.|
|Relevant experience and/or expertise||Most successful private entrepreneurs have experience and/or expertise which others are willing and able to ‘buy’. This could be, for example, the ability to judge the quality and quantity of meat a live animal will yield when slaughtered.|
|An understanding of agriculture||This of course, relates to agribusinesses and is essential to those seeking to do business with farmers (or fisherman). Knowing how crops are grown and mature and understanding the priorities of producers and the daily/seasonal pressures they face is invaluable in agribusiness.|
Abbott claims to have identified several areas of marketing where private companies tend to perform better than other forms of marketing enterprise.
|Perishable Products||This class of product is subject to rapid and extreme fluctuations in supply and demand, and therefore price, as well as considerable variation in quality, both at harvest time and subsequently, due to mechanical, pathological and/or physiological damage. A private company, with its ability to make quick decisions, in response to an ever changing environment and set of market conditions, is in a better position to prosper in the perishable produce market.|
|Livestock and meat||Abbott claims that the marketing of livestock and meat is dominated by private enterprise. He says that this is explained by the fact that direct decision making gives private enterprise the edge because of the need for skilled judgement in appraising quality and value when the product is so variable.|
|Combined purchase of produce and sales of farm inputs and consumer goods||Businesses serving rural customers often have to deal in small quantities of supplies and purchases and this requires a great deal of flexibility on the part of the enterprise. It is usually the smaller, private, enterprise which proves willing and able to conduct business in such a way.|
|New and highly specialised activities in marketing||The willingness to invest in new, and therefore risky ventures or to invest in highly specialised activities is usually the province of the private sector. The French economist J.B. Say (c.1800) is quoted as defining the entrepreneur as one who “…shifts economic resources out of an area of lower and into an area of higher productivity and greater yield”. Committees and government bureaucracies are not especially fond of closing down existing economic activities. They are not much better equipped to generate new ideas or indeed to innovate.|
Marketing boards are, in most instances a government agency and/or statutory organisation having the function of intervening in the marketing process, with a view to serving the cause of efficient and orderly marketing. Less frequently they are voluntary organisations established by farmers/producers. Put another way, marketing boards tend to be born out of government policy rather than by consensus among commercial parties. This is especially true of Marketing boards in the tropics where their chief object is to improve the income of the smallholder, grower, and/or livestock farmer. Marketing boards do not normally provide marketing services to large estates or plantations. Prior to the adoption of structural adjustment and market liberalisation in nearly all Marketing boards served as ‘price stabilising boards’.
Another characteristic of marketing boards is their focus on durable products. Marketing boards are normally given authority for ‘controlled’ or ‘scheduled crops’. In many countries fewer than 5 crops are controlled. These tend to be traditional crops like millet, sorghum, rice, maize, groundnuts and palm oil and ‘colonial’ crops such as cocoa, cotton, coffee, tea, tobacco and rubber. Some governments have opted for boards that control more than one crop. In some cases, the marketing board performs all of the marketing functions itself but in others it cooperates with private enterprise by, for example, hiring storage facilities or appointing local buying agents.
The effectiveness of a particular marketing board is often viewed in terms of three factors:-
Its contribution to orderly and efficient marketing
The reduction in the capacity of intermediaries to manipulate margins at the expense of producers and consumers
The generation of producer-oriented monopoly power
In many cases the establishment of a marketing board was a reaction to situations where middlemen and/or foreign buyers were perceived to hold monopsonistic power over producers. Hence the role of the marketing boards is frequently articulated as being one of organising producers into monopolistic agencies with real countervailing power; to reduce inefficiencies due to unwarranted competition, and duplication of effort between intermediaries.
Figure 1.5 Main roles played by marketing boards
In theory at least, the marketing board contributes to orderly marketing by acting as an agent for improving marketing practices, as a market regulator and as a provider of facilitating services. For instance:
|Change agent||Marketing boards can establish marketing practices and procedures for raw and/or processed products.|
|Regulatory role||Marketing boards may act as “watch-dogs” over agreed marketing practices and procedures e.g. credit arrangements, weights and measures, quality control etc.|
|Facilitator||Marketing boards may provide all or some of the facilitating services e.g. credit, market intelligence and risk management. The last of these usually takes the form of the guaranteeing of prices. In the case of tree crops prices are announced in advance of harvest. Prices for annual crops are normally made known before planting or sowing.|
The role of marketing boards in bringing about more efficient marketing is most often framed by policy makers in terms of modifying the market structure. That is, trying to make what is perceived to be an imperfect market structure more advantageous to producers. Of course, in doing so, account ought to be taken of the effect on both consumers and other players within the marketing system. This is not always done and the question is begged whether a market structure which is organised to the principal benefit of one particular set of players is anything other than imperfect to the others.
However, the argument in favour of giving producers real countervailing powers is strongest in situations in which the marketing system is characterised by a myriad of largely powerless producers and a relatively small number of powerfull intermediaries. In these circumstances, the price-makers are the middlemen and both producers and consumers are price-takers.
One particular way that a marketing board may act to modify an existing market structure is to rationalise the system in an attempt to reduce inefficiencies seen to be caused by unwarranted competition and duplication of effort between intermediaries. For example, there may be duplication of transport, storage and processing facilities to the extent that capacity utilisation cannot rise to economic levels without extremely high charges to compensate. Marketing boards may try to rationalise the system through, for example, a system of licenses.
Buying operations of marketing boards: Marketing boards would normally buy at fixed prices. Each season or year, the government sets the price for scheduled crops. In the case of tree crops, this price is announced before harvest and before planting or sowing in the case of annual crops. It is subsequently kept at the same level for a period of time: typically about 6 months. These procedures give some security to producers.
Buying takes place at official buying points where there are either appropriate storage facilities for the produce, or transportation so that it can be moved before any significant deterioration in quality occurs. Clearly farmers are concerned that buying points should be conveniently located. However, maintaining an extensive network of buying points adds substantially to a marketing board's operating costs and so the interests of the two parties often conflict. One compromise is for the marketing board to operate mobile buying teams to supplement permanent buying points.
In some countries the buying points are staffed by board employees, but the costs of running the buying points and the associated transportation costs can become too high and some governments seek alternative solutions such as transferring buying points to local co-operatives, and/or by appointing licensed buying agents (LBAs). It is common in anglophone West Africa to have co-operatives operating as LBAs, in competition with private traders who are also LBAs. The use of buying agents promises some degree of competition, which in view of the fixed prices, expresses itself in the secondary conditions, in particular better service.
Selling operations of marketing boards: Some marketing boards, like grain boards, are concerned entirely with domestic consumer markets. These tend to be handling staple crops such as maize, millet and rice. Other boards are dealing exclusively with export markets and, therefore, industrial buyers. The two types of markets are quite different from one another and so therefore are the operations of the boards serving them. A distinction is sometimes drawn between these two types of board by referring to Food Marketing Boards (FMBs) and Export Marketing Boards (EMBs). Among the major differences is the position of governments with regard to them. First, governments have no control over demand in export markets whereas they can, and do, exert control over demand within the domestic market. Second, since governments have to take account of the interests of domestic consumers of staple crops, they sometimes instruct FMBs to adjust their marketing strategies to meet social and/or political rather than commercial objectives. The interests of consumers in export markets are of no direct concern to the government of the exporting nation.
Selling operations of EMBs: Some export markets are governed by commodity agreements such as the Sugar, Cocoa and International Coffee Agreement, but in the majority of cases they must operate within free or open markets where vigorous competition exists. EMBs tend to favour early sales. That is, they try to minimise the time period between buying and exports. This is sometimes termed a ‘rapid evacuation’ policy. It keeps storage and capital investment requirements to a minimum, since the burden of holding and financing stocks is carried by the recipient of the produce. Most EMBs practice ‘forward selling’ which as the term itself suggests, means signing sales contracts well in advance of delivery. Sometimes it means selling the crops well in advance of their being harvested, or sometimes even before they are planted.
The practice of ‘export parity pricing’ is prevalent among EMBs. This means that the producer price is calculated as a residual of the export price minus marketing costs. There is no particular motivation to minimise those marketing costs in such a system, since a major source of uncertainty for EMBs has always been the instability of prices in the open world markets. As EMBs cannot influence these prices, they tend to take the defensive approach of lobbying for low producer prices. In this way they hope to avoid a trading deficit when world prices fall.
Selling operations of FMBs: In many developing countries the FMB's selling price is set by government. Concern for the welfare of consumers often encourages governments to set low prices. This means the gross trading margin of an FMB is often small. The margin is invariably a source of conflict between FMBs and the government. In its desire to please both consumers and farmers, government will often suppress the profit margin and insist upon the FMB reducing its outgoings. The government usually has the upperhand but since it has to bear any deficit it is a hollow victory.
Consumers needs determine the timing of the release of stocks. Staple crops, usually have a fairly constant demand throughout the year, and FMBs have to bridge the usual, and considerable, interval between buying after harvest and staggered selling over the year. Stockholding is an important but expensive function of FMBs especially immediately after harvest when there is often insufficient storage space for the incoming produce. Conversely, as the stocks are slowly released FMB stores are under capacity for much of the year. A common objective of FMBs is basic ‘food security’ in times of shortage. This policy makes a lot of political sense but commercially it presents difficulties. Working capital is required for a longer period, and, if after all there is no shortage, the FMB is left with decaying stocks.
Nearly everywhere there is a ‘dual marketing system’, with a parallel market which allows farmers, traders and consumers to by-pass the FMB. In some countries the parallel market is permitted by the government. Where FMBs have been given a monopoly, parallel markets become black markets, suppression of which has proved impossible. Indeed whether the parallel market is permitted or forbidden, the FMBs have to reckon with its competition.
Some boards do not fit easily into the two categories discussed so far. Produce such as groundnuts, sunflower seed oil and palm oil, have both domestic and export markets. Marketing boards handling these products have been mainly been established in countries where a surplus for export exists. These boards are normally classified as export boards. However, there is always the possibility that domestic demand will increase to the point where it absorbs the export surplus, at which point the board becomes a domestic marketing board.
On the whole the picture of marketing boards in the literature is a depressing one. They are largely portrayed as weak organisations which have achieved little success. There are however some outstanding success stories like the Zimbabwean Cotton Marketing Board (CMB) part of which is related belowa.
When setting out to evaluate the economic performance of marketing boards, it is all too easy to neglect to acknowledge that to a very great extent they are charged with achieving political as opposed to purely commercial objectives. Indeed policy makers often refer to them as ‘instruments’. Those who readily identify the “mistakes” of marketing boards more often than not neglect to distinguish between those errors which could be rightly attributed to the boards' management, and therefore can be corrected by that management, and those lying outside the board itself. Some criticisms would best be addressed to those governing the activities of the board. For example marketing boards are frequently used, by governments, as instruments of national policy, including:
the promotion of agricultural and rural development with social goals overriding commercial objectives
as instruments of fiscal policy
as a mechanism for containing urban wages through price restraint on staple foods
as a device to encourage farmers to grow and sell more food and export crops, by pushing higher producer prices
as a means of consolidating power by placing political appointees on to the Board11.
a. The details of Zimbabwe's Cotton Marketing Board given here relate to the period preceding the implementation of the structural adjustment programme. A number of the operational details of this Board have changed as a result but the positive lessons to be learned from reading this case remain valid.
Thus, many of the decisions and activities undertaken by marketing boards which adversely affect profits and cash flow are not the product of poor commercial judgement on the part of management but are attributable to individuals, outside of the boards themselves, who have goals that are entirely divorced from the efficient and effective operation of those boards.
The co-operative enterprise has its origins in the 19th century and has become one of the most ubiquitous examples forms of business/economic enterprise. Co-operatives exist in all countries of the world and operate under diverse political systems: from communism to capitalism. The majority of these co-operatives are, through their national apex organisations, ultimately in membership of the International Co-operative Alliance (ICA), the representative world body of co-operatives of all types.
The motivation to form co-operatives has three particular aspects:
the need for protection against exploitation by economic forces too strong for the individual to withstand alone
the impulse for self-improvement by making the best use of often scarce resources
the concern to secure the best possible return from whatever from of economic activity within which the individual engages whether as a producer, intermediary or consumer.
It is the belief that each of these aspirations can most advantageously be pursued and secured in concert with like-minded people that provides the stimulus to co-operative action. The underpinning principles with are those of self-help, voluntary participation, equity, democracy, and a common bond of common need and purpose. The cohesion of the group is maintained by ensuring that individual members cannot secure power or gain advantages at the expense of the others. Co-operatives reward participation in the co-operative venture rather than rewarding capital Self-interest is a primary motivator in co-operative enterprises, with economic gain being the primary objective. In these respects, co-operatives differ little from capitalistic enterprises; self-interest is simply pursued in a different way from the capitalist enterprise. Thus, the rate of interest paid on share capital is fixed and limited, and not subject to variation according to the amount of profit made. Secondly the use and distribution of surplus is restricted to one or more of the following purposes:
allocation to reserves, where it becomes collectively-owned capital and is thereafter non-distributable
for use on, or donation to, common-good, community project
distribution to members in proportion to the trade each member has done with the co-operative. In other words, the distribution is made not in relation to capital held, but by declaring a bonus or dividend per cash unit of trade done
The Structure and organisation of co-operatives
There are two principal forms of co-operative organisations: primary co-operatives and secondary co-operatives. The basic unit in the co-operative systems is the primary co-operative. A primary co-operative is one in which the shareholder are individuals; each of them having an equal share in its control.
|Primary co-operatives||In many cases, primary co-operatives will combine several functions e.g. an agricultural co-operative may provide consumer supplies to its members. Primary co-operatives may also own and run subsidiary enterprises related to their main functions, such as a consumer co-operative with its own manufacturing/processing or servicing business.|
|Secondary co-operatives||While a primary co-operative has individual persons as members, a secondary (or federal) co-operative is one in which other co-operatives are the members. Apart from this basic difference the structure and organisation of both types follow a very similar pattern.|
The control and management of primary co-operatives
The control structure of co-operatives is made up of three tiers as figure 1.4 depicts. The General Meeting of Members makes policy and through this meeting members exercise control. In most countries there is a legal requirement to hold an Annual General Meeting which has the particular responsibilities of receiving and deciding upon an audited statement of account, deciding how any surplus shall be used and distributed, and of electing a committee.
Figure 1.6 The management structure of primary co-operatives
The General Meeting of Members delegates the operational control of the co-operative to a management committee (or board of directors), which controls the works of the co-operative on behalf of the members. One member of this committee is elected chairman or president. A manager (or secretary) is appointed by the management committee as the chief administrative officer of the co-operative. He/she is responsible to the committee for the day-to-day control of the business. In small co-operatives he/she may be a member elected to do the work without pay.
Federal or secondary co-operatives
Secondary co-operatives (also variously described as “union” or “federal” co-operatives) can be organised for many different purposes. It is quite possible, and quite common, for a primary co-operative to be a member of several secondary co-operatives, depending on its needs and the local co-operative structure. Examples of secondary co-operative organisation would be:
a local district union of 3/4 cotton marketing co-operatives to operate a ginning plant
a federation of 2, or more, consumer co-operatives to operate a bakery
a national union of agricultural co-operatives to manufacture fertiliser
a national union of consumer co-operatives to organise wholesaling services and to manufacture merchandise
a national federation of co-operatives to run a national bank.
Through the device of federation, co-operatives are able to organise very large-scale business operations at the national - or even international - level without detriment to the democratic control of the primary co-operatives by their own members. The secondary co-operative can, because of its larger volume of business or its wider representational base, undertake functions, provide services, and make representations, which would be beyond the capacity of all but the very largest primary co-operatives. Secondary co-operatives are a from of vertical integration providing the opportunity for economies of scale, scope for development and improved administration.
Secondary co-operatives can in turn form other secondary co-operatives - sometimes called tertiary co-operatives. In many countries there is one apex federation representative of all other co-operatives in the country and providing, at the national level, representative, advisory and professional services to the co-operative movement as a whole. These national co-operatives can then be affiliated to international organisations such as the International Co-operative Alliance.
The control and management of secondary co-operatives is similar in form to that of primary co-operatives. The share holding members - the primary co-operatives - exercise policy control through the General Meeting and elect a management committee to act on their behalf. The management committee in turn appoints a chief officer to manage the operation under its direction. The bye-laws of secondary co-operatives, as with the primaries, set down the organisational rules and procedures and are subject to the approval of the responsible local authority. The operating surplus of a secondary is also used and distributed following the same principles as a primary co-operative.
The federal co-operative can tend to become the masters of their member co-operatives rather than their servants. This situation can arise two reasons. Secondary co-operatives engaged in manufacture and trade can usually only operate efficiently given a high level of integration between their operations and those of their members. This requires a commensurate high level of discipline or some from of contractual compulsion. Secondly, the operational size and volume of trade of secondaries can be such, compared to individual primaries, that there is a strong tendency for them to behave as the dominant partner in the relationship. It is a tendency that has to be monitored and, where necessary, checked. The secondary co-operative has as its chief obligation, the provision of services to member co-operatives.
Figure 1.7 Primary and secondary cooperatives relationships
The potential of co-operatives is immense. Co-operatives appear well suited to the economic, social and institutional needs of development in the rural economy. Co-operatives can provide the mechanism to organise and mobilise people for self-help action in providing the services they require as a farming and rural community. As self-administered rural institutions, co-operatives have the capacity to reflect, and to respond to the needs of their members; and, at the same time, to help foster attitudes of self-reliance and self-confidence within a framework of mutual aspirations and mutual action. In the delivery of services to their farmer-members they can provide an essential support to the development objectives of both the farmers themselves, and of national development policy.
As business organisations co-operatives also have the capacity to act directly as development agencies. In their steady accumulation of business assets, the expanding range of their services, the acquisition and use of management skills, the employment of staff, they are involved in a positive and measurable development function. Moreover, the flexibility of co-operative organisation, for example through the potential of secondary co-operatives, offers opportunities for collective action in the development of agro-industrial enterprise to help support and strengthen local initiatives, and to give a further boost to rural development. There are few countries where co-operatives are not recognised as potentially important agencies of development.
Unfortunately, the potential of co-operatives, and the extent of their development, has, in many cases, fallen for short of expectations. Low standards of performance, bad management, financial failure, corruption and misuse of funds, use of co-operatives for political ends, have been common features of co-operative enterprise in many countries. As a consequence, a great deal of understandable criticism has been levelled at the co-operative system, and many, including some members, have become cynical as to its ability to play an effective role in the development process. There are a number of problems which inhibit co-operative development and adversely affect performance, the more important of which are discussed below.
Realism of objectives: Commitment and purpose are two important ingredients in motivation. Achievement of purpose is equally important. Objectives are expressions of purpose and expectation. To serve as motivators and guides to action they have to be attainable. The resources available have to be adequate to achievement of the objectives, and aspirations must be matched to ability. Neither members nor others should expect too much of co-operatives, including expecting them to expand too quickly. Most agricultural co-operatives in developing countries operate in commercial circumstances which any form of business enterprise would find difficult. Like their farmer-members, co-operatives have to operate in very marginal conditions. Their members are usually poor, often subsistence, farmers. High operating costs, low margins, relatively low turnovers, narrow stock inventories, seasonal trading patterns, exposure to the consequences of crop failure, high credit risk, fluctuating demand, are all familiar aspects of trading in such circumstances. Indeed, were it not so, it could be expected that private enterprise would have moved in to exploit a profitable market. It is not uncommon for co-operatives to be introduced to provide essential services because other agencies have either failed, or refused, to do so.
Expecting too much of co-operatives is one fault, expecting too much too quickly is another. The mistake is frequently made that once a co-operative appears to be reasonably well established, injection of loan capital from some external source will permit it to rapidly expand its services. Such hasty injection of loan capital can strain management resources, encourage unwise risk-taking, weaken financial judgement, lead to overstocked inventories and promote loss-making enterprise. Co-operatives ought to be allowed to develop at a pace commensurate with the ability of members to manage, control and finance the development. They should be permitted to expand steadily like any other successful business enterprise, finding the resources to do so largely from surpluses made in their own trading operations. Business capacity should not be strained, for example, to meet the objectives of a government development policy. Revolution rather than evolution, will only prove detrimental to both the viability of the co-operative and to the attainment of the policy objectives.
Conflict between economic and social purposes: Economic success is basic to the achievement of co-operative purpose for, in the long run, unprofitable enterprises cannot be sustained. However, co-operatives are constrained in the extent to which they can mimic the objectives and practices of capitalist enterprise without abandoning the fundamental values of the co-operative movement. For example, in the pursuit of business growth there can be a strong temptation to weaken member control and concede greater control to professional management, to make the creation of profit a paramount consideration, and to ignore the concepts of equity and fair dealing. The creation of collectively-owned capital by reinvestment of profits (surplus) is a highly important and desirable practice, but has its disadvantages in that if the element of members' share capital as a proportion of the total capital structure becomes so insignificant that professional management can afford to ignore it and so ignore member control in making policy decisions. The outcome is an enterprise largely indistinguishable, except in name, from a capitalist enterprise.
Misuse of co-operatives to pursue political objectives: Attempts to divert the purpose and resources of co-operatives to the support of particular political objectives adversely affects the co-operative movement. Factional dissension among the group distracts it from the achievement of its economic objectives. Members' meetings can become political forums devoted to the advocacy of opposing views. In these circumstances many members can become disenchanted and lose interest, making it easy for a minority group to take control and to attempt to run the co-operative to serve its own ends.
Co-operative principles require that membership should not be assumed to imply either political commitment or obligation. Co-operative systems organised and tightly controlled by governments as instruments of state economic policy are rarely conducive to the development of democratically-controlled, member-owned co-operatives. They are created to serve the objectives of politicians and planners; objectives which may or may not coincide with those of the members who have little effective control of the enterprise.
Management: There has been a tendency to argue that a major cause of co-operative failure is the constraint imposed on the exercise of management skills and authority by the democratic nature of the enterprise. That being so, it is suggested that the authority of the General Meeting ought to be curtailed, leaving committees and managers to get on with the job of management. However, to do so would deny the purpose of the enterprise that being to enable people to run their own business. The solution lies in increasing and improving the level of member participation, not restricting it. Moreover, the standard of management within co-operatives is often inherently poor. As has already been said, co-operatives often come into being in markets and geographical areas considered as marginal in terms of profit potential by most other forms of commercial business enterprise. This being the case, the salaries, working conditions and work location that they are able to offer fail to attract top quality managers.
A principal policy question in co-operatives is the procedure to be used in selling members' produce. The alternatives are: outright purchase from members, or sale on commission.
Outright purchase: In this case members are paid for their produce, at prices fixed by the co-operative, at the time of delivery, and the co-operative takes title to the produce. The co-operative then resells the produce at the most advantageous terms it can secure. Profits made on the transaction will be used first to meet the operating expenses, any surplus balance being used or distributed by decision of the General Meeting. This approach requires the co-operative to have high levels of funds available. Since, in the case of seasonal crops, a lot of produce is being offered within the immediate post harvest period, a serious adverse cash flow situation can arise. This can be alleviated by a two-stage payment system whereby members are paid part of the sale price at the time of delivery, and the balance after the co-operative has resold the produce.
The main objection to outright purchase is that the co-operative carries all of the post harvest risks including: fall-off in demand, price fluctuation, reduction of produce value due to down-grading, deterioration giving rise to loss of quality and so value, failure of transport arrangements, spoilage, fire and theft. Some of these can be covered by insurance but most cannot. Generally, this method is only acceptable where the risks incurred are limited and can be reasonably well assessed. For example, where forward contracts have been negotiated. These risks being taken into account, outright purchase has the advantage of permitting the co-operative to add value to the crop and thereby add to the profits of its members. There are three principal ways in which a co-operative might add value to the commodity.
Produce can be stored for sale at a later date when prices have improved
Value can be added through primary processing of the crop. Cotton ginning is a good example of relatively simple and inexpensive process which is best done close to the fields. The value of baled ginned cotton, is normally considerably more than the sum of the value of the raw cotton plus the cost of ginning. And there is the additional value of the cotton seed
Opportunity for adding value exists in the packing and presentation of the crop, or in the case of livestock, improvement in condition or quality before sale. Graded, washed and well packed fruits and vegetables can attract wider markets and premium prices.
There is a caveat which ought to be added. Whilst price advantages gained by adding value are of direct benefit both to the co-operative as a whole and to individual members, the additional investment needed to capture the additional return, can be prohibitive. Apart from the risks incurred, outright purchase, storage, packing, processing, transportation, marketing etc., require substantial financing. Moreover, these more complicated operations call for a high level of management skill and judgement, which is frequently a scarce resource.
Sale on commission: This far simpler, virtually risk-free, operation leaves the co-operative as the producers' agent with no legal title to the goods. All attendant risks therefore remain with the individual producers. The co-operative collects produce from members and sells in the most advantageous markets. It then deducts a commission at a previously agreed rate from the sale price. The co-operative meets the cost of its expenses from its commission income. With the sale-on-commission system the co-operative avoids the need to finance crop buying and it minimises its risks. In addition, much simpler operating procedures are required and expenditure can be more accurately matched to anticipated income.
The main disadvantage of sale-on-commission is that neither the member nor the co-operative is able to exploit possible price improvement. Another is the possible delays in the producer receiving cash for his crop. No payment will be made by a co-operative until it has been paid by the customer. Apart from the time taken in an ‘open market’ for crops to be sold, it is by no means unknown for parastatal agencies to be dilatory in paying-out for produce received from co-operatives.
The argument in favour of agricultural and food enterprises, in developing countries, becoming more customer oriented is a compelling one. Average incomes in developing countries are low and so the marketing systems which deliver agricultural and food products have to be efficient if they are to deliver food and other products at affordable prices. Moreover, when a country does experience economic growth this is normally accompanied by an acceleration in the rate of urbanisation. The end result is that greater demands are placed upon farmers. Marketing systems have to be capable of signalling the needs of both consumers and industrial users of agricultural outputs to the farmers. The marketing system must also motivate and reward all of the parties whose participation is essential to the delivery of commodities and products in the quantities and at the qualities demanded. Yet another development which has increased interest in marketing practices of late is the move towards market liberalisation as part of economic structural adjustment in many developing countries.
The marketing concept suggests that an organisation is best able to achieve its long term objectives by orientating all of its operations towards the task of consistently delivering satisfaction to the customer. In order to do so, the organisation must begin by getting to know what it is that will satisfy the customer. The marketing system as a whole has to be customer orientated. A marketing system comprises the functions of marketing (buying and selling, storage, transport and processing, and, standardisation of weights and measures, financing, risk bearing and market intelligence), and the organisations that perform them. Marketing systems have at least four sub-systems, these being production, distribution, consumption and regulation. These sub-systems often have conflicting interests that have to be resolved if the system as a whole is to be efficient and effective.
The food industry is a major user of agricultural products and commodities. As disposable incomes increase in developing countries, the food industry will have to meet new and different needs from its more affluent consumers. The food industry will, in turn, require agriculture support its efforts to meet the new challenges and opportunities. In particular, the food industry will demand that agriculture produces a wider range of qualities in its products and commodities with a greater proportion of total supply in the top grades; downward pressure will be exerted on agricultural production costs; agriculture will be required to supply throughout the year rather than seasonally; reliability in the quantity, quality and timing of supplies will become the major determinant in supplier selection; innovative producers who can provide differentiated products and products that make food processing easier or cheaper are more likely to survive than those who persist in producing traditional products using traditional farming methods; and issues related to the health aspects of food consumption will become increasingly important.
The institutions and enterprises that make up a marketing system are critical components of that system. In this chapter three types of marketing organisation have been discussed: private enterprise, marketing boards and co-operatives. These were chosen because historically they have been principal components of the food and agricultural marketing systems of so many developing countries. Private enterprise has often proven to be more efficient (technically and financially) than other forms of enterprise and especially those that are agents of government. Moreover, private enterprise has demonstrated higher levels of capacity utilisation, more timely decision making, greater adaptability to changing market circumstances, higher levels of motivation and personal initiative, and to have better experience and expertise than other forms of agribusiness enterprise.
Marketing boards - both food marketing boards and export marketing boards - usually have the function of intervening in the marketplace to aid the process of efficient and orderly marketing. Very often a marketing board's chief goal is to help improve the income of smallholders. Marketing boards generally handle durable products. A marketing board can expect to be judged in terms of its contribution to orderly and efficient marketing, the extent to which it counters the monopolistic practices of market intermediaries and the transference of the balance of power, in the distribution channel, in favour of producers. As a generalisation it has been concluded that agricultural and food marketing boards have failed to achieve expected results in developing countries. It would appear that this is due to social objectives compromising commercial objectives, government's use of the boards as instruments of fiscal policy, manipulation of the marketing board's prices to encourage increased production and contain retail prices for staple foods, and the placing of political appointees to the management of the boards.
The formation of co-operatives is often motivated by their potential in: protecting smallholder and small scale business from economic exploitation; stimulating self-reliance; and improving the return on investment of economically disadvantaged individuals or groups. The management structure of co-operatives - whether these are primary or secondary - invariably has three tiers: the General Meeting of Members, the management committee and the manager/secretary. In the case of primary co-operatives all members have equal voting power and members are rewarded in relation to the amount of trade they do with, or through the co-operative and not in accordance with the amount of capital which they have invested in the co-operative. Secondary co-operatives, whose members are primary co-operatives sometimes accord voting power in proportion to the relative size of the primary co-operatives that make up their membership.
The chief weakness of co-operatives are: the fact that they operate in marginal economic conditions, they have social as well as economic objectives that are sometimes in conflict with one another, co-operatives are sometimes used to achieve political ends which divert them from their legitimate mission and because of very limited resources and lack of status, they experience difficulty in attracting high calibre people to management positions.
|Adding value||Food marketing boards||Marketing concept||Secondary co-operatives|
|Exchange functions||Federated co-operatives||Marketing systems||Scheduled crops|
|Export marketing boards||Local buying agents||Physical functions|
|Facilitating functions||Marketing boards||Primary co-operatives|
From your knowledge of the material in this chapter, give brief answers to the following questions below.
Highlight the main conflicts of interest between the key players in agricultural and food marketing system.
What are the 3 physical functions of a marketing system mentioned by Khols and Uhl?
How is value added to a product or service?
What is the principal goal of the standardisation of weights and measures for agricultural products?
What was the Ujamma programme?
According to Adam Smith what is the purpose of production?
Name the 4 sub-systems that Rosson suggests comprise agricultural and food marketing systems.
In the past, what has been the main function of marketing boards in developing countries?
Explain the term ‘rapid evacuation’.
What are the difficult commercial circumstances in which co-operatives often find themselves?
Explain the term ‘tertiary co-operatives’.
What are the 2 ways in which co-operatives purchase produce from their members?
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