Wednesday, September 16, 2015

Exercise No 3 Notes

Exercise No. 3 Price Spread and Market Efficiency

Price Spread
            Price spread is the difference between the price paid by the ultimate consumer and that received by the producer per unit of the commodity.
Market Efficiency

            It is the ratio of total value of goods marketed to the marketing cost.

ME = CP / ∑ (MC + MM)
            where, CP is the consumer’s purchase price, MC is the market cost and MM is the marketing margins.
            This is also called as Shepherd’s Index.
Model Problem
Marketing costs, margins and price spread for tomato (Rs. / q)
Sl. No.
Channel I
Channel II
Channel III

Net price received by producer
Village trader

Price paid by village trader
Marketing cost
Profit margin
Marketing margin
Wholesaler - cum - commission agent

Price paid by Wholesaler
Marketing cost
Profit margin
Marketing margin

Price paid by Retailer
Marketing cost
Profit margin
Marketing margin

Price paid by consumer
Producer’s share (%)
Price spread
Shepherd’s Index
(i) Producer’s share = (Net price received by producer / Price paid by consumer) *100
                                    = ( 426 / 1113) *100 = 38 %
(ii) Price Spread  =    Price paid by consumer - Net price received by producer        
                              = 1113 - 426 = Rs. 687.
(iii) Shepherd’s Index =   CP / ∑ (MC + MM)
                                      = 1113 / (909) = 1.22
            The price spread was very high at Rs. 686 / q (62 per cent) in Channel I and Rs. 456 / q (46 per cent) in Channel II.
            The  Shepherd’s  Index  of  market efficiency  was  very  low  for  the tomato crop in Channel I (1.22) and low in Channel II (1.73).

            Since Channel III involves direct marketing by the farmers, there will be none of the market intermediaries involved. Thereby, there will be no need for working out price spread or market efficiency. But both the farmer and the consumer are benefitted here, as the farmer is able to realize a better price for his produce and the consumer is getting the vegetable at a comparatively low price.

Exercise No. 2 Notes

Exercise No. 2 A Study of Input Marketing: Seeds

Input Marketing: An Introduction 
            In the Indian marketing literature a dominant theme is agricultural marketing, focusing mainly on the marketing of agricultural produce and that of agricultural inputs. Agri-marketing has two aspects: (1) Input market, and (2) Output marketing. For producing agricultural products, a large number of inputs are needed. These include seeds, fertilizers, pesticides, agricultural implements (tractors, pumpsets, etc.), cattlefeed, poultry feed, etc. Input marketing also includes marketing of services such as diesel engine, repair, health care services. These agricultural inputs are going to be the focus of this chapter. On the other hand, output marketing includes marketing of food grains, vegetables, milk, etc. Output marketing is an aspect of agricultural marketing. A timely and adequate supply at fair prices of farm inputs - seeds, chemical fertilizers, plant protection chemicals, farm equipment and machinery, labour, electricity, diesel oil and credit help in the production of output. The importance of purchased farm inputs has significantly increased in the recent past with the technological break-through in Indian Agriculture.
Importance of Farm Inputs
            Agricultural inputs are at the heart of rural marketing and rural development. They support farm production which is the source of income to a large rural population and help create market for other consumable and durable products in rural areas. Being industry processed, manufactured, packaged and branded products, they are vehicles of modernization and rural development. But they differ in their market as they have a derived demand, are less frequently brought, and are expensive.
Why agri-inputs are of derived demand in nature and stature?
            Unlike consumer products, agricultural inputs are ‘derived demand products’. The inputs are demanded not individually but a package because one input decides the need for other inputs. Thus their demand complements each other. For example, a local or hybrid seed will determine whether to use a fertilizer or a pesticide, in the required quantity and quality. Further, the demand for inputs are dependent upon: (i) weather in a season; (ii) cropping pattern changes; (iii) nature and health of the crop; and (iv) other facilities like government price policy, subsidies, loans and physical facilities for the product. The demand keeps changing from season to season, month to month and even week to week.
Classification of farm inputs
            Agricultural inputs can be categorized into two types: Consumable and capital inputs (Fig. 1). The former include manures and fertilisers, seeds, insecticides/pesticides, diesel oil and electricity. On the other hand, capital inputs include tractor, trailers, harvesters and threshers, pumpsets, and other implements.
Figure 1: Classification of Agricultural Inputs
Efficient marketing system for farm inputs
            The importance of an efficient marketing system for farm inputs may be judged by,
(i) Farm products are produced in the countryside. The effect of change in production methods can, therefore, be realized only if the farm inputs reach the farmers in time at the least cost.
(ii) The use of modern inputs by farmers largely depends upon the spread of information about them. The marketing system has to perform this function.
(iii) An efficient marketing system for farm inputs is essential for the development of the inputs - manufacturing and supplying industries in the country.
Marketing environment of agricultural inputs
            The growth of input markets is influenced by a large number of price as well as non-price factors. A more comprehensive framework can be used for understanding the market environment for agricultural inputs in developing countries which should consist of:  (1) The Agronomic Potential, (2) The Agro-economic Potential, (3) The Effective Demand, (4) The Actual Consumption.
Figure 2: Marketing Environment Components for Agricultural Inputs
Agronomic Potential
            Agricultural inputs can be considered to be primarily yield saving or yield raising units. Their basic usefulness to the farmer and therefore their potential comes fundamentally from the quantity of yield they are able to raise or save. This gives the ‘Agronomic Potential’. They may also help to ‘improve quality’. They also help to ‘reduce the uncertainty or risk’ of obtaining good yields, especially if they are used at the onset or for prevention of disease, e.g., pesticide. Research and development is typically necessary for the creation of new agronomic potential for inputs. Expansion of irrigation raises the agronomic potential.
Agro-Economic Potential
            Inputs are typically expensive units. Unless the output that is gained due to the use of inputs or lost due to its non-usage which is of substantial value, else farmers will not use inputs. The price of the output must be significantly high relative to the price of the input for agronomic potential to be transformed into ‘agro-economic potential’. Thus, output markets and demands become important determinants of agro-economic potential. Inputs to be used are typically more in high value cash crops. Commercialization of agriculture can be expected to expand the potential for input use and thereby widening the scope of agri-business.
Effective demand
            In other words, effective demand is the actual demand in an economy supported by the consumers’ capacity to pay. It comprises the quantity of a good or service that consumers are actually buying at the current market price. Demand is the quantity that consumers are able and willing to purchase at each conceivable price. This type of demand can always be called as effective demand as it is opposed to latent demand. A latent demand is where a consumer is unable to satisfy their demand, whether it may be due to lack of information about the availability of a product or due to lack of money.
Actual consumption
            Even when effective demand has been created, its actual consumption may be strongly restricted unless there is:
(a) Aggregate supply: either through ‘production or import’. Factors that determine this are: investment in production, the investment environment, government policies, foreign exchange situation and other factors such trade barriers and intellectual property rights protection, among other things.
(b) Distribution: A large effective distribution system is developed for catering to small farmers scattered over a large area. This is especially difficult in the early stages when the volumes are small.
Marketing of seeds
            Historically, the importance of seed has been recognized since the Vedic times for increasing food production and quality. However, organized production of supply of quality seed at the national level started in 1963 as a consequence of the introduction of hybrid technology during the start of the green revolution period (1961-65). The release of high yielding dwarf varieties of wheat and rise by the mid 1960s gave further impetus to the growth of the seed industry. During this period Seed Review Team was constituted and Seeds Act, 1966, was enacted, and National Commission on Agriculture was formed. During this period, the private sector took significant steps into seeds business. By 1987, private companies were granted permission for investment in seed sector. During 1988, New Policy on Seed Development was introduced and it encouraged global seed companies to enter the seed business in India.
            Currently there are more than 200 seed companies operating in India with majority being in the private sector that includes national, global, regional and other seed producing and/or selling companies. Besides, there are 10,000 dealers and distributors of seeds across the country.
Following major categories of seed companies operate in India:
  • Seed Firms without R & D: Which only multiply certified seed of superior varieties/ hybrids developed by public sector R & D systems;
  • Seed Firms with R & D: Which have initiated plant breeding research to involve superior hybrids, through their own R & D programmes, while still primarily engaged in multiplication of seeds developed by the public sector;
  • Multinational Company (MNC) Subsidiaries: Which obtain breeding material from their parent companies, isolate adaptable lines, make crosses and develop superior hybrids, without disclosing their pedigree;
  • Joint Sector Firms: Involve both private and public capital, that multiply seeds of only publicly bred hybrids/varieties; and
  • Public Sector Firms: Government seed enterprises which primarily play the role of developing seed trade, maintain foundation seed stocks for sale, and Inter-state marketing of HYV seeds. These include National Seeds Corporation and other govt. seed agencies.
Structure of Seed Industry in India
            Seed sector in India is of two types namely formal and informal. Informal sector is the one where farmers produce seeds without following certification procedures and exchange it amongst themselves. The formal type of seed sector follows seed certification procedures and standards to produce a particular variety of seed.
Figure 3: Formal and Informal Seed Production Systems in India
Major players in Seed Industry
            Indian Seed Industry is one of the biggest seed market in the world and it involves various institutions and organizations like Government institutions, Public sector organizations, Research and academic laboratories and Institutions and Private Sector. Ministry of Agriculture and the Department of Seed Certification, Indian Council of Agricultural Research (ICAR), State Agricultural Universities (SAU), National Seeds Corporation (NSC), State Farm Corporation of India (SFCI), 15 State Seed Corporations (SSCs), 22 State Seed Certification Centers and 104 notified Seed Testing Laboratories are major players in the seed industry. Nearly 150 large private seed companies nationwide are involved in seed production.
Figure 4: Seed Supply Chain in India
Public and Private Marketing of seeds: the difference
            Usually the public agencies are only involved in the production and marketing of ‘high volume but low value seeds’ (eg. Paddy, wheat) where is lesser profit, whereas the private companies are actively engaged in either production or marketing or both of ‘low volume but value seeds’ (eg. Vegetable seeds).

Factors that influence seed industry
1. Seed Multiplication Ratio (SMR): It is the number of seeds to be produced from a single seed when it is sown and harvested.
SMR = Seed Yield / Seed Rate
2. Seed Replacement Rate (SRR): Seed replacement rate is the percentage of area sown out of total area of crop planted in the season by using certified / quality seeds other than the farm saved seeds.
SRR = X / Y x 100
Where, X = Quantity of farmer saved seed (‘grains as seeds’)
             Y = Quantity of quality seeds of a particular variety reported to cover a given area.
            This is essential for maintaining genetic purity and quality seed production. The seed replacement rate gives an idea about the quantity of the quality seeds used by the farmers.
Marketing mix of seeds
            Marketing of seeds is an area that needs careful analysis based on following four parameters: (1) Production, (2) Pricing, (3) Place (Distribution), and (4) Promotion.
            Production of seeds is carried out in a decentralized manner on individual farms. The certified/ truthfully labeled seeds are produced by contract growers, either selected from a number of villages scattered over a large area, or a few villagers are selected for intensive coverage. The seed companies enter into a contract with the growers for production and supply of quality seed. The growers bear all costs and all risks. They are paid at a pre-agreed price only after the quality of seed is tested and for quantity that passes through these tests. If germination of parent seed/foundation seed goes down to 70 per cent or lower, the growers are advised to
‘plough down’ (destroy the crop stand), for pursuing the production till the end would be uneconomical. No compensation is paid for this ‘plough down’ of the crop.
            The land facility for contract production of seeds is obtained in following ways: (1) Lease System: In which seed company takes land on lease, supplies all inputs, and undertakes risk of seed production; (2) Collaboration: In which one company collaborates with another for procurement of raw seeds; (3) Seed Grower: Under which a seed grower for procuring raw seed; and (4) Seed Production Organizers (SPOs): In which companies appoint commission agents called SPOs to identify growers and secure their area commitment for seed production of variety hybrid during the season.
            Following are the trade practices in seed industry involving the growers, the Seed Production Organizers (SPOs) and the seed company. They are as follows: (1) Foundation seeds are supplied to growers; by the seed company, cost of which is borne by growth. (2) Growers bear all operational expenses, generally (except under lease system of production. (3) Financial inputs (in form of credit, loan, etc.) is provided to grower. (4) Technical inputs and guidance is provided by the SPO (Seed Production Organizers). (5) Transport is arranged by the grower, generally. (6) Processing facilities are fixed by the SPOs. (7) Packing material is also arranged by the SPOs. (8) Quality testing is done by the company. (9) Cost of rejection of seed (after quality testing) is borne by the grower. (10) Processing expenses are borne either by SPO or the grower. (11) Procurement (minimum) price is decided collectively by Seeds-men Association, SPOs and growers. (12) Procurement and payment is as per pre-agreed terms.

            Pricing strategies depend on (uncertainties) in demand and government intervention (in pricing of seeds produced by public sector organizations) which varies from state to state. Pricing strategies of private sector are also influence by the pricing structure following by the public sector. However, the final marketing price of certified seed is the result of components as follows: (1) Seed Price, (2) Price paid to the seed growers for raw seeds, (3) Storage and processing costs, (4) Transport, distribution and marketing costs. Supply and demand obviously influences pricing. Time trend and prices of other farm products also need to be considered prior to pricing.

            Companies have a network of distributors and dealers. Public sector markets through (1) dealers in private sector, (2) dealers in cooperative sector, (3) sale points and depots, (4) departmental sales. The distributors, dealers and retailers are paid commission by the companies on sale. Demand of seeds fluctuates depending on season, monsoon, etc. Therefore, seed marketing at the micro level involves matching of farmers needs with timely seed supply, and ensuring adequate supply much ahead of the season. Storage at distribution points close to distributors/ dealers has to be ensured.  Proper storage of seeds is necessary. Hence, buffer godowns with proper storage condition are must in end-use area.
            The demand for hybrid seeds is largely dormant and has to be awakened by creative use of promotional tools that reach the cultivators. Customer contact programme has to be launched.
Promotional media has to be effectively used to encourage purchase and to stimulate awareness,
free samples of seeds can be distributed to farmers. Video shows, exhibition, ‘Krishi Melas’, mobile vans, and wall trolley painting are the most commonly used promotional tools by seed marketing firms. Many companies resort to advertising on TV. Advertising in radio is a cost-effective way of reaching farmers. Newspapers also can be used to for advertisements. Cinema slides can also be deployed to focus on local conditions, local dealers and seasonal crops. Hoardings in bazaars, bus stands, etc. can be put up. Effectiveness of glow signboard, calendars and stickers can also be explored. Posters, hand-bills can also be used for IEC (Information, Education and Communication).

            Post-sales service, including technical help should also be provided and follow-up of complaints about seed quality, etc. should be done. Farmers’ behaviour should be understood. Demand Forecast is also an essential element to estimate the production requirements. Companies should undertake forecasting exercise for each crop district-wise. Forecasting can avoid over or under production, maximizing net returns, and helps arranging logistics, working capital and decisions on payment. Forecasts can be short-term, medium-term as well as long-term forecasts.

Exercise No. 1 Notes

Exercise 1 Introduction to Agricultural Business Management
The term agri-business was first introduced by John Davis and Gold Berg in 1957 and their definition is as follows, “Agri-business is the sum total of all operations involved in the manufacture and distribution of farm supplies, production activities on the farm, storage, processing and distribution of farm commodities and items made from them” (John David and A. Gold Berg).
            In 1980s it was given three connotations: (1) synonymous with term agriculture, (2) synonymous with agricultural economics and (3) a modified concept of agriculture, excluding farming, or the off-farm aspects of agriculture.
            At present, agribusiness is defined as all business enterprises that cater farmers / traders / consumers. Such transactions may involve either an input or a produce or service and encompasses items such as:
1)      Productive resources (feed, seed, fertilizer, equipment, energy, pesticides, machinery)
2)      Agricultural commodities – (raw and processed or manufactured commodities of food and fiber)
3)      Facilitative services (credit, insurance, marketing, storage, processing, transportation, packing, distribution, consultancy, soil testing).
            In other words, agri-business is that sector of the economy which is concerned with the production, processing and distribution of agricultural products, including supplies (human labour, bullock labour, fertilizers, pesticides) essential for farm production, various agricultural services (processing, storage etc.) and also the economic agencies (financial institutions, warehouses, marketing agencies etc.) that serve agricultural producers.
Agricultural Economics Vs Agribusiness
            Agribusiness is different from the study of agricultural economics as agricultural economics emphasizes on the economics of farm production alone whereas agribusiness in addition to that, also takes in to account non-farm agricultural enterprises (e.g. processing). Besides, in case of agribusiness thrust is given more on the business outside the scope of the farm (e.g.) the pricing objective of a firm includes not only profit maximization (of that of a farm) but also image building of a farm firm as well as to insulate from competitors.

Scope for Agribusiness in India
1.      India is endowed with varied ago-climate, which facilitates production of temperate, sub-tropical and tropical agricultural commodities.
2.      There is growing demand for agricultural inputs like feed and fodder, inorganic fertilizers, bio-fertilizers.
3.      Biotechnology applications in agriculture have vast scope in production of seed, bio-control agents, industrial harnessing of microbes for bakery products.
4.      Export can be harnessed as a source of economic growth.
5.      The size of Indian food market is at least Rs. 450,000 crores (2014-15), which needs to be exploited well before exploring the opportunities abroad. An average Indian spends 53 per cent of his income on food.
6.      As a signatory of World Trade Organization (WTO), India has vast potential to improve its present position in the World trade of agricultural commodities in both raw and processed form.
7.      At present processing is done at primary level only and the rising standard of living expands opportunities for secondary and tertiary processing of agricultural commodities.
8.      The enhanced agricultural production throws open opportunities for employment in marketing, transport, cold storage and warehousing facilities, credit, insurance and logistic support services.
9.      Production of vegetables and flowers under green house conditions can be taken up to harness the export market.
10.  There is wide scope for production and promotion of bio-pesticides and bio-control agents for crop protection
11.  The vast coastal line and internal water courses provides enormous opportunity for production of marine and inland fish and  ornamental fish culture gaining popularity with increase in aesthetic value among the citizens of India.
12.  The livestock wealth gives enormous scope for production of meat, milk and milk products, poultry products etc.
13.  The forest resources can be utilized for production of byproducts of forestry.
14.  Beekeeping and apiary can be taken up on large scale in India.

            Management is the unifying and coordinating action, which combines different activities of individuals or an organization through establishing an environment favourable of performance thereby leading to the accomplishment of desired objectives.
Important requisites/ tasks for success in business are:
            Today, the business has become very competitive and complex. This is mainly due to changing taste and fashion of the consumers on the one hand, and introduction of substitute and cheaper and better competitive goods, on the other. Production has become customer-oriented catering their demands and wants. A farmer / business firm owner has to give proper thought to this consideration in order to make his business a successful one. The important requisites for success in business are:
1) Clean objectives
2) Planning
3) Sound organization
4) Research
5) Finance
6) Proper plant location, layout, and size
7) Efficient management
8) Harmonious relationship with workers
Agricultural market and marketing management
Market: The word market comes from the latin word “markatus” which means merchandise or  trade or a place where business is conducted. Various terms used for describing markets in India are hats, painths, shandies, santhais and bazzars.
            The term markets means not a particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such a free communicate with, one another the  price of the same goods tend to equality, easily and quickly.
Marketing: Connects a series of activities involved in moving the goods from the point of production to the point of consumption. It is that part of economics which deal with the creation of time, place and possession utilities.
Agricultural marketing: It is the study of all the activities, agencies and policy involved in the procurement of farm inputs by the farmers and movement of agricultural products from the farms to the consumers.
Marketing activities: They are traditionally divided on the basis of operational activities, such as sales and distribution, and marketing service activities which include advertising, promotion and market research.
4 P’s in marketing: In considering the needs of their customers, companies must think in terms of the product itself, the price of the product and the place where the farmer needs it, while making sure that the existence of the product is known through effective promotion. These various components are described in more detail below,
Product: The product is the focus of marketing. Although many aspects of the product are not marketing responsibilities (such as plant breeding, seed production and processing), marketing is concerned with the product's attributes and what these mean to the farmer. Such factors include quality, appearance and performance.
Price: Price creates sales revenue and is therefore important in determining the total value of the sales made. Price is really determined by what farmers perceive as the value of seed of a particular variety. It is important to understand how farmers value seed as well as how much they are prepared to pay in relation to the benefit they expect to earn.
Place: The place factor deals with the various methods of transporting and storing seeds and then making them available to the farmer. Getting the product to the right place at the right time depends on the distribution system. The choice of distribution method will depend on market circumstances and the nature of both the seed and the farmer.
Promotion: Promotion is the business of communicating with and influencing the customer. Although the cost associated with promotion can be a significant element in the overall cost of a product, successful seed promotion increases sales so that costs are spread over a larger output. While increased promotional activity may be a response to competitor activity or a new product launch, it is important to maintain a constant flow of messages to the consumer as well as visibility in the market place.

Characteristics of a developed market:
(1)   A good market should provide commodities which the consumers want and are ready to pay for.
(2)   It should provide wide variety of product but not so wide that create confusion for consumers.
(3)   No harmful products should be offered for sale in the market. Precautions should be taken into protect consumers.
(4)   The information on the presence of goods in the market and their relative merits should be available to the entire prospective consumer.
(5)   There should not be any sort of pressure on the consumers to buy products from a particular trader.
(6)   The retailing servants should be available in the market for small consumer.
(7)   Price should be fair and uniform for the products for all categories of consumers.
(8)   There should not be any inefficiency or waste in the market.
Characteristics of good marketing system:
(1)   There should not be any government interference in free market transactions.
(2)   Market should operate independently but systematic and orderly
(3)   The marketing system should bring demand & supply to gather and should establish an equilibrium between the this two forces
(4)   The marketing system should be able to generate employment.
Payoff Matrix:
            A payoff matrix depicts the probable value / expected value of each of the decision alternatives, by displaying the various outcomes and the probabilities of their occurrence.  
            A probability is the degree of likelihood that a particular event will occur. It ranges in value from 0 (no chance of occurring) to 1 (certain chance of occurring).
Expected Value:

            The expected value of an alternative course of action is the sum of values of all the predicted outcomes for the alternative multiplied by their respective probabilities.