Agriculture Trade and Marketing 1774695197, 9781774695197

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Agriculture Trade and Marketing

AGRICULTURE TRADE AND MARKETING

Nekesah T. Wafullah

www.delvepublishing.com

Agriculture Trade and Marketing Nekesah T. Wafullah Delve Publishing 224 Shoreacres Road Burlington, ON L7L 2H2 Canada www.delvepublishing.com Email: [email protected]

e-book Edition 2023 ISBN: 978-1-77469-551-7 (e-book)

This book contains information obtained from highly regarded resources. Reprinted material sources are indicated and copyright remains with the original owners. Copyright for images and other graphics remains with the original owners as indicated. A Wide variety of references are listed. Reasonable efforts have been made to publish reliable data. Authors or Editors or Publishers are not responsible for the accuracy of the information in the published chapters or consequences of their use. The publisher assumes no responsibility for any damage or grievance to the persons or property arising out of the use of any materials, instructions, methods or thoughts in the book. The authors or editors and the publisher have attempted to trace the copyright holders of all material reproduced in this publication and apologize to copyright holders if permission has not been obtained. If any copyright holder has not been acknowledged, please write to us so we may rectify.

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© 2023 Delve Publishing ISBN: 978-1-77469-519-7 (Hardcover)

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ABOUT THE AUTHOR

Nekesah T. Wafullah is a skilled agriculture expert with extensive knowledge in agricultural energy value addition products, agricultural business management services, project management, various forms of fertilizer, their production, sales, marketing aspects and application regimes; cross border fertilizer trade policies; youth and women empowerment and volunteerism. She is adept at project planning and management as well as creating simple solutions to complex problems. She has experience within agricultural markets in Kenya, Zambia, Malawi, Tanzania, Rwanda, Democratic Republic of Congo (DRC)- Bukavu and Lubumbashi and Uganda. She mentors high school and college students and advocates for better performance in Agricultural science. During her free time, she loves editing books, watching movies, cooking, baking, networking, reading, and dancing. Nekesah holds an M Sc. in Agricultural and Applied Economics degree from the University of Nairobi with a major in International Trade and Policy.

TABLE OF CONTENTS



List of Figures.................................................................................................xi



List of Tables.................................................................................................xiii



List of Abbreviations......................................................................................xv

Acknowledgment......................................................................................... xix Preface..................................................................................................... ....xxi Chapter 1

Agricultural Marketing............................................................................... 1 1.1. Overview............................................................................................. 2 1.2. Concept and Definitions of Market...................................................... 2 1.3. Components of a Market...................................................................... 3 1.4. Dimensions of a Market....................................................................... 3 1.5. Market Structure.................................................................................. 4 1.6. Agricultural Marketing Concept and Definition.................................... 7 1.7. Markets Classification........................................................................ 15

Chapter 2

Marketing Functions................................................................................. 21 2.1. Overview........................................................................................... 22 2.2. Packaging.......................................................................................... 24 2.3. Transportation.................................................................................... 25 2.4. Grading and Standardization............................................................. 36 2.5. Storage and Warehousing.................................................................. 40 2.6. Processing......................................................................................... 49 2.7. Buying and Selling............................................................................. 54 2.8. Market Information............................................................................ 63 2.9. Financing........................................................................................... 66

Chapter 3

Agricultural Value Chain and Actors........................................................ 69 3.1. Overview........................................................................................... 70 3.2. Need for Agricultural Value Chains (AVCS)........................................ 72

3.3. Conditions for Success of AVCS......................................................... 74 3.4. Factors to Consider When Stating an AVC.......................................... 77 3.5. Farmer Groups and Value Chains....................................................... 78 3.6. Role of Media in Value Chains........................................................... 80 3.7. AVCS Upgrading................................................................................ 81 3.8. Gender and AVCS.............................................................................. 83 3.9. Characterizing of the AVCS................................................................ 83 3.10. Actors of AVC.................................................................................. 91 Chapter 4

Agricultural Product Prices.................................................................... 101 4.1. Overview......................................................................................... 102 4.2. Agricultural Prices Characteristics.................................................... 102 4.3. Role of Prices................................................................................... 104 4.4. Approaches to Agricultural Price Determination.............................. 105 4.5. Pricing Objectives........................................................................... 127 4.6. Ways Markets Arrive at Prices (Price Discovery)............................... 133 4.7. Government Intervention in Agricultural Price................................. 138

Chapter 5

Agricultural Cooperatives...................................................................... 143 5.1. Overview......................................................................................... 144 5.2. Origins and History......................................................................... 145 5.3. Types of Cooperatives...................................................................... 148 5.4. Underlying Principles of Cooperation.............................................. 153 5.5. Common Cooperative Functions...................................................... 155 5.6. Economic Concepts that May Encourage The Formation of Cooperatives...................................................... 158 5.7. Limitations in Cooperatives.............................................................. 163 5.8. Cooperatives Equity and Debt Considerations.................................. 166 5.9. Legal Organization of Cooperatives................................................. 171 5.10. Cooperative Management Characteristics...................................... 173 5.11. Cooperative Influences on Public Policy........................................ 180 5.12. Relationships and Linkages Between Cooperatives Types............... 181 5.13. Sources for Additional Information on Cooperatives...................... 183 5.14. Agricultural Marketing Cooperatives.............................................. 185

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Chapter 6

Agricultural Trade.................................................................................. 191 6.1. Overview......................................................................................... 192 6.2. Type of Trade................................................................................... 193 6.3. Structure and Trends in Agricultural Trade........................................ 205 6.4. Agricultural Policy Objectives and Instruments................................ 206 6.5. Agriculture Commodity Trade Trends............................................... 215

Bibliography........................................................................................... 267 Index...................................................................................................... 271

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LIST OF FIGURES Figure 1: Agriculture product characters making agricultural marketing unique. Figure 2: Modes of transport. Figure 3: Generic value chain (Source: Porter, 1980 Figure 4: Sample agricultural value chain (Source: Cuddeford, 2014) Figure 5: The agriculture and food value chain (Source: KPMG International Cooperative, 2013) Figure 6: Change in quantity supplied and change in supply. Source: pcsb.instructure. com. Figure 7: Types of trade. Source: Google Images

LIST OF TABLES

Table 2.1: Thomsen Market Function Classification Table 2.2: Kohls and Uhl Classification of Market Functions Table 2.3: Huegy and Mitchell Classification of Market Functions Table 2.4: Agencies for Grade Standards Table 3.1: Types of Agricultural Value Chains Table 3.2: Upgrading Strategy for AVCs Table 3.3: Causes, Effects, and Potential Future Developments in the Area of Scrutiny

LIST OF ABBREVIATIONS ACB

Agricultural Credit Bank

ACCO

Agricultural Cooperative Council of Oregon

ACP

African, Caribbean, and Pacific

AGMARK

agricultural produce (grading and marking)

AVC

agricultural value chains

BEC

business and employment cooperative

BOT

balance of trade

CAP

common agricultural policy

CCC

Commodity Credit Corporation

CCIC

Central Cottage Industries Corporation

CIF

cost insurance freight

COGS

cost of goods sold

COR

certificate of review

CSA

community-supported agriculture

CWC

Central Warehousing Corporation

DMI

Directorate of Marketing and Inspection

EAGGF

European agricultural guarantee and guidance fund

EOU

export-oriented units

EPZ

export processing zones

ETC

export trading companies

EU

European Union

FAO

Food and Agricultural Organization

FAQ

fair average quality

FBO

farmer-based organizations

FCS

farm credit system

FDI

foreign direct investment

FIFO

first-in-first-out

FOB

free on board

FPOs

farmer producer organizations

FRC

organized food retail chains

G&T

generating and transmission

GDP

gross domestic product

GHGs

greenhouse gases

GNP

gross national product

GPSs

global positioning systems

GVCs

global value chains

HHEC

Handicrafts and Handloom Export Corporation

ICA

International Co-Operative Alliance

ICTs

information and communications technology

IEC

International Electrotechnical Commission

IPCC

Intergovernmental Panel on Climate Change

ISA

International Sugar Agreement

ISO

International Organization for Standardization

IT

information technology

ITC

International Trade Center

LDC

least developed countries

LLCs

limited liability companies

LOP

letter of permission

MACs

marketing agencies-in-common

MCAs

monetary compensatory amounts

MR

marginal revenue

MRLs

maximum residue limits

NABARD

National Bank for Agriculture and Rural Development

NCBA

National Cooperative Business Association

NCFC

National Council of Farmer Cooperatives

NGCs

new generation cooperatives

NGOs

Non-Governmental Organization

OECD

Organization for Economic Co-Operation and Development

OPEC

Organization of Petroleum Exporting Countries

ORS

Oregon revised statutes

PFA

pest free areas

R&D

research and development

RAS

rural advisory services

ROI

return on investment

RoO

rules of origin

SBUs

strategic business units

SCIC

Société Coopérative D’intérêt Collectif

SHG

self-help group

SMEs

small and medium-sized enterprises

SPS

sanitary and phytosanitary

SWCs

State Warehousing Corporation

TBT

technical barriers to trade

TNCs

transnational corporations

UK

United Kingdom

UNCTAD

United Nations Conference on Trade and Development

UNEP

United Nations Environment Program

UNFSS

United Nations Forum on Sustainability Standards

UNIDO

United Nations Industrial Development Organization

USA

United States of America

USDA

United States Department of Agriculture

USITC

United States International Trade Commission

USSR

Union of Soviet Socialist Republics

VA

value addition

WTO

World Trade Organization

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ACKNOWLEDGMENT

The book is the product of great effort and time spent. The completion of this book could not have been possible without the participation and assistance of so many people whose names may not all be enumerated. Their contributions are sincerely appreciated and gratefully acknowledged. However, I would like to express our deep appreciation and indebtedness, particularly to the following: Arcler Education, Inc. and Charles Kuria, for their endless support, kindness, and understanding spirit during this undertaking. To all relatives, friends, and others who, in one way or another, shared their support, either morally, financially, or physically, I would like to thank you personally.

PREFACE

The need for agriculture to fulfill food need is ever increasing due to population. With more population being in the urban areas, the need to move quality and sufficient food to the urban areas is of great importance. To ensure quality of agriculture products Value Addition (VA) is fundamental for the handling and transportation of processed and semi-processed products. To ensure sufficient quantity, farmers need to add inputs in order to meet the quantity demand for the rural and urban markets. Therefore, agricultural markets review involves the products, market functions and players. All these components help in transforming agricultural products in terms of time form and or location. One of the best ways to understand agricultural market is through a value chain (VC). A VC enables one to understand agricultural market in terms of how manufacturing, purchasing, and selling works. The VC also helps in understanding the key players and their functions in the chain such as producers, consumers of goods and services, processors, retailers, financial providers, and so on. A common VC has producers at on end and consumers at the other end, with variation of other players depending on a VC. Another factor in and agricultural value chain is the determination of prices of products. Given the fact that the agricultural sector in most countries is declining, agricultural product price determination is very crucial to the economy of most countries and therefore it remains to be highly political issue. This is because of its great influence on consumer welfare and foreign earning in most countries. The price of different agricultural products in different countries can be influenced by several factors, such as cost, demand, competition, value, or a combination of these. Given the behavior of different players and politics of the day, price determination is somewhat an art. To avoid some bad habits among players that disadvantage other groups some players may decide to get together to form a cooperation. Cooperatives have been known to quite productive and resilient compared to other business models among farmers. One of the biggest advantages of cooperatives is the ability to increase farmers bargaining power in the face of other big players such as agribusinesses and food factories. Cooperatives also help to reduce the length of a VC which has been shown to increase farmers margin and at the same time help in delivery of quality products. Cooperative also provide additional function to members such as credit facilitation, transportation, marketing and timely input acquisition. One of the major downsides of cooperatives is limited investment/capital compared to regular business models that give investors some operational control.

This book, therefore, looks at the different aspects of agricultural markets under different factors to help the audience understand this kind of market. The book also looks at the behavior of players under different conditions that determine different approaches adopted by market at a particular moment. The books also look at the upside and downside of different approaches in agricultural markets.

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1

CHAPTER

AGRICULTURAL MARKETING

CONTENTS 1.1. Overview............................................................................................. 2 1.2. Concept and Definitions of Market...................................................... 2 1.3. Components of a Market...................................................................... 3 1.4. Dimensions of a Market....................................................................... 3 1.5. Market Structure.................................................................................. 4 1.6. Agricultural Marketing Concept and Definition.................................... 7 1.7. Markets Classification........................................................................ 15

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1.1. OVERVIEW Agriculture provides for humanity’s basic needs by creating food. Farmers used to produce food commodities largely for self-consumption or for exchange (cash or kind) with others in the same village or adjacent regions about a century ago. They were mostly self-sufficient. However, the production environment has shifted from self-sufficiency to commercialization. High yielding varieties, fertilizers, insecticides, herbicides, and agricultural mechanization have all contributed to a significant increase in farm production and, as a result, a greater marketable and marketed surplus. Improved production is accompanied by rising urbanization, money, changing consumer lifestyles and food habits, and stronger ties to the international market. Consumers are no longer restricted to rural areas where food is grown. Furthermore, rising demand for processed or semi-processed foods necessitates value addition (VA) in agricultural raw materials. These advancements necessitate the migration of value-added food commodities from producers to consumers. Agricultural marketing connects farmers and consumers through a number of actions, making it an important part of the economy. Agricultural marketing encompasses more than just the ultimate agricultural product. It also concentrates agricultural inputs (factors) supply to farmers.

1.2. CONCEPT AND DEFINITIONS OF MARKET The word “market” comes from the Latin word “marcatus,” which means “merchant,” “trade,” or “a location where business is done.” The term “market” has a wide range of meanings. • • • • • •

A location or structure where goods are bought and sold, such as a supermarket; Wheat and cotton markets are examples of prospective buyers and sellers of a product. Some of the definitions of market are given as follows: The domain in which price-determining forces work is known as a market; A market is an area where the forces of supply and demand converge to form a single price; The term “market” refers not to a specific location where commodities are purchased and sold, but to any region where buyers and sellers interact in such a free and open manner that

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• •

3

the prices of similar goods tend to equalize readily and fast; A market is a social entity that conducts activities and offers facilities for buyers and sellers to exchange goods; In economic terms, the term market refers to a commodity or commodities, as well as buyers and sellers who are free to trade with one another.

1.3. COMPONENTS OF A MARKET Certain requirements must be met for a market to exist. These requirements should be both sufficient and essential. They might also be referred to as market components: • • • •

The presence of a good or commodity as a medium of exchange (physical existence is, however, not necessary); The existence of buyers and sellers; Business relationship or intercourse between buyers and sellers; and Demarcation of area such as place, region, country, or the whole world. The existence of perfect competition or a uniform price is not necessary.

1.4. DIMENSIONS OF A MARKET There are various dimensions of any specified market. These dimensions are: • • • • • • • • • •

Location; Area or coverage; Time span; Volume of transactions; Nature of transactions; Number of commodities; Degree of competition; Nature of commodities; Stage of marketing; Extent of public intervention;

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• •

Type of population served; Accrual of marketing margins.

1.5. MARKET STRUCTURE The term structure refers to something that has been evolved for the purpose of fulfilling a function and has organization and dimension – shape, size, and design. The nature of the current structure limits the performance of functions, and a function affects the structure. The size and design of the market are referred to as market structure. •

The organizational qualities of a market that determine the nature of competition and price, as well as the conduct of business enterprises, are referred to as market structure. • The elements of the market that influence trader behavior and performance are referred to as market structure. • The formal organization of a marketing institution’s functional activity is known as market structure. The ability to recognize flaws in a market’s performance requires an insight and knowledge of the market structure.

1.5.1. Components of Market Structure The following are the components of the market structure, which together influence the market’s conduct and performance: •

•

Concentration of Market Power: Market power concentration is a key factor in influencing the nature of competition and, as a result, market behavior and performance. The number and size of enterprises in the market are used to determine this. The degree of concentration indicates how much control a single corporation or a group of firms has over the buying and selling of produce. A high degree of market concentration prevents products from moving between buyers and sellers at fair and competitive pricing, resulting in an oligopoly or oligopsony. Degree of Product Differentiation: The market structure is influenced by whether or not the products are homogeneous. If products are homogeneous, market price differences will be limited. Firms have a tendency to charge varied prices for their

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items when their products are heterogeneous. Everyone strives to show that his product is better than the competition’s. • Conditions for Entry of Firms in the Market: Another aspect of the market structure is any restrictions on new enterprises entering the market. Because of their market dominance, a few large corporations can refuse to allow new enterprises to enter the market or make their entry difficult. Government limits on business entry are also possible. • Flow of Market Information: A well-organized market intelligence information system allows all buyers and sellers to freely engage in order to reach pricing agreements and close deals. • Degree of Integration: The behavior of an integrated market will differ from that of a market with no integration between enterprises or between their activities. Firms plan their strategy in terms of how they will determine prices, increase sales, collaborate with competitors, and use predatory tactics against competitors or potential entrants. The conduct of enterprises in developing strategies for their selling and buying activities is governed by market structural factors.

1.5.2. Dynamics of Market Structure: Conduct and Performance Market structure influences market behavior and performance. The phrase “market conduct” refers to a company’s patterns of behavior, particularly in terms of price and how it adapts and adjusts to the market in which it operates. Market behavior entails the following: • Market sharing and price setting policies; • Policies aimed at coercing rivals; and • Policies towards setting the quality of products. The phrase “market performance” refers to the economic outcomes of the industry when each company pursues its own course of action. The conditions for acceptable market performance must be determined by society. The following are some of the criteria for evaluating market performance and market structure efficiency: •

Resource efficiency, including the real cost of executing certain operations.

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•

The existence of a monopoly or monopoly profits, as well as the link between margins and average costs of executing particular services. • The system’s dynamic progressiveness in modifying the size and number of enterprises in accordance to the volume of business, adopting technical innovations, and finding and/or inventing new types of products in order to maximize overall societal welfare. • Whether or if the system exacerbates the problem of income disparities between individuals, regions, or groups. Inequalities, for example, rise in the following circumstances: – A market middleman may earn more money than it contributes to the national economy; – When small farmers are offered a reduced return due to a little surplus, they are discriminated against; – New uses for some products, as well as considerable variances and rigidities in production patterns between regions, wreak havoc on inter-product price parity. As a result, if the market structure is to meet social goals, it must constantly adapt to changing conditions. Because of changes in physical, economic, institutional, and technical elements, a static market structure quickly becomes outmoded. The market structure should keep up with the following developments for a suitable market performance: •

•

•

Production Pattern: Because of technological, economic, and institutional considerations, significant changes in the production pattern occur. To keep up with such changes, the market structure needs be re-oriented. Demand Pattern: Because of changes in incomes, distribution patterns among customers, and changes in their tastes and habits, demand for diverse items, particularly in terms of form and quality, is constantly changing. The market structure should be re-oriented to keep up with demand fluctuations. Costs and Patterns of Marketing Functions: Transportation, storage, financing, and market information transmission are all important marketing services that influence market structure. Government policies on purchases, sales, and subsidies have an impact on market function performance. The market structure should continue to alter as costs and government policies change.

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Technological Change in Industry: Technological advancements entail changes in market structure through adjustments in company scale, firm size, and financial requirements.

1.6. AGRICULTURAL MARKETING CONCEPT AND DEFINITION Agriculture and marketing are the two words that make up the term agricultural marketing. Agriculture is the process of growing and/or raising crops and livestock, whereas marketing is the process of transferring things from the point of production to the point of consumption. Many academics have defined agricultural marketing by taking into account time, place, shape, and passion utility. The following are some definitions of agricultural marketing: •

Human action aimed at meeting needs and desires through the trade process (Phillip Kotler). • Business operations that control the flow of commodities and services from producers to consumers (American Marketing Association). • Agricultural marketing is the study of all activities and organizations involved in the transportation of farm-produced foods, raw materials, and their derivatives, such as textiles, from farms to ultimate consumers, as well as the impact of such operations on farmers, middlemen, and consumers (Thomsen). The input side of agriculture is not included in this definition. • Agricultural marketing is a process that begins with a decision to produce a marketable farm commodity, includes all aspects of the market structure or system, both financial and institutional, based on technical and economic considerations, and includes pre- and post-harvest operations, as well as assembling, grading, storage, transportation, and distribution (National Commission on Agriculture, 1976). An understanding of the complexity inherent in the agricultural marketing system, as well as the identification of bottlenecks, is required in order to provide effective services in the transfer of farm products and inputs from producers to consumers. A well-designed marketing strategy reduces costs and helps all members of society. The system’s expectations differ

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from group to group, and the goals are frequently at odds. The system’s efficiency and success are determined by how well these competing goals are harmonized. •

Producers: Producer-farmers want the marketing system to buy their produce quickly and give them the greatest possible part of the consumer’s currency. They want the highest possible price for the extra produce they have generated through the system. Similarly, they want the system to provide them with the lowestcost inputs. • Consumers: A marketing structure that can deliver food and other commodities in the quantity and quality that they require at the lowest possible price is appealing to agricultural product consumers. However, the goal of marketing for consumers is at odds with the goal of marketing for farmers and producers. • Market Middlemen and Traders: Market intermediaries and dealers want a marketing system that allows them to earn a consistent and growing income from the purchase and selling of agricultural commodities. Market middlemen can achieve this goal by purchasing agricultural products at low prices from farmers and selling them at high prices to consumers. • Government: The goals and expectations of society’s three groups—producers, consumers, and market intermediaries – are at odds. Each of the three categories is critical to society. To protect the interests of all parties involved in marketing, the government must serve as a watchdog. It tries to give the producer the greatest possible share of the consumer’s rupee; food of the highest possible quality to consumers at the lowest possible price; and enough margin to market middlemen so that they stay in the business and do not consider leaving and jeopardizing the entire marketing mechanism. As a result, the government wants the marketing system to be such that it can deliver general welfare to all segments of society. Agricultural marketing, in its broadest meaning, refers to the sale of farm products generated by farmers as well as the sale of agricultural inputs used by farmers to produce farm products. The topic of output marketing dates back to the dawn of civilization. With the rising marketable surplus of crops following the technological progress, the role of output marketing has grown more apparent in recent years. Farmers make goods for sale on the

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market. Input marketing is a relatively recent field of study. Farmers used farm sector inputs like local seeds and farmyard manure in the past. These inputs were readily available to them; farmers’ purchases of inputs for crop production from the market were minimal. The new farming technology responds to input. As a result, agricultural marketing must encompass both product and input marketing. Agricultural marketing, in particular, covers marketing functions, agencies, channels, efficiency, and costs, price spread and market integration, producer surplus, government policy and research, agricultural marketing training, and statistics.

1.6.1. Key Aspects of Agricultural Marketing •

•

•

Agricultural marketing includes all activities related to the delivery of farm inputs to farmers and the transportation of agricultural goods from farms to consumers. The agricultural marketing system is divided into two parts: Input (factor) marketing and product marketing Farmers, village/ primary traders, wholesalers, processors, importers, exporters, marketing cooperatives, controlled marketing committees, and retailers are all part of the product marketing sub-system. Input makers, distributors, linked associations, importers, exporters, and others make diverse farm production inputs available to farmers through the input subsystem. As a link between the farm and non-farm sectors, the agricultural marketing system is studied and developed. Fertilizers, pesticides, farm equipment, machinery, diesel, electricity, packing material, and repair services are all needed by a vibrant and growing agriculture sector. These items are produced and supplied by industrial and non-farm firms. Farm output growth encourages forward linkages by supplying food and natural fiber surpluses that require transportation, storage, milling or processing, packing, and retailing to consumers. Non-farm enterprises are in charge of these tasks. Furthermore, if increases in agricultural productivity are accompanied by increases in farm family real incomes, the demand for non-farm consumer goods increases, since the proportion of income spent on non-food consumables and durables tends to rise with increases in real per capita income. As a result, several companies discover new customers for their products in the agricultural sector.

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•

•

•

The marketing system should be designed in such a way that it benefits all members of society (producers, consumers, middlemen, and merchants). The government serves as a watchdog to ensure that the interests of all parties involved in marketing are protected. Agricultural marketing includes marketing functions, agencies, channels, efficiency, and costs, price spread and market integration, producer surplus, government policy and research, agricultural marketing training, and agricultural commodity imports and exports. In a developing country like India, the overall goal of agricultural marketing is to assist primary producers, such as farmers, in obtaining remunerative prices for their produce, as well as to provide the right type of goods at the right place, in the right quantity and quality, at the right time, and at the right price to processors and/or final consumers.

1.6.2. Importance of Agricultural Marketing Agricultural marketing is critical not just for encouraging output and consumption, but also for speeding up economic development. It is the most important agricultural development multiplier. Because of the production surpluses caused by the transition from traditional to modern agriculture, marketing becomes the most difficult problem. The following examples demonstrate the significance of agricultural marketing: •

•

Optimization of Resource Use and Output Management: An effective agricultural marketing system optimizes resource utilization and output management. By reducing losses caused by inefficient processing, storage, and transportation, an efficient marketing system can also help to enhance the marketable surplus. A well-designed marketing system can effectively disperse the available stock of modern inputs, allowing the agricultural industry to grow at a quicker rate. Increase in Farm Income: By lowering the number of middlemen or limiting the cost of marketing services and malpractices in the selling of farm products, an efficient marketing system assures better levels of income for farmers. An effective system ensures farmers get higher prices for their farm products and

Agricultural Marketing

•

•

•

•

•

•

•

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encourages them to invest their surpluses in modern inputs to boost productivity and production. This leads in an increase in the farmers’ marketed surplus and income. There is no motivation for a producer to create more if he does not have an easily accessible market outlet where he may sell his surplus produce. Widening of Markets: An effective and well-knit marketing system expands the market for products by transporting them to far-flung locations both within and outside the country, i.e., areas far from the point of manufacture. The expansion of the market helps to maintain a steady increase in demand, ensuring a larger income for the producer. Growth of Agri-based Industries: An enhanced and effective agricultural marketing system aids the expansion of agriculturebased enterprises and encourages the economy’s overall development. Agriculture provides raw resources to many sectors, including cotton, sugar, edible oils, food processing, and jute. Price Signals: Farmers can plan their production in accordance with the needs of the economy with the support of an efficient marketing strategy. This work is accomplished through the transmission of pricing signals. Adoption and Spread of New Technology: Farmers can use the marketing system to assist them accept new scientific and technological information. New technology necessitates greater investment, and farmers will only do so if they are guaranteed market clearance at a reasonable price. Employment Creation: Millions of people are employed by the marketing system in diverse tasks such as packing, shipping, storage, and processing. The marketing system employs people such as commission agents, brokers, traders, retailers, weighmen, hamauls, packagers, and regulating personnel. Apart from that, several others work as suppliers of goods and services to the marketing system. Addition to National Income: Marketing operations increase the nation’s gross national product (GNP) and net national product by adding value to the product. Better Living: The marketing system is critical to the success of development programs intended to benefit the entire population. Any economic development plan aimed at reducing agricultural

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•

•

•

• •

poverty, lowering consumer food prices, increasing foreign exchange earnings, or minimizing economic waste must therefore give special attention to the development of effective food and agricultural marketing. Creation of Utility: Marketing is profitable and just as important as farm produce. It is, in fact, a part of production, because the product is only complete when it reaches a location in the form and time demanded by consumers. Marketing increases the price of the goods while also increasing its utility. Marketing creates the four types of product utilities listed below: Form Utility: By converting the raw material into a final form, the processing function gives form utility to the product. The product becomes more useful as a result of this modification than it was when it was created by the farmer. Oilseeds, for example, are transformed into oil, sugarcane into sugar, cotton into cloth, and wheat into flour and bread by processing. The processed versions are more useful than the raw ingredients themselves. Place Utility: The transportation function gives things more location utility by moving them from a place of plenty to a place of need. Because of the greater utility of the commodity, products fetch higher prices at the point of need than at the point of creation. Time Utility: The storage function gives the products more temporal value by making them available when they are needed. Possession Utility: The buying and selling marketing function aids in the transfer of ownership from one person to another. Products are shifted from those with low utility to people with higher utility through marketing.

1.6.3. Character Differences between Agricultural and Manufactured Product Because of the unique aspects of the agricultural sector (demand and supply) that influence marketing, agricultural commodity marketing differs from that of manufactured commodities. Agricultural marketing has been handled as a separate discipline as a result of these qualities, which makes the subject relatively challenging. These unique characteristics of the agricultural sector have an impact on agricultural product supply and demand that is distinct from that which governs the supply and demand of manufactured goods.

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The agriculture industry has unique qualities that distinguish it from the manufactured sector: •

•

•

•

•

•

Perishability of the Product: The majority of farm products are perishable by nature; however, their perishability varies from a few hours to several months. Because of their perishability, producers find it difficult to set a reserve price for their farmgrown products. Farm products’ perishability can be lowered by processing, but they cannot be made nonperishable like industrial products. The more perishable products necessitate quick handling and, in some cases, specific refrigeration, raising the marketing cost. Seasonality of Production: A specific season of the year is used to produce farm products. They cannot be produced all year long. It causes price seasonality within the year. Farm commodity prices drop during harvest season. The supply of manufactured goods, on the other hand, can be regulated or made consistent throughout the year. Bulkiness of Products: The bulkiness of most agricultural goods makes transportation and storage difficult and expensive. This constrains the location of manufacturing to be close to the point of consumption or processing. Bulky products have a wider price range due to increased transportation, handling, and storage costs. Variation in Quality of Products: Agricultural products have a wide range of quality, making grading and standards challenging. Manufactured goods do not have this problem because they may be made in a consistent quality. Irregular Supply of Agricultural Products: Because agricultural output is dependent on natural conditions, agricultural product supply is unpredictable and irregular. Agricultural product prices fluctuate significantly more than manufactured product prices due to variable supply and nearly constant demand. Small Size of Holding and Scattered Production: Farm products are produced all throughout the country, and the majority of the manufacturers are small businesses. This makes supply estimation difficult and causes problems in marketing (Figure 1).

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Figure 1: Agriculture product characters making agricultural marketing unique.

•

Product Pricing: Aside from the challenge of estimating overall supply in small-scale agriculture, a typical marketing dilemma confronts an individual farmer. He cannot influence market supply since his percentage of total supply is so small. Furthermore, because most farm products’ demand is inelastic, the market price for his product is established independently of his supply. An individual farmer is supposed to be working in a buyer’s market in this sense. Contrary to popular belief, most manufacturing enterprises may have some control over supply and so impact the price of the products they sell due to their bigger market share. • Processing: Most farm products require some form of processing before being consumed by end users. While the processing function adds value to agricultural goods, it also widens the price spread. In the market, processing companies benefit from monopsony, oligopsony, or duopsony. This dynamic might occasionally work against the producers. Agricultural commodities have unique qualities that make their marketing system complex and distinct from those of manufactured goods. These are depicted in the diagram above.

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1.7. MARKETS CLASSIFICATION Markets are classified according to the conditions present in them. When economists classify markets, they take into account a number of factors. The presence of competition is one of these requirements. Is there any competition, first, and foremost? How many competitors are there, if so? What are they competing against once you figure out how many there are? Do they sell the same things or products that are comparable but not identical? They will also consider the market’s size and geography. Is this a neighborhood market? Is it a national market that spans the entire country, or is it an international market that allows items to be traded across borders? It is taken into account the quantity and size of suppliers. How many individuals are involved in the manufacturing or distribution of these items? What are the sizes of the companies that make these goods? Suppliers’ price influence Only one supplier can control the pricing. If there are several suppliers, the actions of one will influence the actions of the other. Even if there are many suppliers, they will consider what their rivals will do in terms of price. Product range: Is everyone selling the same thing or different versions of the same thing? Market accessibility: What is the difficulty of being a market vendor or buyer? Is it simple to enter the market and get started, or is it more difficult? Is it limited to one or two suppliers or buyers? How many are there? It will be easier to get into the industry if there are numerous providers and purchasers. Economists classify markets depending on their structure and competitive behavior. Keep in mind that while defining markets, a variety of economic conditions will be considered. Different types of markets exist. Geographical location, time, business volume, product nature, consumption, competition, seller’s status, transaction nature, and other factors all influence market kinds. Each of the 12 dimensions outlined below can be used to categorize markets: • •

•

On the Basis of Location: Markets are classified into the following categories based on their location or mode of operation: Village Markets: It is a market located in a small hamlet where large transactions take place between the village’s buyers and sellers. Primary Wholesale Markets: These markets are located in large cities near agricultural commodity production centers. The producer-farmers themselves bring a large portion of the produce to these marketplaces for sale.

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•

•

•

•

•

•

•

•

• •

Secondary Wholesale Markets: These markets are usually found around railway crossroads, district offices, or key trading centers. The main commodity transactions take place between village traders and wholesalers. Other markets account for the majority of the arrivals in these markets. Terminal Markets: It is one where produce is either sold to consumers or processed for export. Merchants are well-organized and employ current marketing techniques. These markets have commodity exchanges that provide opportunities for forward trading in certain commodities. Markets like these can be found in either metropolitan centers or seaports, such as Bombay, Madras, Calcutta, and Delhi. Seaboard Markets: These are those that are located near the seashore and are mostly used for the import and/or export of commodities. Bombay, Madras, and Calcutta are examples of these markets in India. On the Basis of Area/Coverage: Markets can be grouped into four categories based on the area from where buyers and sellers often come for transactions: Local or Village Markets: A market where purchasing and selling activities are restricted to buyers and sellers from the same village or surrounding communities. Village markets are primarily for perishable goods in small quantities. Regional Markets: A market for a commodity that draws buyers and sellers from a wider area than local marketplaces. Food grains are mainly sold in regional marketplaces in India. National Markets: A market with buyers and vendors from all around the country. Durable items like jute and tea have national markets. World Market: A market where buyers and sellers come from all over the world. These are the most important markets in the region. These marketplaces exist for commodities with international demand and/or supply. On the Basis of Time Span: On this basis, markets are of the following types: Short-Period Markets: These are defined as markets that last

Agricultural Marketing

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•

• •

•

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• •

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only a few hours. These marketplaces trade in very perishable items like seafood, fresh vegetables, and liquid milk. Long-Period Markets: These markets are held for far longer than short-term markets. Food grains and oilseeds are among the commodities sold in these marketplaces since they are less perishable and may be stored for a long time. The factors of supply and demand both influence prices. Secular Markets: These are markets that are always open. The commodities exchanged in these markets are long-lasting and can be kept for a long time. Markets for machinery and manufactured goods are two examples. On the Basis of Volume of Transactions: On the basis of transaction volume, there are two sorts of marketplaces. This are; Wholesale Markets: Commodities are bought and sold in huge lots or in bulk on a wholesale market. The majority of transactions in these markets are between dealers. Retail Markets: It is one where people buy and sell goods according to their needs. In these markets, transactions take happen between retailers and consumers. Retailers buy in bulk from wholesalers and sell to customers in small batches. These markets are conveniently located for customers. On the Basis of Nature of Transactions: The markets which are based on the types of transactions in which people are engaged are of two types: Spot or Cash Markets: The spot or cash market is a market where items are traded for money immediately after the transaction. Forward Markets: A market in which the purchase and sale of a commodity occurs at time “t,” but the exchange of the commodity occurs at a future date, i.e., time t + 1. It is possible that the commodity will not be exchanged on the given date in the future (t + 1). The difference between the purchase and sale prices is instead paid or taken. On the Basis of Number of Commodities in which Transaction Takes place: The quantity of commodities in which transactions are completed determines whether a market is general or specialized:

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•

•

•

• • • •

• • •

•

•

General Markets: It is a market where all types of commodities are bought and sold, such as food grains, oilseeds, fiber crops, Gur, and so on. These markets deal in a wide range of products. Specialized Markets: It is one in which transactions are limited to only one or two goods. There are distinct markets for each type of commodity. Food grain markets, vegetable markets, wool markets, and cotton markets are all examples. On the Basis of Degree of Competition: Each market can be categorized on a continuous scale ranging from perfectly competitive to pure monopoly or monopsony. There are almost no extreme forms. Nonetheless, knowing their qualities is beneficial. Various midpoints of this continuum have been identified in addition to these two extremes. Markets can be categorized into the following groups based on competition: Perfect Markets: It is one in which the following conditions hold good: A significant number of buyers and vendors are present; Demand, supply, and prices are all perfectly understood by all buyers and sellers in the market; Prices are uniform over a geographic area at any one time, plus or minus the cost of transporting products from excess to shortage areas; Prices are consistent at any given location over time, plus or less the cost of storage from one period to the next; Different forms of a product have the same price, plus or minus the cost of transforming it from one form to another. Imperfect Markets: These are defined as markets that lack perfect competition conditions. The following scenarios can be recognized, each based on the degree of imperfection: Monopoly Market: A market arrangement in which there is only one vendor of a commodity is known as monopoly. He has complete control over the commodity’s quantity and pricing. The price of a commodity in this market is often higher than in other markets. When it comes to purchasing energy for irrigation, Indian farmers are in a monopoly market. A monopsony market is one in which there is just one buyer for a product. Duopoly Market: It is one in which there are only two commodity

Agricultural Marketing

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•

•

•

•

• •

•

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sellers. They may jointly agree to charge a common price that is higher than the hypothetical market price. The duopsony market refers to a situation in which there are only two buyers of a commodity. Oligopoly Market: It is one in which there are more than two but still a few sellers of a commodity. Oligopsony market is a market with a few (more than two) buyers. Monopolistic Competition: It occurs when a large number of vendors trade in a heterogeneous and differentiated form of a commodity. Different trade markings on the product draw attention to the difference. For the same basic product, different prices are prevalent. The input marketplaces are examples of monopolistic competition that farmers encounter. They must, for example, pick between several brands of insecticides, pump sets, fertilizers, and equipment. On the Basis of Nature of Commodities: Markets can be categorized into the following groups based on the sort of items traded: Commodity Markets: These are markets that deal in goods and raw resources such as wheat, barley, cotton, fertilizer, seed, and so on. Capital Markets: These, such as money markets and stock markets, are markets where bonds, shares, and securities are purchased and sold. On the Basis of Stage of Marketing: Markets can be divided into two categories based on their stage of development: Producing Markets: These are those that primarily assemble the commodity for subsequent sale to other markets. These markets are found in agricultural areas. Consuming Markets: These are markets that collect produce for final distribution to the general public. Such markets are typically found in locations with insufficient output or densely populated urban areas. On the Basis of Extent of Public Intervention: Markets can be classified into one of two categories based on the level of government intervention:

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•

•

• •

•

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Regulated Markets: Markets in which transactions are conducted according to rules and regulations established by a statutory market organization representing various market segments. In such marketplaces, marketing expenditures are standardized, and practices are regulated. Unregulated Markets: These are markets where there are no fixed rules or restrictions for doing business. Traders set the rules for how the company is conducted and run the market. There are numerous flaws in these markets, ranging from unstandardized costs for marketing tasks to price determination flaws. On the Basis of Type of Population Served: A market can be classed as either urban or rural based on the population it serves: Urban Market: It is a market that caters mostly to those who live in urban areas. The urban market for farm products describes the nature and volume of demand for agricultural products generated by the urban population. Rural Market: The term “rural market” usually refers to demand generated by rural residents. The form of embedded services required with a farm product differs significantly between urban and rural demands. On the Basis of Accrual of Marketing Margins: Markets can also be segmented based on who receives the marketing margins.

2

CHAPTER

MARKETING FUNCTIONS

CONTENTS 2.1. Overview........................................................................................... 22 2.2. Packaging.......................................................................................... 24 2.3. Transportation.................................................................................... 25 2.4. Grading and Standardization............................................................. 36 2.5. Storage and Warehousing.................................................................. 40 2.6. Processing......................................................................................... 49 2.7. Buying and Selling............................................................................. 54 2.8. Market Information............................................................................ 63 2.9. Financing........................................................................................... 66

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2.1. OVERVIEW A marketing function can be defined as any activity that carries a product from its point of manufacture to its ultimate consumer. A marketing function can include any or all of the three dimensions of time, location, and form. Marketing functions can be categorized in a variety of ways. Marketing functions are divided into three categories by Thomsen. These are listed in Table 2.1. Table 2.1: Thomsen Market Function Classification Classification Primary functions

Secondary functions

Tertiary functions

Function

· Assembling or procurement · Processing · Dispersion or distribution · Packing or packaging · Transportation · Grading, standardization, and quality control · Storage and warehousing · Price determination or discovery · Risk taking · Financing · Buying and selling · Demand creation · Dissemination of market information · Banking · Insurance · Communications – posts and telegraphs · Supply of energy – electricity

Source: Thomsen (2018).

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2.2.

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Kohls and Uhl have classified marketing functions as shown in Table

Table 2.2: Kohls and Uhl Classification of Market Functions Classification Physical functions

Exchange functions Facilitative functions

Function

· Storage and warehousing · Grading · Processing · Transportation · Buying · Selling · Standardization of grades · Financing · Risk taking · Dissemination of market · Information

Source: Kohls and Uhl (2002). Huegy and Mitchell have classified marketing functions in a different way. According to them, the classification is as shown in Table 2.3. Table 2.3: Huegy and Mitchell Classification of Market Functions Classification Physical movement functions

Ownership movement functions

Function

· Storage · Packing · Transportation · Grading · Distribution · Determining need · Creating demand · Finding buyers and sellers · Negotiation of price · Rendering advice · Transferring the title to goods

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Market management functions

· Formulating policies · Financing · Providing organization · Supervision · Accounting · Securing information

Source: Huegy et al. (1965).

2.2. PACKAGING Before being shipped, commodities are wrapped and crated, which is known as packing. Goods must be packed in order to be preserved or delivered to buyers. Packaging refers to the process of packaging things in compact packages such as bags, cartons, bottles, or parcels for sale to end users. The packaging of agricultural commodities is the first step in the marketing process. It is essential at every level of the marketing process for practically all agriculture products. The type of container used in commodity packaging varies depending on the type of commodity and the stage of marketing. Gunny bags, for example, are used to transport cereals, pulses, and oilseeds from the farm to the market.

2.2.1. Advantages of Packing and Packaging Packaging is an important part of the agricultural commodity marketing process. The following are the key benefits of packing and packaging: •

• • • •

It protects commodities from breakage, spoilage, leakage, and pilferage along their transit from the site of manufacture to the point of consumption. Compression is used in the packaging of some commodities, such as cotton, jute, and wool, to minimize bulk. It makes it easier to handle the product, especially fruits like apples and mangoes, during storage and shipping. It aids in product quality identification, differentiation, branding, and advertising, for example, Hima peas and Amul butter. Packaging aids in the reduction of marketing costs by lowering handling and retailing expenses.

Marketing Functions

• • •

•

25

It aids in the detection of adulteration. The packaging guarantees that the product is clean. Packaging with labeling makes it easier to give purchasers instructions on how to utilize or preserve the item. The product’s composition is listed on the label. Packaging protects products from the negative effects of the weather, which is especially important for fruits, vegetables, and other perishable goods.

2.3. TRANSPORTATION At every level, from the threshing floor to the point of consumption, transportation, or the transfer of products between locations, is one of the most significant marketing tasks. Transportation increases the utility of a location and regulates supplies from one location to another. Transportation makes it easier to accomplish marketing operations such as purchasing, assembling, selling, storing, and warehousing. A well-connected transportation system is essential to the economy’s growth and development.

2.3.1. Transport Modes •

•

Seaports: These have always played an important role in trade history. The early stages of European expansion, known as the era of exploration, from the 16th through the 18th century, strengthened this importance. Seaports aided the early development of international trade through colonial empires, but inland access was restricted. Many ports became key industrial platforms later in the industrial revolution. Seaports have become increasingly important in enabling international trade and global supply chains as a result of globalization and containerization. The economic complexity of the hinterlands is reflected in the cargo handled by seaports. Bulk cargoes are usually linked with simple economies, whereas containerized movements are connected with complex economies. Increasing reliance on the oceans as an economic and circulatory zone has resulted from technological and commercial advancements. Rivers and Canals: River trade has thrived throughout history, and canals were developed where there was no major altitude shift due to primitive lock technology. The development of canal systems with locks in Western Europe and North America,

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•

•

•

primarily to convey heavy products, was linked to the early stages of the industrial revolution in the late 18th and early 19th centuries. This allowed for the creation of primitive and restricted inland distribution systems, many of which are still in use today. Railways: The invention and construction of rail lines enabled more flexible and high-capacity inland transportation systems during the second stage of the industrial revolution in the 19th century. Through resource exploitation, regional settlement, and increased freight and passenger mobility, this created significant economic and social potential. Roads: Comprehensive Road transportation systems, such as national highway systems and vehicle manufacturing, grew rapidly as a major economic sector in the 20th century. Particularly after World War II, individual transportation became generally available to the middle classes. This was linked to enormous economic prospects to provide reliable door-to-door delivery to industrial and commercial clients. The automobile also opened up new social possibilities, especially with suburbanization. Airways and Information Technologies: In tandem with economic globalization, the second half of the 20th century saw the development of global aviation and telecommunication networks. In the constantly evolving field of logistics and supply chain management, new organizational and managerial forms were possible. Although sea transportation provides the physical backbone of globalization, air transportation and IT enable passengers, specialized cargoes, and information flows to move more quickly (Figure 2).

Figure 2: Modes of transport.

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The main advantages of the transport function are: • • • • • •

Widening of the market; Narrowing price difference over space; Creation of employment; Facilitation of specialized farming; Transformation of the economy; Mobility of the factors of production.

2.3.2. Transportation Costs Transport expenses have an impact on mobility. The relationship between annual vehicle mileage and fuel costs is highlighted by empirical evidence for passenger car use, implying that the greater the fuel costs, the lower the mileage. The doubling of transportation costs can restrict trade flows by more than 80% on a global scale. The more economical transportation is, the more frequent moves will occur and the larger distances will be covered. Furthermore, empirical evidence shows that transportation expenses are higher in the first and last miles of a journey. There are numerous transportation charges to consider: •

•

•

Terminal Costs: Expenses associated with loading, transshipment, and unloading. There are two major terminal costs to consider: obligatory loading and unloading at the origin and destination, and avoidable intermediate (transshipment) costs. Terminal prices for complicated transportation facilities, such as ports and airports, might include docking/gate fees, handling fees, and pilotage/traffic control fees. Linehaul Costs: Costs that are proportional to the distance traveled by a unit of freight or passenger. When it comes to freight, weight is also a cost function. They typically exclude transshipment costs and include labor and gasoline. Capital Costs: Costs associated with transportation’s physical assets, such as infrastructure, terminals, and vehicles. They can include the acquisition or significant upgrade of fixed assets, which is often a one-time expenditure that can be amortized over several decades. Because physical assets deteriorate over time, frequent capital investments are required for maintenance.

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Transport providers make a variety of judgments based on their cost structure, which is determined by all of the above transportation costs. This entails the communication of information in the form of documents and terms for transactions involving passenger and cargo transportation. To simplify transactions and define various duties, specific commercial transportation phrases have been established. While the transport rate influences modal choice, enterprises that use freight transportation services are not necessarily motivated by cost savings. They frequently exhibit “pleasing behavior,” in which transportation costs must be below a particular threshold and specific requirements for reliability, regularity, and other service features must be met. Such complexity makes determining the influence of transportation rates in the behavior of transport users more challenging, especially in supply chains where transportation costs are a tiny percentage of the end product’s market value. In the setting of global commercial geography, the importance of transportation businesses has grown. Multinational enterprises have emerged in the maritime shipping industry, air carriers, and logistics service providers. However, the nature of this job is shifting as a result of falling transportation costs but rising infrastructure expenditures, owing to increased traffic and land competition. Each transportation industry must examine the relative importance of various transportation expenses. While air transportation has high operating expenses, sea transportation has large terminal costs. Several indexes, such as the Baltic Dry Index, have been constructed to provide a pricing mechanism that can be used for planning and decision-making, especially when it comes to future expectations. Terminal operator-carrier relationships have thus become critical, particularly in containerized traffic. They are required to overcome the physical and time constraints associated with transshipment, particularly at ports. The linkages between transportation modes, terminals, and economic activity have deteriorated as a result of technological advancements and the resulting reduction in transportation costs. As long as transportation networks remain available, there is more locational flexibility with lower transportation costs. Manufacturing and transportation services such as warehousing and distribution are given more priority than heavy industries. New functionalities are being grafted onto transportation activities to help with logistics and production. The traditional concept of transportation costs is being expanded to include logistics costs, which include inventory carrying costs as well as the combination of modes required to complete a complex transfer. The demands of international trade prompted the growth of specialized and intermediary firms that provide transportation services.

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These are companies that do not physically transport goods but are obliged to help with freight grouping, storage, and handling, as well as the complicated paperwork, financial, and legal processes that come with international trade. Freight forwarders, customs brokers, warehousing, insurance agencies, and financial institutions are all examples. There has been a recent trend to combine these various intermediate functions. Multinational firms that provide door-to-door logistics services are now organizing a rising share of global trade. Third-party logistics providers are what they are called.

2.3.3. Factors Affecting the Cost of Transportation Transportation has a wide range of costs and service levels, resulting in significant disparities around the world. The cost of a transportation service includes the user’s direct out-of-pocket charges, time costs, and costs associated with potential inefficiencies and risk (e.g., unexpected delays). However, economic actors frequently choose a mode or route based on only a portion of the overall transportation cost. Motorists, for example, are influenced by short-run marginal costs. They may reduce the cost of a car trip to just the cost of fuel, leaving out charges like tolls, depreciation, insurance, and vehicle tax. When evaluating the cost aspect in modal choice, many shippers or freight forwarders are primarily guided by direct monetary considerations. To some part, the limiting focus on direct money expenses is due to the fact that time costs and costs related to potential inefficiencies are more difficult to measure and are typically only completely appraised after the cargo has arrived. There are a number of factors that influence transportation costs and consequently rates. Other things being equal, a commodity’s transportation cost is determined by some factors which are discussed in subsections.

2.3.3.1. Distance Distance and accessibility are the fundamental effects of geography. The most basic factor impacting transportation costs is distance. The more difficult it is to swap space for money, the greater the importance of distance friction. It can be measured in terms of length, time, economic expenditures, or energy consumption. It varies considerably depending on the mode of transportation and the efficiency of various transportation routes. Because landlocked countries lack direct access to ocean transit, their transportation costs are sometimes twice as high. The impact of geography on the cost structure can be expanded to encompass multiple rate zones, such as local,

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national, and export. The transport time component is particularly crucial to evaluate because it is linked to the transportation service factor. Transport time, order time, timing, punctuality, and frequency are all factors to consider. A maritime shipping company, for example, might provide container transportation between multiple North American and Pacific Asian ports. Transport time between two ports across the Pacific could take up to 12 days, with a port call every two days (frequency). A freight forwarder must call at least five days ahead of time to reserve a spot aboard a ship (order time).

2.3.3.2. Quantity of the Product The lower the unit transit cost, the larger the amounts being transported. If bulk goods such as energy (coal and oil), minerals, and cereals are transported in huge amounts, economies of scale or the ability to apply them are particularly advantageous. Container transport follows a similar pattern, with larger containerships resulting in lower unit prices. For passenger transportation, public transit systems benefit from economies of scale. They are, however, constrained by demand, as the largest transport unit that can be allocated to a route without jeopardizing its profitability cannot exceed the existing demand. Transportation activities consume a lot of energy, mainly oil. Transportation operations account for over 60% of worldwide oil consumption. Transportation typically consumes roughly 25% of an economy’s total energy consumption. Energy prices affect the expenses of numerous energy-intensive modes of transportation, such as maritime and air transport, because energy accounts for over half of their operating costs.

2.3.3.3. Mode of Transportation Transport expenses are directly influenced by the efficiency and capacity of modes of transportation and terminals. Poor infrastructure leads to higher transportation costs, delays, and negative economic outcomes. Because better established transportation networks are more reliable, linked, and capable of handling more movements, they tend to have lower transportation costs. Because each mode has its own capacity restrictions and operational requirements, different modes have varying transportation costs. A key consideration is the acceptability of modes based on the distance traveled and the type of the cargo. When two or more modes compete directly for the same market, lower transportation costs and specialty development

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31

are common outcomes. By permitting relatively small transport units (containers) to be carried in massified loads, containerized transportation dramatically cut freight transport rates globally.

2.3.3.4. Condition of Infrastructure and Modes Transportation expenses are directly influenced by the efficiency and capacity of transportation modes and terminals. Poor infrastructure results in higher transportation costs, delays, and negative economic outcomes. Because they are more reliable, linked, and capable of handling more movements, more developed transportation networks have lower transportation costs. Because each mode has its own capacity restrictions and operational requirements, different modes have varying transport costs. One of the most important considerations is the suitability of different modes for different distances and different types of cargo. When two or more modes compete for the same market, lower transportation costs and specialty development are common outcomes. By permitting relatively small transport units (containers) to be carried in massified loads, containerized transportation dramatically cut freight transportation rates globally.

2.3.3.5. Nature of Products The cargo determines freight mobility. Packaging and careful handling are required for many big or perishable products. Because it only requires minimal storage facilities and can be transshipped using rudimentary technology, coal is a commodity that is easier to transport than fruits or fresh flowers. Insurance expenses are also taken into account, and are often based on the value-to-weight ratio and the risk connected with the relocation. As a result, because each economic sector has its unique transportation intensity, different economic sectors incur varying transportation costs. Containerization reduces the impact of product type on transportation costs because rates are determined by container, but products must still be loaded and unloaded from the container. Passengers must be supplied with comfort and facilities, especially when traveling long distances. These luxuries come at a price, but they can also generate cash, as in shopping and repair. A segmentation of services and levels of comfort during travel is used to differentiate products. For example, air travel is frequently divided into business and economy classes in its most basic form. • •

Perishability (e.g., vegetables); Bulkiness (e.g., straw);

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• • •

Fragility (e.g., tomatoes); Inflammability (e.g., petrol); Requirement of a special type of facility (i.e., for livestock and milk).

2.3.3.6. Availability of Return Journey Consignment Because it is rare to have a perfect match between an inbound and return route, many transportation exchanges contain empty backhauls. Unbalanced flows and empty return trips are common commuting patterns. Imbalances between imports and exports have an impact on transportation costs in international trade. This is particularly true for container transportation, as trade imbalances necessitate the repositioning of empty containers, which must be factored into total transportation costs. As a result, if a trade balance is heavily negative (more imports than exports), import transportation costs are likely to be higher than export transportation costs. Along important commercial routes, significant transport rate mismatches have formed. At the national and local levels, where freight flows are frequently unidirectional (e.g., from a port terminal to a distribution center), empty backhaul movements are common.

2.3.3.7. Competition, Regulation, and Subsidies The transportation industry operates in a highly competitive and regulated environment. Transport services in highly competitive segments are typically less expensive than those in less competitive segments (oligopoly or monopoly). Many parts of the transportation business, particularly maritime and air modes, have preferred concentration due to international rivalry. Tariffs, cabotage rules, labor, security, and safety regulations all add to transportation costs, especially in developing economies. If infrastructure development and maintenance are costly, the cost should be included in tickets to cover asset amortization. Because they provide free infrastructure to their users, publicly accessible highways are a sort of cross-subsidy. However, freedom of access can be deceiving because users pay sales and fuel taxes, which are used to build and maintain road infrastructure. Crosssubsidization occurs when a government or firm uses funds from other areas of its business to cover the full cost of transportation infrastructure. To cross-subsidize public transportation, taxes, and tolls are frequently used.

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2.3.3.8. Surcharges, Taxes, and Tolls Surcharges are a variety of fees that are often established arbitrarily to reflect transient conditions that may affect the transporter’s costs. They also occur when fares are controlled, forcing the operator to seek alternate revenue streams. The most typical surcharges include fuel surcharges, security fees, geopolitical risk premiums, and excess baggage fees. The passenger transportation business, notably airlines, has become reliant on a variety of surcharges to generate revenue. Yield management is a type of fee in which a transportation service provider adjusts their tariff in response to demand fluctuations. Taxes on transportation activities, such as automobile sales taxes and registration fees, are common. Governments levy the most significant type of taxation, with income often used to finance maintenance and infrastructure investment expenditures. Tolls are frequently imposed on the use of transportation assets, especially at bottlenecks like bridges and tunnels.

2.3.3.9. Risk Associated Transportation Issues with Agricultural Commodities Some of the newest hazards affecting transportation include advances in technology, cyber vulnerabilities, and market fluctuations caused by international trade disputes. The rising driver scarcity, regulatory compliance, and the deplorable state of America’s infrastructure are all ongoing issues. The following are the major issues that arise from the transportation of agricultural commodities: •

The modes of transportation employed are slow; as a result of the inadequate packaging material used, there are more losses/ damages during transportation; • The expense of transporting farm products is higher than for other goods; • There is a lack of coordination among various modes of transportation, such as trains and trucking businesses. As time goes some of the current risks in transportation are as given below: •

Cyber Attacks on Physical Assets: More access points for hackers are being created as fleet telematics systems that track the location, status, and condition of physical assets become more widely used. While breaking into a private network exposes

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•

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private customer information, the greatest threat to transportation companies is cyber thieves causing physical harm to the vehicle or its valuable cargo. For example, cyber attackers may take control of a truck carrying fresh produce’s computerized dashboard, which displays the trailer’s temperature and displays a suitable reading while shutting off the cooling processes. As a result, thousands of dollars’ worth of rotting food may go undetected until the driver stops to make his delivery. Electronic sensors, network technologies, and automation are also widely used in the train business. These technologies are used in positive train control, track signaling, communications systems, and power distribution. Because of the greater risk of supply chain disruption, high-volume, and commodities rail operators may be particularly vulnerable to cyber-attacks by political actors. Advancing Technology: The introduction of new technologies, such as semi- and fully-automated vehicles and increased usage of sensors connected to the Internet of Things, is anticipated to increase cyber transportation hazards. Apart from cyber risk, these technologies have the potential to help alleviate the driver shortage and improve safety, but organizations who ignore or fail to keep up with these advances risk falling behind competitors and missing out on crucial possibilities. “As operational technology changes, critical infrastructure operators will need to ensure that new architecture can be regulated and secured,” according to a Marsh analysis on cyber risks in transportation. Companies will be vulnerable to cyber-attacks as they grow and modernize. Upgrades to existing legacy systems may result in security being compromised.” Continuing Driver Shortage: According to the American Trucking Associations, the sector will face a driver shortage of over 100,000 by 2022. The continuous scarcity is caused by the retirement of older workers, the difficulty of filling vacant positions with new recruitment, and the advent of e-commerce, which has increased delivery demand. The average age of a truck driver in the United States is 56 years old. Trucking owners and operators have struggled to sell the trucking lifestyle—

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long, lonely, sedentary hours on the road—to younger people, despite increased earnings and signing bonuses for new drivers. Furthermore, an older workforce is associated with a higher prevalence of health conditions and higher consumption of employee benefits, which increases employer expenditures. Due to the driver shortage, seasoned drivers are under additional pressure to complete extra runs and spend more hours on the road per day in order to meet delivery deadlines, resulting in weariness and an increased risk of an accident. Deteriorating Infrastructure: The United States’ old—and in some cases, deteriorating—infrastructure will continue to wreak havoc on ground transportation and add to traffic congestion on the roads and trains. Even minor travel delays add up to significant expenses for trucking and rail companies. “In 2014, there were a total of 6.9 billion vehicle-hours of delay on roads due to congestion throughout 470 urban areas,” according to the American Society of Civil Engineers’ 2017 Infrastructure Report Card. These delays cost the country $160 billion in wasted gasoline and 3.1 billion gallons of wasted fuel. Aside from higher fuel expenses and fewer on-time delivery, cars are more likely to be damaged by badly maintained roads, necessitating more regular maintenance or costly repairs. The issue is likewise unlikely to go away very soon. “The total investment gap is now anticipated to be $1.1 trillion through 2025, and an additional $3.2 trillion from 2026 through 2040,” according to the ASCE’s infrastructure study. Greater Regulatory Oversight: One reason for increasingly strict federal regulations determining how many hours drivers can sit behind the wheel in one day is driver tiredness. Trucks must be equipped with electronic devices that track how many hours each vehicle spends on the road each day as of April 1, 2018. Truckers are not allowed to drive more than 11 hours in a 14-hour period under the new “hours of service” law. After an 11hour travel, they are required to rest for at least 10 hours. While the law has been proved to lower driver weariness and crash rates, it also raises training costs and may cause further delays in deliveries, increasing the driver shortage and adding to the list

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of transportation concerns. The Food Safety Modernization Act, which large trucking businesses were required to comply with by April 2017, adds to the regulatory compliance load for motor carriers and exposes them to hefty fees. “The FDA finalized its new food safety guideline in April 2016 to avoid food contamination during transit,” Fleet Owner Magazine reports. The rule requires shippers, loaders, carriers, and receivers of human and animal food to follow best practices for hygienic transportation, such as appropriately refrigerating food, cleaning vehicles between loads, and properly protecting food during transportation.” The rule includes provisions for appropriate recording of all actions conducted. Demand Volatility: Fuel prices have a significant impact on transportation profit margins. Reduced oil prices mean lower gas prices and more money in the coffers of operators. Unfortunately, oil prices are volatile, and the trucking, rail, and aviation industries all face unpredictably high fluctuations that effect each sector differently. When gasoline is inexpensive, more shippers choose trucking over rail to convey their goods because trucking is generally faster. Railways, on the other hand, may benefit from increasing oil prices since freight trains offer greater value than gas-guzzling tractor-trailers. International political tensions and trade disputes, in addition to oil price fluctuations, are likely to alter the number of products moved and disrupt global supply chains. According to a Fitch Ratings research, auto tariffs and aluminum and steel tariffs might potentially have an impact on the US transportation business.

2.4. GRADING AND STANDARDIZATION Grading and standardization are marketing functions that help in produce mobility. First, commodity grade standards are established, and then the commodities are sorted according to the recognized requirements. The first steps in the value chain of an agricultural product as it goes through a market channel to the customer are standardization and grading. The price of a product must be proportional to its quality, which is determined by a responsive grading and standardizing system. As a result, extension workers must encourage grading of various commodities at the farmer level and facilitate price-quality connection by developing appropriate buyer-seller

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relationships. Because the quality of agricultural food brought to market by farmers varies over time and between areas, it is necessary to grade the produce on scientific lines in order to link the price of the produce to the grade and quality fluctuations. Scientific grading should be based on objective evaluation of quality elements so that vendors can describe the quality they are offering and buyers can understand what is available in the market. Following the adoption of the Agricultural Produce (Grading and Marking) (AGMARK) Act (1937), efforts were made to systematize the marketing of agricultural commodities on scientific lines. The AGMARK Act gives the Central Government the authority to regulate grade standards for agricultural commodities and livestock products, as well as rules governing their use and grading procedures. The Directorate of Marketing and Inspection (DMI) of the Ministry of Agriculture and Farmers Welfare, Government of India, has produced grading standards for 213 agricultural commodities at this time. The AGMARK label appears on graded agricultural products. DMI’s various grading categories can be divided into the following categories: • Domestic consumption of agricultural commodities; • Exports of agricultural commodities; and • Ag-marking at producer’s level. Besides DMI, there are other agencies entrusted with the task of standardization for different purposes, as furnished in Table 2.4. Table 2.4: Agencies for Grade Standards Agencies for Grade Standards Department of Food and Civil Supplies

Fair average quality (FAQ) standards for the public distribution of agricultural commodities for Procurement

PFA/FSSAI

Provide guidelines for packing and labeling of an article of food. PFA (pest free areas) standards prescribe minimum limit for quality as well as safety parameters (mandatory)

DMI (AP(G&M) Act, 1937)

Standards of various agricultural commodities prescribed under the provisions of the act are popularly known as AGMARK standards. AGMARK standards comply with minimum standards of quality and safety prescribed in PFA/FSSAI. Recently, Organic Agricultural Produce Grading and Marking Rules (2009) have been notified which provides for certification of organic agricultural commodities included in the schedule under the act

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BIS Act (1986)

The act provides for framing of products standards for processed commodities and for processes. The act is voluntary in nature

Commodity Exchanges

Provides a platform for market participants to trade in a wide spectrum of commodity derivatives (agriand non-agri-commodities). Quality specifications are prescribed for each commodity with relaxations to facilitate trading

Source: bizencyclopedia.

Standardization is the process of determining the standards that will be applied to various commodities. Pyle defines standardization as the formation of model procedures and systems for producing, handling, and selling goods and services, or the determination of basic limitations on grades. Weight, size, color, appearance, texture, moisture content, staple length, amount of foreign matter, maturity, sweetness, flavor, chemical content, and other qualities are used to set standards. The qualities that are used to standardize products are referred to as grade standards. As a result, standardization entails making grade quality requirements consistent across buyers and sellers over time and geography. Grading is the process of separating unlike lots of produce into various lots based on quality requirements. In terms of quality, each lot has essentially the same qualities. It is a way of classifying products into groups or lots based on preset criteria. Grading happens after standardization. It is a standardization sub-function.

2.4.1. Types of Grading Grading may be done on the basis of fixed standards or variable standards. It is of three types: •

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Fixed Grading/Mandatory Grading: This entails categorizing things based on their size, quality, and other predetermined features. These do not change with time or space. Permissive/Variable Grading: Under this system, commodities are rated according to standards that change over time. This type of grading is not permitted in India. Centralized/Decentralized Grading: The program can be classified as centralized or decentralized grading depending on the level of government oversight conducted on the grading of various farm products.

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Under the centralized grading system, an authorized packer either establishes his own laboratory with competent chemists or seeks access to a state-approved grading laboratory set up for the purpose by co-operatives, associations, or commercial agencies. Grading has been centralized in respect of commodities such as ghee, butter, and vegetable oils, which require extensive testing facilities for confirming purity and rating quality. State Marketing Authorities apply the decentralized grading system under the overall direction and guidance of the DMI.

2.4.2. Criteria for Grade Standards The criteria, which determine the adequacy of standards, are: •

•

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Standards should be based on the traits that consumers value, and these characteristics should be immediately identifiable. The user’s opinion should be given more weight. Grade criteria should be based on variables that can be evaluated and interpreted consistently and reliably. The subjective measurement-based grading standards will be difficult to apply consistently, especially by diverse graders. At all levels of the marketing channel, the grade requirements terminology should be consistent. The grading system’s operating costs must be acceptable.

2.4.3. Advantages of Grading Grading has the following benefits for various groups of people: •

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Farmers can earn a better price for their crops by grading it before selling it. Grading also serves as a motivator for companies to promote higher-quality products. Grading facilitates marketing because both parties are familiar with the product’s size, color, characteristics, and other grade designations, and the seller is not required to provide any assurance regarding the product’s quality. Grading expands the market for the goods because purchases can be made over the phone between people in different locations without any inspection of the product’s quality. Grading lowers marketing costs by reducing fees for physical inspection of produce and reducing storage losses.

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•

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Grading reduces advertising costs while also removing the costs of handling and weighing at each level. Grading allows the farmer to work more efficiently. – to get easy finance when commodities are stored; – to get the claims settled by the railways and insurance companies; – to get storage place for the produce; – to get market information; – to pool the produce of different farmers; – to facilitate futures trading in a commodity. Grading helps consumers to get standard quality products at fair prices. Grading contributes to market competition and pricing efficiency.

2.5. STORAGE AND WAREHOUSING Storage is a crucial marketing function that entails keeping and conserving items from the time they are manufactured until they are consumed. Storage is a form of human foresight that protects commodities from deterioration and allows surplus supplies in times of abundance to be carried over to times of scarcity. As a result, the storing feature enhances the time utility of products. Agriculture is characterized by significant and irregular seasonal and year-to-year production variations. On the other hand, most farm product consumption is pretty steady. Due to the competing behaviors of demand and supply, huge volumes of farm produce must be kept for an extended length of time. The function of storage is as old as man himself, and it is carried out at all levels of the industry. A portion of the output is kept on the farm by the producers. Traders keep it in their warehouses to gain a price edge. Processing plants have a reserve store of raw materials in order to keep their plants running continuously. Retailers stock a variety of goods to meet customers’ day-to-day needs. Food grains are stored by consumers as well, depending on their financial situation. Agricultural products must be kept in storage for the following reasons: •

Agricultural items are produced seasonally, although they are required for consumption all year. Thus, from the moment of production to the time of consumption, items are stored to maintain a continual flow of goods in the market.

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Perishable and semi-perishable items are protected from deterioration by storage. • Woolen clothes, for example, are in high demand during the winter. In order to meet this demand, continual manufacturing and storage are required. • It helps in the stabilization of prices by adjusting demand and supply. • For the performance of additional marketing duties, storage is required for a period of time. For example, the produce must be stored until transportation arrangements are established, or throughout the buying and selling procedure, or the weighment of the product after sale, and during the processor’s processing. • Some agriculture commodities require storage either to ripen (banana, mango, etc.), or to increase quality (rice, pickles, cheese, tobacco, etc.). • Through price advantages, storage gives jobs and money. Middlemen, for example, store food grains by purchasing them at low costs during peak season and selling them at higher prices during other seasons. Health, hygiene, and safety regulations should be followed when storing. People do store products in the storage facility for later use. When storing your prized possessions, temperature, and other associated factors must be taken into account. The importance of storage in marketing includes the following: •

•

Creation of Time Utility: Storage adds dimension to a commodity’s market. If transportation and communication define the market’s length and breadth, storage, and its associated financial function determine the market’s depth. As a result, a storage facility is said to provide commodities with “temporal utility.” Because items that are not created equally throughout the year must be stored until they are desired by consumers, storage provides time utility. Otherwise, product price instability could emerge, potentially destroying the entire economic system. When consumption falls behind production, excess produce is held until it is needed. The gap between consumption and output is narrowed with this approach. Regularity in Supply: Seasonally produced items should be preserved at the time of manufacture to ensure that consumers

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•

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are supplied during times of scarcity. Grain, cotton, tobacco, and other items can be preserved for months. In this regard, cold storage plays a crucial role. Many perishables, such as potatoes, eggs, fruits, and fish, can be stored in cold storage to ensure that the market is consistently supplied. In the case of items with unpredictable demand, storage is critical for maintaining production consistency. Seasonal products include Fanta, 7-up, and Coca-Cola, ice cream, electric fans, and woolen garments. If the factories that make these commodities are to be open all year, the goods created during the off months must be stored until the customers require them. Natural disasters such as fire, flood, and storms, which can disrupt production and transportation, necessitate storage as well. Reduction of Business Fluctuations: Storage can also help processes adapt to fluctuations in business activity. Producing for storage augments activity when business is slow, while withdrawals from storage increase supply when demand is high. This smooths out company volatility and decreases risk to some extent. Expedition of Financing: The warehouseman who stores the items may offer the merchandise’s owners a financing service. If he does not provide this service, he will provide the owners with negotiable warehouse receipts that will allow them to seek outside funding. Stabilization of Pricing: Prices tend to be stabilized as supply and demand are adjusted. One of the most significant advantages of storage is the role it plays in price stabilization. Cutting of Transportation Costs: Transportation costs are decreased when storage is used. This is due to the fact that storage allows for the accumulation of larger amounts of a commodity. Because shipments of merchandise in amounts less than a carload are charged higher transportation rates than carload shipments, the ability to increase the size of a cargo through storage helps to reduce transportation expenses. Reduction of Risking: By storing things with a reliable warehousing service, the owner of commodities can eliminate some risks associated with ownership. Part of the danger is taken on by the warehouseman.

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Reduction of Prices: Storage helps to lower commodity prices in the long run by encouraging producers to store their excess production. The ability to store commodities allows for higher output, lowering unit costs and prices. Mass Production: Because modern mass manufacturing is conducted in anticipation of future demand, finished goods must be kept in stock until they are required. Conditioning: Some products necessitate conditioning, curing, or similar treatments. These operations can be carried out with the use of storage. Raw Material for Continuous Production: Continuous production by a major manufacturer is difficult unless the necessary raw materials are kept in stock to ensure their immediate availability.

2.5.1. Storage Risks in Agriculture The storage of agricultural commodities involves three major types of risks. These are: •

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Quantity Loss: During storage, there is a risk of quantity loss due to rats, insects, and pests, theft, fire, and other factors. Dehydration, too, causes an unavoidable weight loss. Poor and incorrect storage is projected to result in the loss of around 10 million tons of food grains each year. Quality Deterioration: The second major danger associated with storing farm products is quality degradation, which affects the value of the stored goods. These losses might occur as a result of insect and pest attacks, excessive moisture and temperature, or chemical reactions that occur throughout the storage period. Fruits, vegetables, and meat that have been dehydrated during storage may have a lower sale value. Butter can get rancid if not stored properly, lowering its sale value. The loss in quality of farm products is dependent on their quality at the time of storage, the storage method, and the storage length. Price Risk: This is another significant concern associated with the storage of farm products. Prices do not usually rise enough to pay storage costs during the storage time. They can decline dramatically at times, resulting in a significant loss for the owner.

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Farmers and dealers usually stockpile their goods in anticipation of a price increase, and they suffer when prices drop.

2.5.2. Principles of Storage The warehouse storage system has a significant impact on the total cost and success of warehousing operations. Firms place a higher value on how inventories are handled than on how they are stored. Invariably, investment planning in industry is focused on handling equipment rather than storage systems. In reality, if the storage system provides for convenient storage and retrieval of inventory, efficient use of material handling equipment is conceivable. A well-designed storage system strikes a balance between optimal space utilization and the necessity for easy and quick access to the stored items. The following guidelines are generally followed when constructing an efficient storage system: • Minimize the travel distance; • Maximize the utilization of available space; • Provide easy and quick access to the stored goods; • Facilitate easy tracking of the material; • Provide security against fire, damage, and theft; • Prevent contamination and deterioration of the goods. The following elements influence the criteria for selecting a storage system for a specific application: •

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Product Characteristics: Contamination-prone products require a storage facility that isolates them from other product categories. Flowers, for example, are prone to odor pollution. Hazardous substances, on the other hand, represent a threat to other products as well as human life. As a result, special design considerations for these types of items are required. Configuration: Objects of consistent shape and size can be stacked or placed in an enclosure, whereas odd-shaped products may require more open space. Steel sheets, billets, rods, angles, and pipes, for example, are stored in the steel yard in the open. Shelf Life: The storage system designed on first-in-first-out (FIFO) consideration. Product Variety: The system needs to segregate the products for ease in identification during storage and retrieval.

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For agricultural goods the following storage principle are considered: •

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Control of Respiration: Because respiration is a breakdown process, the storage strategy should allow for this metabolic activity to be minimized. The methods based on this idea are cold storage, atmospheric modification, and low-pressure storage. The heat produced during respiration, also known as respiratory heat or heat of respiration, collects in the storage’s core. If the heat in the storage chamber is not removed, the rate of respiration of stored produce increases. As a result, appropriate ventilation will aid in the removal of this heat, lowering the rate of respiration. Reducing respiration rate can also aid to postpone the ripening of some fruits and vegetables, extending their storage life. Control of Transpiration: Even after harvest, fresh produce continues to lose water, resulting in wilting or shriveling. A 5% loss of moisture is enough to cause the produce to shrivel, rendering it unmarketable. The amount of moisture lost from fresh vegetables is influenced by relative humidity and temperature. Water loss will also be high when storage temperature rises. At high temperatures and little humidity, fresh produce seeps more. As a result, by storing the fruit at low temperatures and high relative humidity, this process can be regulated. Prolonging the Dormancy Period/Control of Sprouting and Rooting: After harvest, several root and tuber vegetables go into a dormant state known as dormancy. Sprouting and roots of these crops are not possible during this time. These crops, on the other hand, re-grow in favorable conditions, resulting in sprouting and roots. Consumers prefer not to purchase sprouted or rooted veggies. Sprouting also causes the produce to quickly lose moisture, shrivel, and become susceptible to microbial illness. As a result, the principle for increasing the storage life of this sort of produce is to prolong the dormant phase by generating unfavorable conditions. Control of Spoilage: Fresh produce has a high moisture content and readily available nutrients, making it vulnerable to germs. Warm temperatures and high humidity in the storage area encourage the growth of these microorganisms, which leads to increased deterioration. As a result, storage solutions should

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attempt to slow or stop the growth of these spoilage-causing microbes.

2.5.3. Types of Storage and Warehousing Different principles are observed depending on the agricultural commodity being stored, leading to different methods of storage to satisfy a specific demand. The types of storage and warehousing are discussed in subsections.

2.5.3.1. Underground Storage Structures Underground storage structures are dugout buildings with sides coated with cow dung, comparable to a well. Stones, sand, and cement can also be used to line them. They can be either circular or rectangular. The capacity varies depending on the structure’s size. • • • •

Advantages: External dangers such as theft, rain, and wind are less likely to cause damage to underground storage buildings. With simple alterations, the subsurface storage area can be temporarily used for other purposes; and Because of the gravity factor, underground storage systems are easier to fill.

2.5.3.2. Surface Storage Structures Food grains in a ground surface structure can be stored in two ways – bag storage or bulk storage. • • • • • • •

Advantages of Bag Storage: Each bag contains a definite quantity, which can be bought, sold, or dispatched without difficulty; Bags are easier to load or unload; It is easier to keep separate lots with identification marks on the bags; The bags which are identified as infested on inspection can be removed and treated easily; and The problem of the sweating of grains does not arise because the surface of the bag is exposed to the atmospheres. Advantages Bulk or Loose Storage:

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Per unit weight of grain, the exposed peripheral surface area is smaller. As a result, the risk of damage from outside sources is minimized; Because the deeper layers are practically airtight, pest infestation is reduced; The Indian government is working to encourage better storage facilities at the agricultural level.

2.5.3.3. Improved Grain Storage Structures • •

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For Small-Scale Storage: PAU Bin: This is a galvanized metal iron structure. It is capacity ranges from 1.5 to 15 quintals. Designed by Punjab Agricultural University. Pusa Bin: This is a storage structure is made of mud or bricks with a polythene film embedded within the walls. Hapur-Tekka: It is a cylindrical rubberized cloth structure supported by bamboo poles on a metal tube base, and has a small hole in the bottom through which grain can be removed. For Large Scale Storage: CAP Storage (Cover and Plinth): It entails erecting 14-inchhigh masonry pillars with grooves into which wooden crates are inserted for stacking sacks of food grains. In less than three weeks, the structure can be built. It is a cost-effective method of large-scale storage. Silos: The grains in bulk are unloaded onto conveyor belts and transported to the storage structure via mechanical activities in these structures. Each of these silos has a storage capacity of roughly 25,000 tons.

2.5.3.4. Warehousing Warehouses are scientific storage facilities designed to protect the amount and quality of things being housed. Among the benefits of warehousing are: •

Scientific Storage: The product is safeguarded against quantitative and qualitative losses by using the appropriate preservation methods.

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•

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Financing: Warehouses are designed to suit the financial requirements of the individual who stores the product. Nationalized banks extend credit to the amount of 75% to 80% of the value of the warehouse receipt issued for the stored goods. Price Stabilization: Warehouses aid in the price stabilization of agricultural commodities by preventing farmers from making post-harvest sales. Market Intelligence: Market information is also available to people who store their produce in warehouses.

2.5.3.5. Working of Warehouses •

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Acts: The warehouses (CWC (Central Warehousing Corporation) and SWCs (State Warehousing Corporation)) work under the respective Warehousing Acts passed by the Central or State Govt. Eligibility: Any person may store notified commodities in a warehouse on agreeing to pay the specified charges. Warehouse Receipt (Warrant): The warehouse manager/owner issues this receipt/warrant to the person storing his produce with them. The date of issue, the name and location of the warehouse, a description of the commodities, including the grade, weight, and approximate worth of the produce based on current prices are all listed on this receipt. Use of Chemicals: The produce that is accepted at the warehouse is properly maintained and safeguarded against rats, insects, bugs, and other infestations. To preserve the items, periodic cleaning and fumigation are performed at the warehouse’s expense. Financing: The warehouse receipt is used as a kind of collateral when applying for loans. Delivery of Produce: Before the products can be withdrawn, the warehouse receipt must be surrendered to the warehouse owner. After paying the storage fees, the holder may take delivery of a portion of the entire produce stored.

2.5.3.6. Types of Warehouses • •

On the basis of Ownership: Private Warehouses: Individuals, major corporations, and wholesalers hold these for the storage of their own inventory.

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They also keep other people’s goods. Public Warehouses: These are government-owned warehouses that are used to store products. Bonded Warehouses: These warehouses are expressly built at a harbor or airport to accept imported items for storage until the importer of goods pays customs. The government has granted these warehouses this license. These are bound items that are kept at this warehouse. Bonded warehouses provide the following services: Because he can take delivery of the products in portions, the importer of goods avoids the hassle of paying customs duty all at once; Spraying and dusting are done on a regular basis in order to maintain the quality of the goods; The possibility of entrepot trade (the re-export of imported commodities) emerges. On the basis of Type of Commodities Stored: General Warehouses: These are regular warehouses where most food grains, fertilizers, and other items are stored. Special Commodity Warehouses: These are warehouses designed specifically for storing specific commodities such as cotton, tobacco, wool, and petroleum goods. Refrigerated Warehouses: Perishable commodities such as vegetables, fruits, fish, eggs, and meat are stored in these warehouses, which are kept at the appropriate temperature.

2.6. PROCESSING Processing is a significant marketing role in today’s agricultural commodity marketing. The commodity’s form is changed during the processing procedure. This function encompasses all essentially manufacturing processes that alter the product’s basic form. The raw material is converted and the products are brought closer to human use. It is concerned with increasing the value of a product by altering its shape. A little more than 100 years ago, it was a relatively unimportant function in marketing. A considerable percentage of farm products were sold unprocessed, and much of the processing was done by the customers themselves. Consumers are currently reliant on processing for the majority of their needs. Many technological advancements have

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occurred recently, including the introduction of refrigeration, current ways of milling and baking food grains, new dairy processing methods, and modern packaging and preservation methods. These technical advancements have had a considerable impact on consumer living standards, societal economic and social organizations, and trade growth in the country.

2.6.1. Advantages In the modern marketing of agricultural goods, processing is an important marketing function. The commodity undergoes a transformation during the processing process. This function encompasses all primarily manufacturing processes that alter the product’s basic form. Processing transforms raw materials into consumable products. It is concerned with enhancing the product’s value by altering its appearance. It was a relatively unimportant function in marketing a little more than 100 years ago. A huge percentage of farm products were sold unprocessed, and consumers did much of the processing themselves. The majority of customer needs are currently met through processing. Many technological advancements have happened in recent years, including refrigeration, sophisticated techniques of milling and baking food grains, new dairy processing methods, and current packing and preservation systems. Consumers’ living standards, societal economic and social organizations, and trade growth have all been affected by technological changes. •

•

Raw food and other farm products are transformed into edible, useable, and palatable forms. The amount of value contributed by processing to the total value produced on the farm varies by product. Rice and wheat have a roughly 7% yield, cotton has a 79% yield, and tea has an 86% yield. Commercial crops often have a larger yield than food crops. The processing of sugarcane to make sugar, gur, and khandsari; the processing of oilseeds to make oil; the grinding of food grains to make flour; the processing of paddy into rice; and the conversion of raw mango into pickles are all examples of items in this category. The processing function allows us to store perishable and semiperishable agricultural goods that would otherwise be wasted, as well as to reuse surplus output from one season or year in another. Fruit and vegetable drying, canning, and pickling, frozen items, milk conversion to butter, ghee, and cheese, and meat curing with salting / smoking are all examples of product processing.

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Employment is created by the processing activity. A major portion of society is employed by the baking industry, canning business, brewing, and distilling industry, confectionary industry, sugar industry, oil mills, and rice mills. Consumers’ requirements are met at a cheaper cost through processing. It is more expensive to do it at the consumer’s door than it is to do it on a huge scale by a company. Consumers save time and are relieved of the hassles and inconveniences associated with the processing process. Other marketing operations, including as transportation, storage, and retailing, rely on processing. The market is widened via processing. Processed items are less expensive to transport to distant and international markets.

2.6.2. Value Addition (VA) in Agriculture The process of modifying or transforming a thing from its original state to a more valued state is known as adding value. Many raw materials have inherent value in their natural state. Field corn planted, harvested, and stored on a farm, for example, has value when fed to livestock on that farm. In fact, adding value to maize usually involves feeding it to an animal, which converts it into animal protein or meat. The added value of a transformed product, such as wheat flour, is called added value. It is critical to identify the value-added operations that can help fund the essential research, processing, and marketing investments. Biotechnology, food engineering from raw materials to customers, and reorganization of the distribution chain to and from the producer all give chances for value addition (VA). A wide definition of value added is to add economic worth to a product by changing its existing location, time, and features to those that are more desirable in the marketplace. A more specific meaning may be to add economic value to an agricultural product (such as wheat) by turning it into a product (such as flour) that customers want (such as bread bakers). Producers who add value should consider themselves to be employees of a food company that processes and sells products to consumers. Building processing plants in the producers’ geographic regions to process locally produced crops or animals is a common example. However, another paradigm has emerged, in which the processing plant is built wherever it is most possible and profitable, such as near the finished product’s market. The following case study illustrates how a remote processing factory might increase the value of wheat.

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2.6.3. Commodities vs. Products The commodity business’s produce-and-sell attitude is being replaced by a strategy of understanding what traits people desire in their food goods first, and then designing or manufacturing products with those attributes. The international market for value-added products is expanding as the world continues to move toward a global economy. Because of market dynamics, raw materials now have more potential for product diversification and additional value: •

Consumer needs for health, nutrition, and convenience have increased; • Food processors’ initiatives to increase production; and • Technological advancements that allow producers to produce exactly what consumers and processors want. In this moment of transition in agriculture, farmers who add value will become more than commodity producers, absorbing all the shocks brought on by global markets. Instead of creating simply raw commodities, they will consider themselves to be manufacturers of finished goods. Beef producers, for example, produce table-ready meat rather than finished (slaughter-ready) animals. Some producers are no longer content to sell basic materials and are vying for a larger portion of the food dollar. These projects include: • •

Adding value to hogs, cattle, bison, fish, and eggs; Marketing crops like organically grown grains, potatoes, carrots, beans, tomatoes, and corn for sweeteners and fuels; • Producing specialty cheeses and even alfalfa-based biomass for a local power plant. It is difficult for producers to respond to consumer requests by producing what is requested. Because demographic trends show growth in the convenience-oriented, health-conscious, and environmentally sensitive sectors, where price is not as essential as quality, it is critical to pay attention to consumer demands in terms of quality, variety, and packaging. Because value-added research is so crucial, producers may look into the competitive benefits of processed goods over raw materials.

2.6.4. Approaches to Adding Value Adding value to products can take a variety of forms, but it usually falls into one of two categories: innovation or coordination. In general, the issue

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is determining what, where, how, and who can perform marketing duties efficiently.

2.6.4.1. Innovation Innovation focuses on improving or inventing new processes, methods, goods, and services. Successful value-added ideas frequently concentrate on very narrow, highly technical, geographically big markets with little competition. Agricultural experiment stations and farms that produce innovative valueadded activities are sources of national growth through changes in product type or production technique. Adding value becomes a reality through promoting new ideas. Alternative crops that can be cultivated successfully by producers to replace traditional crops are another source of innovation. Growing these alternative crops instead of traditional crops allows valueadded producers to prosper economically. Industrial hemp fiber, kenaf fiber, and castor bean oil are three alternative crops that have shown potential. Industrial innovation is a sort of innovation that involves processing traditional crops for non-food use. These value-adding innovation activities take advantage of the research and focus on developing industrial, non-food applications for common agricultural products. Several novel technologies for converting conventional crops into nonfood items have been developed. Producing ethanol from corn, biodiesel from soybeans, and particleboard from straw are examples of these undertakings.

2.6.4.2. Coordination Coordination is concerned with agreements between people that produce and market agricultural products. Horizontal coordination entails pooling or consolidation of resources among people or businesses at the same level of the food chain. Hog farmers, for example, would combine their market hogs to make a truckload. Contracting, strategic partnerships, licensing agreements, and single ownership of several market stages at various levels of the food chain are all examples of vertical coordination. Vertical coordination is required to match production processes and product attributes to consumer and processor preferences, either through ownership integration or contractual arrangements. Traditional marketing interactions between customers, food retailers and wholesalers, food processors, and producers are being altered by fundamental changes brought about by coordination. Individual producers, on the other hand, rarely have enough capacity to properly manufacture, process, and market their goods. Few people have all

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of the talents required for processing, marketing, and business management, as well as remaining productive in their manufacturing businesses. To improve market efficiency or reduce costs, a coordinated effort is required. Many experts anticipate that processor upstream and downstream links will continue to grow in the 21st century. Vertical integration is aligning and controlling all aspects of a manufacturing and marketing system under one roof. Price, quantity, quality, and transactional terms of trade are the aspects that are aligned and managed. Producers who invest in value-added ventures beyond the farm gate help to vertically integrate the market. A fully integrated system can ensure constant quality from field to store, cutting out middlemen and perhaps saving consumers money. Producers’ downstream integration towards consumers typically requires an equity involvement in processing, sometimes through a producer-owned enterprise. As a result, producer-owned enterprises are particularly positioned for food processing integration. The success of these value-added businesses is dependent on meticulous planning and execution.

2.6.5. The Importance of Minimizing Costs in Value Addition (VA) However, before producers look into value-added processing and marketing, they must first reduce production costs. In production agriculture, only lowcost and efficient producers will be able to compete. Adding value cannot compensate for the production efficiencies gained through technology and economies of scale.

2.7. BUYING AND SELLING The most crucial activity in the marketing process is buying and selling. Buyers and sellers meet at each stage, items are moved from seller to buyer, and the utility of ownership is added to the commodities. The length of the marketing channel determines the number of times the selling and buying activity is completed. This operation occurs only once in the shortest route, where no middleman is involved, i.e., the producer or farmer sells and the customer buys. However, when it comes to farm commodities, selling, and buying operations are frequently carried out every time the produce passes from the farmer to the primary wholesaler, the wholesaler to the retailer, and the retailer to the consumer. The buying activity entails purchasing the appropriate goods at the appropriate time, in the appropriate amounts, and at the appropriate price. It entails issues like as what to buy, when to buy,

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where to buy from, how to buy, and how to negotiate prices and terms of buying. A prospective buyer is assisted or persuaded to buy a commodity through personal or impersonal selling activities. The goal of selling is to get rid of the things for a reasonable price. Product prices, particularly for agricultural commodities, fluctuate from place to location, across time, and depending on the quantity sold. Selling entails deciding when to sell, where to sell, who to sell via, and whether to sell in one lot or in pieces.

2.7.1. Buying and Selling Methods You can market what your farm generates in a variety of ways. Let us have a look at a few of them. The first eight options on this list are for direct marketing; the others may involve selling through retail establishments. •

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Selling to Friends and Neighbors: Farmers that are new to direct marketing should start here. You and your spouse should make a list of roughly 100 people you know through work, clubs, church, and other social activities. People like your banker, barber, postal carrier, and relatives should be included. This list will be used for contacts and, if you continue to sell this way, as a mailing list to notify customers when your products are ready. This is a simple approach to get started with direct sales, but it has some disadvantages. Contacting people to market your items takes a lot of effort. Furthermore, because these are your friends and neighbors, they may expect a discount as a pleasant bonus. They can also take a long time to pay. You must remind them that you must make a profit in order to stay in business and keep your farm viable. A successful business transaction benefits both sides. Your product may get harsher criticism from friends and neighbors. You must make it clear what they will receive. Customers who are unfamiliar with agriculture frequently believe that a 250-pound hog will yield 250 pounds of edible meat. A 250-pound hog will likely yield 150 to 170 pounds of chopped and wrapped meat, such as chops, hams, and sausage. It is more probable that you will keep a satisfied customer if you tell them what to expect before they buy the meat. Remember that an unhappy friend or neighbor might generate a slew of issues. Farmers’ Markets: Direct marketing is ideal in farmers’ markets. Consider selling at any farmer’s market within a onehour drive. A list of marketplaces should be available from

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your state’s Department of Agriculture. The primary benefit of selling at a farmers’ market is that you can reach a large number of people at once. Selling a small amount of produce to a large number of consumers is significantly easier than selling a large amount of produce to a few customers. Provide clients with tasting samples if you have something unique and different from the competition. Recipes that feature your produce are another effective marketing strategy. Farmers’ markets have two primary drawbacks: cost and time. Time not spent on the farm is time spent in the market. When you factor in all of your expenditures, such as production, booth fees, labor, and transportation, selling here could not be cost-effective. Count your pennies with care. Examine the market ahead of time if you want to sell there. Check out what the farmers are growing and what they are not. Is anything missing, such as yellow or purple snap beans or heritage tomatoes like ‘Brandywine’? Consult with farmers and customers to determine what is required and what you can provide. This is an excellent place to begin. If your community lacks a farmers’ market, try developing one. Assessing client potential, determining exhibitor (farmer) potential, and designing a charter are all critical. Determine fees, dates, and hours of operation, as well as insurance and location. This will need a lot of effort and community support. If you do decide to launch a farmer’s market, hosting special events such as bake sales, festivals, and concerts might help you generate additional cash. Finally, just like you, a farmers’ market will require promotion to let people know it exists. Roadside Stands: These can range from a pickup bed to a temporary shelter to a shop and are usually found on or near your farm. Whether your property is off the main path, ask local businesses like cheap stores and petrol stations if you can set up a temporary stand on their property, or pool your product with a farmer who lives on a decent road. Make your display appealing by including colorful signs and clear information. Customers come to you for free at roadside stands. You could turn this into a nice little on-farm business if you do well. It may draw folks from far away with some promotion. Unfortunately, time is once again a constraint. Unless you are on a well-traveled road with a convenient exit, time spent at the stand may be worth less than at

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a farmers’ market (think in terms of consumer dollars per hour). You will have to decide on the hours for the stand. Is it going to be opened every day, three times a week, or just on weekends? Will it be available throughout the day or only during rush hour, when people are on their way home? In other areas, the farmer places a money can on the table and allows customers to serve themselves. I am not sure I trust this strategy, while it could be a nice way to get rid of excess fruit. To operate a roadside stand, check the insurance requirements. Community-Supported Agriculture (CSA): This is a subscription business in which a farmer signs up clients for a monthly or seasonal charge in exchange for a percentage of the farm’s produce. CSAs are about more than just selling your produce: You and your client create a strong bond, and your customer shares in the risk of your farm’s production. The farmer avoids borrowing money and paying interest by receiving the yearly fees in advance, and he or she has a paid market before planting anything. Customers are aware of how and where their food is produced, and they obtain fresh produce at a reasonable price. Working for a CSA is rather straightforward. The majority of CSAs start with roughly 30 members. The consumer pays $300 for a period of seven months and receives a weekly delivery of his share of the vegetables—presumably approximately 10 pounds per week. Customers may be permitted to work on the farm during peak labor times to save money. Customers can pick up their food on-farm at some farms, which offer a “rollover” table where they can remove stuff they do not want and replace it with something different. Some farms give a yearly list of what they aim to grow, while others solicit client feedback on their preferences. The primary drawbacks of a CSA are selecting a reasonable pricing and attracting clients to join. Many consumers are hesitant to spend money before trying out a product. The majority (but not all) of successful CSAs are located near large cities with a substantial consumer base. You should not start a CSA until you have a firm understanding of what you can raise each year and how much it costs. Catalog Sales: This, which might be a natural offshoot of a customer mailing list, require value-added products. Starting a catalog takes a lot of effort and study into the market. The

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easiest step is printing, packaging, and mailing the catalog. The difficult element is balancing supply and demand, ensuring you have enough products on hand without overspending or creating a surplus. You have lost a sale and maybe a customer if you do not have what the customer wants when he wants it. You have lost a business if you have thousands of unsold jelly jars. Only individuals with several years of expertise in both farming and direct marketing of value-added products should consider catalog sales. A catalog necessitates a great amount of printing. Weather, production levels, and predicted consumer returns all necessitate expertise and experience. It is a good idea to have a nearby farmer who can supply you with extra product if you run out—but it must be of equivalent quality to yours. Shows and Fairs: A booth at a trade fair or a community event can help market your farm and boost sales. These booths are an excellent method to get into local markets, attracting both new consumers and those who have heard about your Aunt Sally’s Special Mustard Recipe but have yet to try it. Consider offering a cooking demonstration, goat milking, or a craft demonstration in exchange for the booth (soap-making, spinning, felting, for example). Make maps accessible on cards or flyers to show people how to find your farm. To find out what events are available to you, contact chambers of commerce in adjacent communities as well as your local extension office. Look beyond the typical agricultural and craft shows. Consider everything: ballooning events, food fairs, music festivals, religious meetings, association conferences, and Living History events. If there are no such events in your region, consider hosting one. A booth at a major farm and craft shows or a state fair is the next step up from local events. Costs must be considered carefully. Keep in mind that you must recoup the booth charge before making a profit. If you are in a different city, you may also have to pay for transportation, housing, and meals. I propose attending a large trade show the year before you want to exhibit there to gauge customer interest. Ask entrepreneurs that sell similar items what they think about the show. Finally, the only way to know if you will have enough consumers to justify the investment is to try a show or two and keep careful records. Be warned: some shows will be fantastic, exceeding all expectations, while others will be duds.

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U-Pick Farms: U-picks is unquestionably a “people-person” company. People of different sizes, shapes, and ages will visit your farm, bringing with them a variety of problems, experiences, and preconceptions about farmers. This can be a wonderful technique to market if you are a “people person” and believe you can offer wholesome products while giving an enjoyable experience to your visitors. U-pick eliminates the cost and time of picking your crop and transporting it to town. (Some farms take a portion of their produce and offer it at a higher price to rushed guests.) You have a fantastic opportunity to sell them other things once they are on the farm. However, there are other more costs to consider. Before you begin, look into the criteria for U-picks, such as insurance, parking, washroom facilities, and a shady rest space. Consult insurance companies, other U-pick farmers, and your local extension office for more information. Also look at county regulations. Consider the issues that come with allowing large groups of people into your property, such as fence location and security. Again, conducting research and consulting with other U-pick farmers as well as your extension department will be beneficial. To prevent harm to your crops, you will need to provide pointers to unskilled pickers. There will always be free “field samples,” but excessive consumption is discouraged. Children must be supervised by their parents. Some farms require appointments, while others just accept walk-ins. Phoning allows production to control consumer numbers, but it requires more advertising until you establish a regular clientele. U-picks used to solely sell by the container, but today the majority prefer to sell by weight. As a result, precise scales are necessary. Unless you have some creative techniques to attract people to your property, it is better to have a significant population center within 45 minutes of driving time. Food Circles: It is a hybrid of a community supported agriculture (CSA) farm and a cooperative. A small number of farmers and others in town pool their produce; a suitable ratio is one farmer for every 10 nonfarm families. A membership fee may be charged, and some circles may need a deposit. A well-organized food circle will have a distribution point (or several) where produce is brought on a weekly basis. The produce is purchased at the distribution center by members. A member who does not purchase

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enough during a specific time period (monthly or seasonally) may be subject to a fine. People in a loosely structured food circle may meet on an ad hoc basis to exchange or barter their goods. A major disadvantage of a food circle is that it requires a large number of individuals to initiate and maintain it. A farmer will spend a lot of time organizing his or her business. It has an advantage over cooperatives in that it does not require a specific volume of food from a farmer, and it has an advantage over CSAs in that the client does not have to contribute as much money up front, making it simpler to attract customers. Farmers may not be able to determine their own prices for their produce. Most food circles set a same price for all similar produce, combine it, and pay the farmer a percentage of the money he contributed. Grocery and Health-Food Stores: These can be good outlets for your products, but because you will be selling them wholesale, you will need to move more stuff to compensate for the lower profit margins and more time and travel. While wholesale selling is beneficial, it should only account for a tiny fraction of your entire sales volume. If the store does not currently carry local produce, it may be difficult to get in. If you can guarantee them a particular amount of something in the way they want it, they might be more accommodating. Of course, double-check that you will be able to deliver the promised amounts. Consignment sales may be a viable option for getting your merchandise into the store. These have the advantage of providing you with a bigger profit, but you will have to devote more time on display and accounting. Restaurants: Although this is not a retail sector, you may be able to find pricing that are slightly lower than wholesale. Specialty restaurants with in-house chefs will be more interested in purchasing fresh food. They are also extremely particular. Before you start growing, chat to the cooks to find out what they want and how much they will require. Bring free samples so they may try things out. Some cooks have a volatile personality. Use onesheet newsletters with information and quotes from food fairs and gourmet publications to subtly push their purchases. Grow one or two new herbs or vegetables each season and give them as samples to chefs who are willing to taste your produce. Market Pools and Groups: Retail market pools are common. They are basically a collection of farmers in a certain area who

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have agreed to recommend sales and promote each other’s companies. If a farmer is now out of what the client needs or if the customer is searching for something a little different, he or she may direct the consumer to someone else in the pool. This approach also gives the customer more options. To take it a step further, the farmers may form a collective to sell their animals at a sale barn or to a corporation in need of larger quantities than a single farmer can give. It would be preferable to build a cooperative if this was done on a regular basis. Market groups are usually regional or nationwide organizations that bring buyers and producers together. There are several of these organizations, mainly in the herb and flower industries. The farmer saves money by not having to sell anything. The negative is that most of these organizations charge a commission. Start by contacting some of the herb and flower associations and magazines listed in the appendix for more information. Cooperatives: Another option for outsourcing marketing is to form a cooperative. These are particularly useful for farmers who loathe direct marketing or who lack “people skills.” Cooperatives work by bringing together a group of small farmers who all raise the same type of crop (s). They combine their produce to meet major buyers’ volume requirements. A co-op salesperson handles the selling, allowing the farmers to devote more time to production. Farmers will not receive the retail price for their produce (though they may receive a little premium for quality), and co-op costs will eat away a portion of their income (including the salary of the salesperson). If the co-op has contracts for X amount of produce and a member’s yield is low that year, he, or she may be in danger. Fines or other penalties may apply depending on the co-op rules. Cooperatives come in a variety of shapes and sizes. A co-op could be as modest as 8 to 10 ranchers pooling calves to produce a bunch of 100 for sale as first-time calvers, or a group of growers specializing in heirloom tomatoes for delis. Sugar beet cooperatives in the Dakotas, for example, can be extremely large, with farmers signing rigorous production contracts. Before joining a cooperative, do your homework. If you want to start one, do your homework first and talk to as many cooperatives as possible. Even loose cooperatives require members to follow rules and regulations. It must be determined what percentage of sales

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goes to co-op salespeople and advertising, how administrative duties will be carried out, and how many growers will be allowed in the co-op; the new “New Generation” cooperatives set strict membership limits, distinguishing them from older cooperative models like the Missouri Farmers’ Association and rural electric cooperatives. Make sure the other members of a small co-op are people you trust and are eager to do business with. Some of the selling types among the following methods of selling agricultural products and commodities include: •

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Transactional Selling: It is a straightforward, short-term sales style that prioritizes closing deals quickly. Neither the buyer nor the vendor is interested in creating a long-term relationship in this type of sales strategy. Solution Selling: It abandons the transactional approach in favor of selling results rather than products and features. Reps in this sales strategy start with a problem and then use various strategies to construct a picture of how the buyer’s life will improve once the problem is solved. Consultative Selling: Consultative selling and solution selling appear to be the same method on the surface. Despite certain similarities, there is a significant difference. Instead, then discussing features and benefits, solution selling focuses conversations only on delivering a solution to the buyer’s problem. Provocative Selling: Provocation, he argues, is the ideal approach for sellers to convince buyers to get past a “buy nothing” mentality by helping customers see competing issues in a new light and instilling a feeling of urgency in solving specific pains/problems. Provocation-based sales, like consultative selling, seek to find demands and pain spots through market research, data analysis, and buyer interactions. Both styles of selling are concerned with bringing consumers to the best answer; however, provocative selling adds a layer of hostility to the mix. Collaborative Selling: It is similar to consultative selling in that it focuses on building relationships and understanding buyer needs, issues, and goals – but it goes a step further by putting the client at the center of their own story. Social Selling: It is the activity of connecting with potential consumers via social media channels, nurturing that connection,

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and building LONG-TERM relationships with them. Partnership Selling: It is a sales strategy that entails close collaboration between organizations at every stage of the sales process, treating customers as partners, and assisting in the achievement of sales goals. When SaaS companies seek to expand into new countries and markets, this selling style is frequently adopted. High-Pressure Selling: Also known as “hard selling” entails the seller applying psychological pressure to the customer by appealing to his fear, pride, or greed in order to seal the deal quickly and force him to make rash judgments only to get out of a difficult situation. One of the most compelling reasons to use this method is that it works. Insight Selling: It is all about getting to know your consumers better so you can build absolute trust and mutual understanding. This strategy entails gathering important customer insights through sales and analytics software, many sales calls and meetings, trends analysis, and market research, and then leveraging them to align benefit and value, differentiate the product, and boost sales effectiveness.

2.8. MARKET INFORMATION Market knowledge is a crucial marketing function that guarantees the marketing system runs smoothly and efficiently. A communication or reception of knowledge or intelligence might be widely characterized as market information. It encompasses all facts, estimates, opinions, and other data that influence the marketing of goods and services. Promote intelligence that is accurate, adequate, and timely is helpful in deciding when and where to market products. Market information fosters competition and prevents the emergence of monopolies or profiteering by individuals. It is a market’s life blood. Everyone involved in product manufacturing, purchasing, and selling is constantly in need of market intelligence. This is especially true for agricultural products, as their prices fluctuate more significantly than those of other industries. Market intelligence is critical for the government, for the efficient operation of the marketing industry, and for the security of all parties involved. It is necessary at all phases of the marketing process, from the selling of food at the farm to the final consumer. Market data is beneficial to all members of society who are interested in marketing. Its

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significance can be assessed from the perspective of various groups. These are the groups: •

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Farmers and Producers: Market knowledge aids farmers in making better decisions. A farmer must select when, where, and how he will sell his produce and purchase his inputs. Price data aids him in making these selections. Market Intermediaries: This requires market data in order to organize the purchase, storage, and sale of items. They can determine the market’s pulse, or whether it is active or sluggish, as well as the market’s temperature (whether prices are rising or declining) and market pressure, using this data (whether supply is adequate, scarce, or abundant). They project their estimates and make judgments based on these facts, such as whether to sell immediately or hold products for a while, whether to sell into the local market or go for import or export, whether to sell in their raw state or process them first, and so on. The non-availability of market information, or its inadequate availability and interpretation, can contribute to a company’s failure. Cooperative marketing societies that act as commission agents use market data to advise their members on when to sell their products. Processors utilize market data to plan their purchases in order to keep their plants running smoothly and profitably. General Economy: Market data is also valuable to the overall economy. In a developed economy, a competitive market mechanism for a commodity is required to regulate the product’s prices. The competitive process contributes to the industry’s operating efficiency. A perfectly competitive system, on the other hand, is difficult to achieve; yet, the availability of market information leads to a competitive environment. Different prices will prevail without this framework, leading to profiteering by specialized agencies. The forward trading business is founded on the availability of market data. Government: Market data is critical for the government to formulate agricultural policies such as market regulation, buffer stocking, import-export pricing, and administered prices.

2.8.1. Types of Market Information Market information is of two types:

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Market Intelligence: It refers to data on historical pricing and market arrivals. These are essentially a record of what occurred previously. As a result, market intelligence is of a historical nature. An examination of the past aids us in making future decisions. Market News: This word refers to the most up-to-date information on prices, arrivals, and market conditions. This information assists the farmer in determining when and where to sell his produce. The importance of timely and accurate market news cannot be overstated. A trader who receives market news early might often gain a significant advantage over his peers who hear it later. Market news quickly gets outdated, necessitating frequent updates.

2.8.2. Criteria for Good Market Information To be of maximum benefit to users, good market information must satisfy the following criteria: •

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Comprehensive: Complete and thorough market data is required. It should include all agricultural goods and varieties, as well as all geographical regions. Prices, output, supply fluctuations, stockpiles, and demand circumstances must all be covered. Accuracy: It is critical that market data be accurate. Under changing market conditions, gathering correct market data is a time-consuming and costly operation. The information must be collected in an honest manner. It should be worked on constantly to increase its accuracy. To collect accurate information about the market and the product, the information reporter needs to be wellversed in both. Relevance: Market data must be pertinent in the sense that it must be gathered, organized, and distributed with the user’s interest in mind. The majority of information that is gathered is typically not usable, making the time and effort invested in gathering it a huge waste. The data must be accurate and useful in order to be reported in large quantities through different channels. Confidentiality: The firms for whom the information has been obtained must have a sense of secrecy. The information revealed in this confidential circumstance will be more accurate and may aid in the formulation of policy consequences. The identities of companies should not be revealed.

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Trustworthiness: Another prerequisite for effective market data is trustworthiness. Users must have faith in the organization that gathers the data, and the agency that collects it must have faith in the users. Equal and Easy Accessibility: Every marketer, whether large or small, wholesaler or retailer, government, or private agency, must have equal and easy access to the information available. Individuals should not be restricted in their use of this material in any way. Timeliness: Market data must be made available in a timely manner. A quick transmission is required for this purpose. Market information that is disseminated late is useless. This knowledge frequently goes stale, especially when it is distributed too late to be useful. A technique for rapid information dissemination should be established.

2.9. FINANCING Between the time of production and the period of consumption, there is a significant gap. The ownership of commodities changes several times between these two places, necessitating financial arrangements. Middlemen require funding for a variety of marketing responsibilities, including processing, storage, packaging, transportation, and grading, in addition to stock purchases. The marketing financing function entails the utilization of money to meet the financial needs of marketing agencies involved in various marketing operations. Because the owned finances accessible to producers and market middlemen (such as wholesalers, retailers, and processors) are insufficient, no business can exist currently without the financial backing of other organizations. The financial requirements rise in tandem with the cost of producing the product and performing numerous marketing activities. “Money or credit is the lubrication that facilitates the marketing machine,” says Pyle. Factors affecting an agricultural marketing firm’s capital requirements include: The following elements influence a marketing agency’s capital requirements for its marketing business: •

Nature and Volume of Business: Selling high-value crops like cumin, chiles, cotton, and oilseeds has higher financial needs than trading food grains. Financial requirements are also higher in the wholesale sector than in the retail business.

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Necessity of Carrying Large Stocks: Large stockpiles of items that are seasonally produced and distributed on a wholesale basis must be carried over throughout the year. • Continuity of Business during Various Seasons: The financial requirements will be higher if commerce is conducted continuously throughout the year rather than only during a specific season. • Time Required between Production and Sale: Some items, such as perishables, are sold immediately after manufacturing, while others, such as rice and cheese, are disposed of after a specific period of time. As a result, the financial needs for marketing the later commodities are larger. • Terms of Payment for Purchase and Sale: The financial requirements of marketing middlemen are influenced by the conditions of transactions, such as whether payment will be made in cash, on credit, or in installments. • Fluctuations in Prices: The financial needs for items that experience frequent price variations are higher than for goods that experience less frequent price fluctuations. • Risk-Taking Capacity: Market middlemen’s financial requirements differ according to their risk tolerance. A middleman with a low risk tolerance frequently uses hedging and requires less capital than a middleman who accepts risks. • General Conditions in the Economy: The financial requirements increase during a period of price decline or recession. In anticipation of a price increase, the marketing agency must keep stocks for a longer period of time. Furthermore, the recovery of old invoices is typically slow. Whenever a new product is introduced, the dealer will want additional funding until the economy’s demand for it increases. Fixed capital for land, buildings (shops and go-downs), equipment, and machinery (Weighbridge, grading equipment, etc.), and working capital for marketing costs, purchase value, and personnel wages are the two types of marketing finance required by marketing middlemen. The proportion of working capital to fixed capital is higher. It is also vital to develop plans for farmers’ financing during the time between harvesting and selling their crops. This is vital to increase their storage capacity and prevent selling produce after harvest when market values are low. Many farmers sell their standing crops – such as fruits – or borrow money in advance from local traders/

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commission agents against their crops, agreeing to sell the product through the trader/commission agent, due to their dire financial circumstances. This limits their ability to sell their goods on the open market. The government has taken the following initiatives to enhance the financial situation of farmers and strengthen their holding capacity: •

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Commercial banks have begun to lend heavily to the agricultural sector, in order to fulfill the growing demands of farmers for production. Agricultural financing has also been established and entered by co-operatives. An integrated finance and marketing plan has been implemented. Co-operative credit organizations can use the sale earnings of the produce to repay their loans, including the interest that is due. Co-operative Marketing Societies are notified directly. After deducting their dues, they may make payments to the farmer for the produce. In this area, significant progress has been made. Farmers may now meet 70% to 80% of their credit needs by depositing their produce in warehouses, thanks to the growth of warehousing facilities throughout the country. Banks provide credit to farmers in exchange for a warehouse receipt mortgage. Farmers and market intermediaries have had their financial concerns alleviated by this scheme. As a result, the temptation to sell produce just after harvest should have been avoided. It has, however, had only limited success. Storage cannot be a profitable proposition as long as the interest rate exceeds the intra-year rise in prices.

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AGRICULTURAL VALUE CHAIN AND ACTORS

CONTENTS 3.1. Overview........................................................................................... 70 3.2. Need for Agricultural Value Chains (AVCS)........................................ 72 3.3. Conditions for Success of AVCS......................................................... 74 3.4. Factors to Consider When Stating an AVC.......................................... 77 3.5. Farmer Groups and Value Chains....................................................... 78 3.6. Role of Media in Value Chains........................................................... 80 3.7. AVCS Upgrading................................................................................ 81 3.8. Gender and AVCS.............................................................................. 83 3.9. Characterizing of the AVCS................................................................ 83 3.10. Actors of AVC.................................................................................. 91

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3.1. OVERVIEW A value chain is not something that can be seen. Rather, a value chain is a great tool for comprehending how the world of manufacturing, purchasing, and selling goods works. As producers, consumers of goods and services, processors, retailers, financial providers, and so on, we are all part of value chains in some manner. We all eat and wear clothes as consumers, therefore we are connected to a variety of value chains, including grain crops, roots, and tubers, fruits, and vegetables, legumes, oils, and textiles. Growers to our kitchens, dining tables, apparel, and beyond are all connected by these connections. Producers—farmers who grow crops and rear animals – are at one end of the agricultural value chain. Consumers, on the other hand, eat, drink, wear, and utilize the finished items. Thousands of men and women, as well as small and large businesses, are caught in the midst. Growing, buying, selling, processing, shipping, storing, checking, and packing are all minor steps in the chain that each person and business adds value to. Other people and businesses play critical roles in the chain’s success. Agriculture research groups develop strategies for farmers to more successfully participate in value chains, while banks give loans and governments build laws and rules. Media outlets play a vital supportive role as well. Farmers can be informed about prices, value chain accomplishments and innovations, opportunities for farmers to participate in value chains, and how value chains work through the media. Furthermore, the media can assist farmers in engaging more successfully in value chains. Extension and advisory services that support agricultural value chains (AVCs) include media. The people and activities that transport a fundamental agricultural commodity like maize, vegetables, or cotton from inputs and production in the field to the customer, through steps such as processing, packaging, and distribution, are referred to as an agricultural value chain. A value chain, according to the US Agency for International Development, is the “whole set of operations required to carry a product or service from conception to end usage, including all market channels available to all enterprises.” Value chains include even subsistence farmers. The great majority of subsistence farmers sell part of their crops or livestock. Many subsistence farmers are connected to markets, and sell modest portions of their goods at local markets or to traders who visit the farm, even in the most distant areas. Human interactions are at the heart of value chains. They are about people and corporations transferring or exchanging goods, money, knowledge, and information. People at different stages of the value chain actively help each other in a successful value chain. Everyone executes their job more efficiently and everyone’s livelihood

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improves when everyone in the chain helps each other. Each link in the chain has the same goal: to meet the wants of customers in order to improve their own profitability. Each value chain is distinct and comprises a distinct set of “links.” In the example (see diagram below), the major connections in the value chain include farmers who raise agricultural commodities and the co-ops they belong to or sell to, traders, processing firms, and various market actors, in addition to consumers. However, there are other essential connections. These include stores and individuals who sell agricultural inputs such as fertilizer and agrochemicals to farmers. There are also wholesalers of raw produce, transporters, and other players. Of course, the national and global policy environment has an impact on all relationships. An example value chain map is shown in Figures 3 and 4

Figure 3: Generic value chain (Source: Porter, 1980).

Figure 4: Sample agricultural value chain (Source: Cuddeford, 2014).

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3.2. NEED FOR AGRICULTURAL VALUE CHAINS (AVCS) Farmers and dealers sometimes clash over pricing. Farmers may deceive traders by placing inferior goods at the bottom of crates, and traders may deceive farmers by using false weights and measurements. There is frequently a mistrust between them. As a result, the value chain does not perform as well as it should, resulting in poor outcomes for everyone. The trader sells the farmer’s produce to a processor, who then distributes it to a wholesaler, who then distributes it to a retailer, who then distributes it to a consumer, with transportation and other connections in between. Each link in the chain adds value in exchange for an economic return, sometimes referred to as “economic rent.” The amount received by each actor in the chain varies depending on the product and value chain. However, the farmer obtains a minuscule percentage of the amount paid by the consumer for his raw goods. Small-scale farmers are frequently at a disadvantage in these value chains as individuals. Many farmers have minimal bargaining power since they grow crops or keep animals on an individual basis. They have little or no say in how much traders pay for their produce, or how much seed, fertilizer, insecticide, and other input providers charge. Farmers also frequently lack knowledge of the market for their products. They may not realize how much their produce is truly worth, or how much more they could earn if they carried it to a neighboring market instead of selling it to a merchant. They may have little idea who the other market actors are, what happens to their stuff once they sell it, or what kinds of things consumers want. The farmer is frequently cultivating the incorrect produce for the market. For all of these reasons, African farmers are finding it difficult to fully benefit from the value chains in which they are currently part. Farmers unwittingly contribute to their own troubles in part. A farmer, for example, might grow a variety of mangoes. Others are little and patchy, while others are huge and healthy. The farmer crates all of her mangoes together. Because the trader is unsure of the quality to expect, he sets a low price. Farmers must “upgrade” their involvement in the value chain to enhance their revenue and capture more of the value (“economic rent”) in the value chain. This can be accomplished in a variety of ways. They must become “crop specialists,” for example. A crop expert is a farmer who has improved his or her farming operations and is producing marketable goods in a cost-effective and efficient manner. For example, a farmer can produce more mangoes of higher quality by employing improved farming procedures. Both the buyer and the consumer are satisfied. We will look into more upgrade options later. The involvement of existing chain

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actors, supporting actors, and the policy environment are all considered in the value chain approach. It enables us to examine present difficulties in a value chain, as well as chances to improve the value chain’s efficiency and the benefits to all parties involved. Being a part of a well-functioning value chain can result in higher income for farmers. The following are some of the advantages of taking a value chain approach to agriculture: •

New Income Opportunities: Analyzing a value chain and recognizing its issues, weaknesses, and strengths might aid in the discovery of new revenue streams. • Stability and Predictability: Participating in a well-functioning value chain might provide farmers with more steady and predictable income rather than higher income or pricing. • Promotion of Inclusivity: By providing better methods to generate money, well-functioning marketplaces and value chains can either lure young people to farming or encourage them not to leave rural regions. • Acquisition of New Skills: A farmer can learn new skills and adopt better practices by participating in value chains. Farmers can earn more money by undertaking basic processing on the farm rather than stacking crops in a container and shipping them to a trader or market. Cleaning and grading fruits and vegetables can make a difference. Washing, packaging, and shipping lettuce or tomatoes to a local store or supermarket can result in a higher price. Peeling and chopping fruit can be a good method to break into the burgeoning market for ready-to-eat meals near cities. As the product progresses from the beginning of the chain to the consumer, everyone involved in the value chain provides value. All participants earn an economic rent in exchange for adding this value. That is the primary benefit or motivation for joining a value chain. Individuals who are most likely to benefit from value chains are enterprising, eager to connect with people from many areas of the value chain, and have the farm and financial resources as well as the knowledge to build new markets or participate more effectively in existing ones. Farmers with limited acreage, are further away from markets, have fewer assets, face language difficulties, lack irrigation, and are not members of successful farmer organizations may find it more difficult to benefit from a value chain. Some examples of AVCs are listed in Table 3.1.

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Table 3.1: Types of Agricultural Value Chains Type of Chain

Characteristics

Traditional primary commodity chains

· · · · · ·

Chain governed by internationally operated traders Trader’s exercise little control on production and quality Quality enforced through price Chain coordination loose and indirect Profit lies in volume, not margins Examples: Coffee, cocoa, cotton

Traditional plantation product chains

· ·

High level of integration Production carried out in large plantations in developing countries, owned by international traders Traders outsource production by contract farming Traders introduce innovations in production and processing Quality assured by traders Developing countries profit mostly from employment in primary production but not from value added generated Examples: Bananas, pineapples, melons, palm oil, sugar, rubber

· · · · ·

Fresh product chains

· · · · · ·

Retailers in high value markets in developed countries or supermarkets in developing countries set quality standards Suppliers profit from high margins Production organized under contracts Not many producers in developing countries able to comply with standards Participation requires rigorous application of cutting-edge technology in production, storage, and transportation Examples: Off-season and exotic fruit and vegetables, fresh fish, and crustaceous, special beef products

Source: Fromm (2007).

3.3. CONDITIONS FOR SUCCESS OF AVCS This is a list of some of the conditions that will help an AVC succeed; India case: •

Institutional Arrangements: The use of a group/aggregation method, such as farmer producer organizations (FPOs), increases sellers’ bargaining leverage against purchasers (Trebbin, 2014). Unorganized smallholders are mobilized and integrated into the value chain using this strategy. These, on the other hand, require government assistance, particularly funding in the early stages of development.

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•

•

•

•

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Agriculture Clusters: Crop intensification and diversification have been fostered in most value chains by building agroproduction clusters. These have greatly boosted the scale of AVC operations, drawing far-flung customers, financial institutions, and service providers to assist with cluster operations. The cashew processing and marketing cluster is a good example (Harilal et al., 2006). Link Producers to Markets, and Market Development: Chain leaders’ attempts to connect producers to both adjacent and distant markets have aided producers in achieving higher returns. Furthermore, they have a market for their products. In many situations, it assisted them in connecting with institutional purchasers; for example, in India, the platform of accredited warehouses assists farmers in eliminating intermediaries from the supply chain. Initial Working Capital Grant and Credit to Producer Group/Producer Company: Initial working capital grants from governments under the Rural Livelihood Enhancement Project, as well as loans from Cluster Level Federations and NABARD (National Bank for Agriculture and Rural Development) to Producer Companies, have aided them in meeting their critical working capital needs, making timely payments to members, and attracting others to sell to the companies rather than to local aggregators. Working capital has been critical in financing the initial investment required to transition from a cereal-centric monoculture to a diversified high-value crop production system (Gupta, 2015). Organized Food Retail Chains (FRC): Through value chains, modern food retail chains have provided new possibilities for reducing risks and increasing returns. A few FRCs have constructed backward links in order to change farming and marketing practices (Chengappa et al., 2007). Farmers’ direct supplies allow retailers to maintain control over quantity, quality, and pricing. Spencer, for example, has pioneered a new agribusiness strategy for agricultural commodity marketing. Incentive Structure for Village Resource Persons and Community Extension Agents: Motivating village resource

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•

•

•

•

•

•

people and community extension agents need attractive incentives related to the procurement of produce from producer groups. Technical Assistance from Chain Leader/NGOs: Intensive technical assistance from the corporate/NGO (Non-Governmental Organization) aids in the development and sustainability of new models through numerous interventions at various stages of the value chain. The development of AVCs depends on the organization of collective institutions and the supply of services to promote smallholder production. Capacity Building: Labor is a crucial input in the production process, and the value chain idea, when evaluated from the perspective of value addition (VA), must prioritize developing farm labor capacity. This can be seen in a Kerala Agricultural University project that formed a group dubbed the ‘Food Security Army’ with the goal of promoting mechanization of paddy cultivation by educating educated unemployed rural youth. The participants’ living situations have improved as a result of this intervention (Devi et al., 2010). In Rajasthan, capacity growth in several aspects of coriander production, post-harvest management, and marketing has resulted to increased farm income (Dhaka and Poonia, 2010). Innovations: A number of critical improvements, such as those listed below, can help to consolidate AVCs both upstream and downstream: Business models, contract farming systems, commodity exchange linkages, and other components of AVCs benefit from process advancements. To decrease cost and risk, financial innovations include interconnected supplier-buyer-producer-bank financial structures. Such connections can significantly minimize the requirement for cash payments and other transactions that drive up financing expenses. Application of ICTs (information and communications technologies) in agricultural extension, mobile technical help, mobile banking, electronic networks, and enhanced management information systems to accommodate specialized financial services are just a few examples of technological developments that have made AVCs much more practical.

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Extension services can be reoriented to boost value chains and invest in supported infrastructure thanks to policy reforms.

3.4. FACTORS TO CONSIDER WHEN STATING AN AVC These should focus on all types of innovations that lower costs and risks while improving services, rather than just high-cost technologies and untested ideas. Other considerations for value chain development include (in the case of India): •

• • • •

•

•

• • •

Existing Markets: The existence of a market is required for AVCs to succeed. Deficit markets within 200 kilometers of agriculture production clusters are important enablers because they operate as rapid demand hubs for agricultural commodities (Gupta, 2015). Selection of Commodity: Before choosing a commodity, keep the following considerations in mind for successful AVC replication. Commodities should be tradable according to market demand; To ensure economies of scale, the majority of producers should be involved in commodity production. Selection of Area: Because of the disparities in relative advantage in the production of different commodities, the majority of AVCs are regional in nature. The following things must be considered for successful replication: An estimate of production potential in terms of agri-climatic parameters such as temperature, rainfall, humidity, soil quality, and water required for the production of the chosen commodity. The location should be excellent for the formation of a production cluster, which involves mass-producing a commodity with consistent characteristics. The area should have access to good roads that allow large vehicles to move quickly and efficiently. For a smooth flow of information among stakeholders, the area should have adequate telecommunication connectivity. Beneficiary Characteristics: Those with sufficient time and labor are the best candidates for intensive operations.

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•

•

•

Strong Culture of Community Collectives: When there were formal and/or informal collectives such as SHGs (self-help groups) and cooperatives/associations, most AVCs were successful. Existing groupings provide the necessary social mobility for economic activity. As a result, whether the possible intervention area has a culture of official and informal community collectives on which the AVC might be based must be considered. SHGs get services ranging from livelihood planning to collective marketing of agricultural produce, making it possible for service providers to work with them. The success of high micro-credit loan payback in India can be linked to good bank-SHG relationships. Funds to Invest in Rural Infrastructure: Initial investment for infrastructure construction, such as aggregation centers, from donors or governments is a good enabler for the establishment of production clusters. This draws private sector investment as well. Upgrading Strategy of AVCs: AVCs should design methods for upgrading in the long run, as shown in Table 3.2. Processes, goods, and functions should be upgraded on a regular basis to keep up with changing market conditions.

Table 3.2: Upgrading Strategy for AVCs Strategy

Process

Entry in to the value chain

Switch from traditional to high-value agriculture, and from traditional marketing chains to modern marketing chains

Process upgrading Adopt new technologies – seed, fertilizer, new methods of planting, drip irrigation, protected cultivation, harvesting at right time, good agricultural practices, and traceability. Product upgrading Production of high-value commodities such as organic products, certification costs arise. Functional upgrading

Processing of produce in addition to cultivation-dal, multigrain millets-value addition costs arise

VC upgrading

Expansion from production into Agri-tourism, home-stays in plantations.

Source: Chengappa (2018).

3.5. FARMER GROUPS AND VALUE CHAINS Farmers must be well-organized in order to compete in an increasingly competitive market. Joining a farmer association, like becoming a crop

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specialist, is a critical step for small-scale farmers who wish to boost their income and capture more value in the value chain. Farmer groups, unlike individual farmers, have the capacity to attract and create partnerships with diverse parts in the value chain, both locally and globally. Farmer associations assist individual farmers by pooling many producers’ harvests, purchasing bulk inputs at lower prices on their behalf, and providing access to farm support services. Co-operatives have the market power due to their scale to boost the prices obtained by individual farmers and offer a more consistent and stable income. Many farmer organizations also offer savings and loan programs to its members. These programs assist farmers in managing money, keeping records, and learning financial skills that are necessary for growing their enterprises. It is critical for commercializing smallholder farmers to work together as a recognized legalized body in order to increase their voice for communicating their requirements, lobbying, buying, bulking, and selling in order to take advantage of economies of scale. The most typical type of collective action is joint input purchasing and product promotion. Being able to sell large quantities of produce is frequently a prerequisite for attracting buyers and establishing bargaining power. Farmers’ cooperative facilities are used for input storage as well as output bulking and storage. Furthermore, managing the flow of goods allows the organization to maintain quality, and it allows perishable products to be processed, increasing marketability. An FBO (farmer-based organizations), particularly one with legal standing, can help with product grouping and market connections by collecting orders from buyers and disseminating information to its members, negotiating minimum prices, and setting a delivery date; it can also help with credit and other financial products from financial institutions. The development and capacities of FBOs are critical to the future viability of demand-driven, marketoriented rural advising services. Collective action is directly responsible for or dependent on the majority of development success stories. The complex role of FBOs in extension initiatives, however, is poorly understood. In many cases, the story of unsuccessful farmer groups is the story of local rural development efforts. The majority of such organizations, which were formed for various objectives by governmental agencies or development organizations, lacked critical characteristics that would have ensured their long-term viability. Improving our understanding of farmer groups’ role in development outcomes is crucial for finding choices and tactics for fostering successful rural advisory services (RAS).

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3.6. ROLE OF MEDIA IN VALUE CHAINS In a value chain, three things flow: the product flows from producers to consumers, money flows from consumers to producers, and information flows both ways. The media can serve as a conduit for information and knowledge. This means that radio and television stations can enlighten their audiences about value chains. Farmers can learn about the advantages of increasing their involvement in the value chain through the media. Information regarding successful and innovative ways to participate in value chains can also be shared through the media. Marketing and contracting opportunities for small-scale farmers might be advertised in the media. The media may help farmers realize the benefits of collaborating with other firms and businesses in the value chain by publicizing success stories. Different actors in the value chain can also interact through the media. The absence of interaction and understanding between diverse actors is one of the most significant difficulties in value chains. Farmers can communicate with processors, traders, policymakers, and other stakeholders through the media. Farmers are not only given a voice, but they are also empowered as major players in the value chain. When discussing value chains, it is critical that broadcasters utilize suitable vocabulary. Speak with a couple of the farmers in the crowd. Find the best words for “value chain,” “link,” and other value chain phrases in the local language. Choose terms that accurately represent the meaning and that your audience understands. It is crucial not to talk down to farmers, either with your tone of voice or by employing jargon that only a small percentage of your audience understands. Before you create value chain initiatives, make sure you understand what value chains are and how they may benefit farmers. If you do not understand something, talk to extension agents, food industry representatives, or others who can explain what value chains are and how they work in your local region. Broadcasters should learn as much as possible about local value chains. Find out who the key actors are in your listening communities’ main value chains. Speak with farmers, processors, retailers, and others involved in the value chain. Determine which arrangements are working well and which are not. Broadcasters can provide accurate information on value chains by interviewing people involved in them on the air. Interacting with diverse links in the value chain has advantages for broadcasters. Developing relationships with processors, merchants, wholesalers, and farmers can help you diversify your advertising sources and discover new business opportunities for your station.

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3.7. AVCS UPGRADING Upgrading a farmer’s farming and business abilities involves boosting her ability to capture more of the value in a value chain. Upgrading can assist farmers in discovering new practices, partners, and ideas for bringing their products to market. Alternatively, it might enhance their activity within current value chains. Upgrades can boost earnings while lowering hazards, or both. A farmer can improve his value chain participation in a variety of ways. The four major upgrade strategies are listed below: •

•

Process Upgrading: This for farmers implies boosting yields or lowering the costs of producing a particular volume of a crop, for as lowering the overall costs of growing and harvesting 100 kilos of cassava. Improvements to farming processes include better planting techniques or planting materials, irrigation, insect control, and storage. Better marketing and packaging may also be included. Higher yields, greater sales, and more food on the table are all possible outcomes of these techniques. Process upgrading is the process of more efficiently converting farming inputs (labor, fertilizer, planting materials, herbicides, and so on) into farming outputs (crop yields). This process is referred to as “crop specialist” for the grower. Farmers must become crop specialists in order to capture more value in the value chain. Farmers can use radio to get the information they need to become crop specialists. Horizontal Coordination: It is a second type of upgrade. Horizontal coordination refers to coordinating your actions with people who are at the same stage of the supply chain as you, such as farmers working in producer groups or cooperatives. Farmers can save money and get access to additional markets when they buy supplies and sell their harvests together. Individuals with better horizontal coordination are more creditworthy. This enhances a farmer’s financial security, allowing her to invest in equipment and other items, as well as providing her with funds to buy what she needs when she needs it. Individual and household income rises, as does food security as a result of increased food spending. Horizontal coordination can also assist farmers in entering markets that require certification, such as organic and fair-trade markets, as well as offer them more negotiating power within a value chain.

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•

•

Vertical Coordination: It is a third sort of updating. Vertical coordination entails shifting from one-time buyer-seller contacts to long-term commercial partnerships. Vertical coordination refers to a farmer’s actions being coordinated with people and businesses at different levels of the value chain, such as processors or supermarkets. Contract farming is one sort of vertical coordination in which a processor, retailer, or exporter enters into an agreement with out-grower farmers to produce a given amount of crops of a certain quality by a set deadline. A lead firm—usually a large buyer or a supermarket – organizes actions all along the value chain. The large corporation often supplies the farmer with discounted inputs, loans, technical support, and equipment in vertical connections. Farmers can benefit from vertical coordination by having more assurance and security regarding future sales and income. Vertical coordination, on the other hand, necessitates the development of trust between suppliers and buyers, which can be a lengthy and arduous process. Only when everyone believes he or she will profit can trust build. Functional Upgrading: When farmers execute extra duties in the supply chain, such as processing, packing, or even sales, they are said to be functionally upgraded. Farmers may be able to capture more economic rent, resulting in increased income. Farmers who create cassava flour or chips, farmers who wash and pre-cook fonio, or farmers who sell cassava treats are examples. This may appear to be an appealing concept. However, in order to succeed at these new jobs, farmers must have the necessary equipment and know-how, as well as adequate financial resources and excellent organizational abilities. This technique can be useful when value chains are short, such as when vertical coordination includes grinding maize and placing it in a sack. However, the longer the chain, the greater the risk, particularly for people with limited experience.

3.7.1. Other Types of Upgrading Other forms of upgrading, which are not described in detail here, include: •

Product upgrading: moving into more complex or sophisticated and higher value products;

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•

Inter-chain upgrading: applying skills gained in one link of a chain to a different chain; • Meeting standards and certifications (e.g., organic and fair trade). This could be called product upgrading, and is driven by market changes associated with changing consumer preferences. All types of upgrades require effective communication and accurate information. As a result, the media can play a significant role in assisting farmers in improving their involvement in AVCs.

3.8. GENDER AND AVCS Women can encounter more severe conditions than men in many AVCs. Women are frequently hired as temporary or casual labor in fruit and vegetable export chains, while permanent workers are typically men. Women have 80% of the positions in Kenya’s fruit and vegetable export enterprises, for example, in packing, labeling, and barcoding produce. Women’s earnings are typically lower than men. Women can benefit from joining a farming association. Women may be more successful in negotiating better terms when they have the support of an organization. It is crucial to be aware of some of the unintended repercussions of value chain upgrades. Here are three illustrations: First, if a family devotes the majority of its time and resources to high-value crops farmed by males, men will have greater control over the resources associated with those crops, such as land and water. Crops grown by women and family food security may be jeopardized. Second, if market opportunities for women’s crops grow, men may begin to take over their activities, such as limiting women’s access to land. Third, contract farming may need the establishing of a bank account for the family. Typically, bank accounts are opened in the name of the guy. As a result, a woman’s access to money may become increasingly dependent on her husband. This can jeopardize family food security in societies where women hoard cash from selling crops, often by hiding it and utilizing it for home costs.

3.9. CHARACTERIZING OF THE AVCS The complicated value chain of the agriculture industry includes input firms, farmers, traders, food companies, and retailers, all of whom must eventually meet the various demands of the customer in a sustainable manner. From R&D-based input firms to generic manufacturers, subsistence farmers to

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high-tech Agri-holdings, biotech boutiques, and small and medium-sized enterprises (SMEs) to global corporations, the industry comprises a vast diversity and variety at each step.

3.9.1. Volatility The agricultural industry is getting increasingly turbulent. The shifting climate, governmental acts, and social changes are all contributing to this volatility. Weather has caused unpredictable yields and a supply shortage, putting downward pressure on crop prices. Drought in Australia caused a severely diminished wheat production, which had knock-on consequences around the world and on other crops, resulting in the 2006 food crisis. While demand has historically been reasonably steady and predictable, supply has been far more variable, owing primarily to weather. It is now widely agreed that, if average temperatures and rainfall rise as a result of global warming, we should expect more weather-related instability in the future. Despite the severity of these extremes, determining the timing and impact of global warming on agriculture remains a work in progress. On the political front, volatility is caused by government measures, such as the drive for biofuels, which has had a significant destabilizing influence on global markets since 2005. While food consumption is restricted by population and economic growth (1–2% CAGR over the last 20 years), demand for biofuels has been much higher and could theoretically continue to increase at this higher level, though it is already showing indications of leveling out. Here are some reasons for volatility: •

Global Warming: Much research and debate has been conducted on the influence of global warming on agriculture. Crop production is expected to shift to the poles, with nations like Canada and Russia benefiting from the combined effects of rising temperatures, increasing precipitation, and the carbon fertilization effect. In the meantime, countries closer to the equator, such as India and Africa, may be the hardest hit, as greater temperatures diminish crop output. However, because some crops are more susceptible to temperature increases than others, the impact will vary greatly per crop. The influence on world crop production is, in general, unknown. Wheat, for example, is more vulnerable to climate change than corn since it cannot be produced in tropical areas. Any considerable effects are anticipated to result in significant changes in production locations and global trading patterns. Aside from the influence on overall

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agricultural productivity, global warming is projected to result in more extreme weather patterns, such as more droughts and floods, which might increase crop production and market volatility. • Biofuels: When Brazil began generating bioethanol from sugar cane in the 1970s to reduce reliance on imported oil and boost the agricultural economy, biofuels became a big player in the transportation market. In the early 2000s, when the US government and the EU both upped their support for biofuels via mandates and subsidies in order to cut carbon emissions, the rate of growth surged even further. Additional motives to promote energy independence and support rural economies existed in the United States. Bioethanol accounted for 40% of US maize production in 2011 and biodiesel for roughly 30% of EU rapeseed oil production. In terms of the future, biofuels that employ food crops as a feedstock do not appear to be as promising as they once were. The justification for biofuels has been questioned in recent years due to concerns about food security and environmental effect. They have been criticized for contributing to high food prices and, in the case of biofuels made from palm oil in Asia, for causing biodiversity loss. Their assertions about their carbon footprint have been called into question. They have also run into financial difficulties since, in the case of corn, the agricultural feedstock accounts for roughly 70% of the cost of goods sold (COGS), so as crop prices rise, margins can become razor-thin, even negative, depending on the relative price of oil. Government measures to subsidize production, as they have in the past in the EU and the US, or to affect trade, such as barring exports when there are concerns about domestic supplies, as Russia has done, are examples of political impacts on supply and demand. The failure of the Doha round of trade negotiations at the World Trade Organization (WTO) has increased the risk of further actions. At the same time, it makes more bilateral trade agreements possible. China might also have a huge political impact. To far, China has pursued a strategy of near (95%) self-sufficiency in rice, wheat, and maize. Soybeans are an exception, since China has had to boost imports to meet rising demand for animal feed. If this is eased, it will have disruptive effects on global markets. There is little doubt that politics are becoming more significant in agriculture, and more political complexity equals more potential volatility due to its naturally unpredictable nature. Consumer reactions to food scares, such as the recent horsemeat scandal in Europe, can

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be swift and severe, having a significant impact on demand for the goods in question. Despite all of this volatility, it is currently widely assumed that crop prices will remain high and considerably beyond long-term historical levels, implying that the so-called commodity ‘super-cycle’ will continue. High crop prices will have a variety of effects on stakeholders at various stages of the value chain. While farmers and those who supply them with seeds, crop protection, fertilizers, and machinery benefit the companies that buy their products, food companies and retailers are seeing their costs rise and are forced to implement strategies to increase efficiency and pass on price increases, among other things. Meat producers are particularly vulnerable because crop feedstock costs account for the majority of their expenses. The impact for middle-of-the-chain traders is more complicated and will rely on their specific business model. The following section delves more into the impact of volatility and possible responses at each stage of the value chain. At all levels of the value chain, however, certain measures can be utilized to mitigate or adapt to volatility: •

•

•

Be more agile – if the future is more difficult to foresee, you must be able to react more quickly when changes occur. This method has ramifications for the structure of the organization. Improve business intelligence and environmental scanning. It is always better to be prepared. As the value chain becomes more intertwined, look beyond your own industry to developments up and down the value chain to acquire a better grasp of potential external drivers and emerging disruptive technologies. Diversify, though going too far beyond the ‘core’ introduces risks of another nature. ‘Adjacency’ might be the best approach.

3.9.2. Complexity The agricultural chain is already complicated, but a number of factors are combining to make it even more so. There are several crops and food varieties, each with its own unique and frequently fragmented supply chain. There is also a lot of variation within each crop in terms of how, where, and who produces it. Environmental factors influence productivity, and they differ by place and year.

3.9.2.1. New Objectives Agriculture has been given new goals: instead of providing food, feed, and fiber, the sector is now expected to provide growing amounts of biofuels,

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contribute to rural development, and offer amenity and “ecosystem services.” Agriculture is also mentioned as a source of bio-materials for the 21st century’s ‘bio-economy.’ Agriculture is becoming more ‘multi-functional,’ as the term goes. Another catalyst for change is the growing emphasis on the nutritional aspect of food, as more people worldwide suffer from obesity than malnutrition. Governments are researching methods to intervene in the food supply chain to counteract this tendency, and the creation of functional foods is becoming a key component of many food companies’ efforts.

3.9.2.2. New Solutions Agriculture is being transformed by technological advancements, particularly in plant genetics and information technology (IT). Across the value chain, there has been a sustained high level of R&D investment, resulting in a steady stream of innovation. Governments, particularly those in emerging economies, have greatly increased their investment in agriculture in recent years, mirroring the increase in private sector investment in agriculture. China, in particular, has raised its agricultural R&D spending to nearly equal that of the United States. Furthermore, public-private collaboration is increasing, with various programs aimed at increasing the number of public-private partnerships in agriculture. Donors, academics, and NGOs no longer distrust the private sector, as the public sector and society recognize that their goals can only be achieved with private sector resources and capabilities. Biotechnology, whether based on genetic alteration or ‘natural features,’ is generating a slew of new traits and broadening the scope of what is possible. Precision agriculture is gaining traction thanks to technological advancements that are changing the way information flows and transactions are done. Biotechnology provides farmers with new tools and options, and also increases the demand for improved traceability. IT gives farmers new alternatives and opportunities, but it also affects the way food companies and retailers connect with their customers, especially through social media.

3.9.2.3. New Markets New consumer segments are forming: the quantity and composition of demand for agricultural and food goods is being driven by the demographic and economic growth of emerging markets. According to the latest Food and Agriculture Organization (FAO) projections, worldwide food demand would rise by 1.1% per year between 2006 and 2050, or 70% during that time span.

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Africa, owing to population expansion, and Asia, owing to both population and GDP growth, are the principal drivers of this need. With increased GDP comes an increase in urbanization and the rise of the middle class. Both of these factors contribute to shifts in demand composition, with some crops and foodstuffs gaining market share, such as meat, dairy products, and vegetable oils, and others, such as staple grain crops, losing ground. The fact that China produced more corn than rice in 2012 exemplifies this and marks a crucial turning point. Dietary variety is also becoming more popular. A similar GDP-driven development is the rise in demand for valueadded, frequently processed food products, which suit consumer demands for convenience and new flavors while also providing opportunities for the food manufacturing industry. Most large food corporations have already set their sights on emerging markets. Economic expansion will affect both the quantity and content of demand, as well as new needs in the domain of food production, such as more information and traceability. This is covered in the following section. These demand patterns raise the question of who will meet the demand. This is more difficult to forecast since supply factors are less predictable (than demand). Russia, Ukraine, and many African countries have the ability to enhance their agricultural production, and how far they go will affect world trade patterns. It will also play out differently at each point of the value chain, necessitating unique attention to each. The EU, for example, is a net importer of primary goods and a net exporter of manufactured goods. However, a common/universal thread running through the value chain is the growing importance of emerging economies as markets for both foreign and domestic enterprises, as well as potential supply and R&D bases for both. Companies are faced with ever more strategic decisions as a result of the agri-food chain’s enormous and increasing complexity: •

•

•

•

Which crops to work with and how wide a range should be covered Technology (traits) and politics (biofuels, for example) are creating new opportunities. Which sectors to address: – How far do they want to stray from their core business? – Are there any synergies? What is the appropriate level of engagement with emerging markets? There is no doubt that the majority of growth is present, but there are risks associated with it. How far to use emerging markets as a resource base?

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How seriously should developing market enterprises be viewed as competitors both at home and abroad? Only 6 of the top 100 food companies are situated in emerging economies, and only one of the top 100 retailers is based in emerging nations. Emerging market enterprises, on the other hand, are rapidly expanding and becoming more active in international markets. The Chinese, who have long been major investors in African agriculture, are now focusing their attention on the European food sector. How far to vertically integrate.

3.9.3. Scrutiny Various forces are pushing for increased traceability and information about the food we consume. First, occurrences such as the BSE catastrophe, melamine in Chinese milk, E coli in German beansprouts, and, most recently, horsemeat contamination of beef in Europe have heightened concerns about food safety. These factors have influenced the development of organizations such as the European Food Safety Authority, and they also allow Western corporations to use their knowledge and skills in emerging markets. This is bolstered by growing interest in the nutritional and health benefits of the foods we consume. Second, the rapid spread of GM crops, which has led in labeling laws in about 40 countries, primarily in Europe, but also in China and Russia, due to their large penetration in some countries and crops. Because the crops where GM has gained considerable penetration are commodity crops, this introduces new identity preservation requirements and potentially be a trade obstacle. Other countries, particularly the United States, are adamantly opposed to GM crop labeling. The rejection of GM labeling in a California vote in November 2012 confirmed the US viewpoint. Third, people want to know not only what is in their food and how safe it is, but also how it has made and what the environmental and social consequences are. As people rise up the economic ladder, their expectations in this area become increasingly high. As a result, voluntary certification programs such as ‘Fairtrade’ and ‘The Rainforest Alliance’ have been established. Food firms are increasingly implementing these programs and pledging to improve the sustainability of their sourcing and operations. In recent years, there has been a profusion of such programs, as well as a variety of techniques. Agriculture has a higher (and more complicated) environmental and social impact than any other sector, as seen by the proliferation and variety of initiatives. Concern over this aspect of agriculture is evident in the widespread adoption of the idea of ‘Sustainable Crop Production Intensification,’ which aims to

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strike a balance between the need to enhance production and the need to reduce negative environmental impacts. The FAO, among others, promotes this, which has widespread support in both the business and public sectors. Advances in technology and the supply chain make it easier to accommodate the aforesaid pressures. Large retailers’ increased penetration results in more sophisticated and efficient supply chains, allowing for improved traceability and information provision. Simultaneously, new lifecycle analysis tools and methodologies are being created to improve the accuracy and detail of data on food production’s environmental and social implications. The creation of carbon labeling is a good example of this. The Sustainability Consortium in the United States is a pioneer in this field. Table 3.3 examines the drivers of and reactions to the growing need for agri-food chain inspection. Table 3.3: Causes, Effects, and Potential Future Developments in the Area of Scrutiny Driver (Examples)

Specifics

Response

Current Situation

Potential Future Developments

Food scares Food (contamination safety or mislabeling)

European Food Safety Authority increased testing

Western companies welcomed into some Ems because of their high safety standards

Ever increasing traceability

Health concerns (obesity)

Nutritional content

Regulation (e.g., pesticides) labels

· Debate of schemes ‘fat taxes’ in Denmark · Banning ‘supersize’ sugary drinks in some US cities

More government intervention

GM crops

· Consum- Labels Idener choice tity preserva· Value tion extraction

· Labels in over 40 countries · Mainly commodity crops

More labeling, identity preservation

Ethical concerns: · Environmental · Social How food is produced

· Organic; Fairtrade · Animal welfare

· Proliferation of schemes · Voluntary schemes confined to cash crops and penetration still low

Voluntary standards Penetration Scope, e.g., carbon labels Rationalization of schemes

Cross-compliance Agrienvironmental schemes Voluntary standards Nitrate directive (EU)

Source: KPMG International Cooperative (2013).

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Despite these advancements, voluntary standards are still widely used. Organic farming has a global market penetration of only 1–2% and is significantly more established in Europe than anywhere else. Other, more contemporary certification schemes, such as Fairtrade and the Rainforest Alliance, account for less than 1% of worldwide consumption, despite their rapid growth. Some of the mandatory directives and policies that have been implemented have had a greater impact, particularly in Europe, where the nitrogen directive has resulted in significant reductions in fertilizer overuse and pollution, and farmer subsidies are becoming increasingly conditional on environmental compliance. There are some options that are similar to all phases of the value chain: •

•

•

‘Make or buy’: Should businesses use existing standards and certification programs or create their own? The majority of businesses choose the former, however some of the larger ones also go their own way. Which plan should they choose if they buy into current ones? While their choice will be influenced by their business profile, product line, and environmental effect to some level, there will still be room for discretion within these parameters. What reporting style should they use: a separate corporate social responsibility report or including it into the annual report, for example? GRI8 has, nonetheless, become the de facto standard. Such factors are crucial because they can influence a company’s desirability to investors, potential workers, customers, and as a potential M&A target. Furthermore, the dynamic nature and intricacy of this field provide potential for distinctiveness and unique positioning. The sustainability dimension is not only about managing reputational risk; it may also lead to the discovery of new business prospects and increased operational efficiency. Lifecycle analysis can lead to a deeper understanding of product and business processes on its own.

3.10. ACTORS OF AVC The following market actors and marketing organizations are involved in the marketing of agricultural commodities:

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3.10.1. Producers The majority of farmers and producers engage in one or more marketing activities. They may sell the excess in the community or at the market. Some farmers, particularly the larger ones, collect the produce of small farmers, transport it to a local market, and sell it for a profit. This activity provides a source of revenue for these farmers. There are around 450 million farmers worldwide. The industry is incredibly diverse, with segments based on farm size, crops farmed, and sophistication. Farm sizes range from less than 1 hectare on average in China to hundreds of thousands of hectares in Russia or Argentina. There are over 400 million smallholders, each with less than 2 hectares of land. Each of these farms supports a family of 4–5 people on average, resulting in a farm population of roughly 2 billion people. As a result, farming is the world’s largest job sector. In a process known as “agricultural transformation,” the development of these small farms in emerging economies is critical to the overall progress of economic development. Farming is one of the riskiest activities in the value chain, due to its reliance on the weather (which has been exacerbated by global warming) and market volatility. It is, however, perhaps the most profitable in excellent years. Until recently, farming was the world’s most highly subsidized industry (Steenblik,1998), with OECD (Organization for Economic Co-Operation and Development) countries spending over US $280 billion on farmer subsidies. As a result of continued WTO pressure, OECD subsidies have been gradually reduced, however subsidies in emerging economies have been increasing in recent years. Certain inexorable demographic dynamics affect the farming industry. Rural populations are dropping in all regions (excluding Africa), as people relocate to cities. This results in farm consolidation as well as a reduction in labor availability in the countryside, which boosts labor productivity. After being regarded as a “backwater” industry in the 1970s, 1980s, and 1990s, farming is now a vibrant growth industry, bolstered by new technologies and concerns about food security.

3.10.2. Middlemen Individuals or businesses who specialize in executing various marketing duties and providing services related to the marketing of goods are known as middlemen. As a result, food grain marketing middlemen can be categorized as follows: •

Merchant Middlemen: Individuals that assume ownership to the items they manage are known as merchant intermediaries.

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•

• • • • • •

•

•

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They buy and sell on their own, making a profit or loss based on the difference between the sale and purchase prices. There are two categories of merchant middlemen: Wholesalers: These are merchant intermediaries that buy and sell big amounts of food grains. They can buy from farmers directly or through other distributors. They sell food grains at the same market or at different markets. Retailers, wholesalers, and processors are among their customers. They do not sell large volumes to final customers. They have their own produce storage go downs. In marketing, wholesalers execute the following tasks: To suit the expectations of buyers, they assemble commodities from various locations and areas. They separate the goods into various lots based on their quality and prepare them for sale. They balance the flow of products by storing them during peak arrival seasons and releasing them during off-peak periods. They control the flow of products by dealing with buyers and sellers in different markets. They provide financial assistance to farmers in order for them to achieve their production input requirements; and They periodically examine the demand of potential buyers and processors and organize the transfer of commodities over space and time. Retailers: They purchase items from wholesalers and sell them in small quantities to customers. They are the producers’ direct representatives to the public. In the marketing channel, retailers are the closest to customers. Itinerant Traders and Village Merchants: Itinerant traders are small-scale merchants that travel from village to village, buying directly from cultivators. They bring it to a neighboring primary or secondary market, where they sell it. Village merchants run modest businesses in the villages. They buy the produce of farmers who have taken out loans from them or are unable to go to market. Farmers are also supplied with vital consumer commodities by village merchants. They serve as lenders to disadvantaged farmers. They frequently visit surrounding markets to stay up

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with current costs. They either sell the harvested produce in the local market or keep it for later sale in the hamlet. • Agent Middlemen: They operate as clients’ representatives. They do not claim ownership of the produce because they do not take title to it. They just negotiate the acquisition and/or sale of the property. They sell services rather than goods or commodities to their clients. They are compensated through commissions or brokerage fees. In effective bargaining, they act as buyers or sellers. There are two sorts of agent middlemen. • Commission Agents or Arhatiyas: A commission agent is an individual who works in the wholesale market and represents either a seller or a buyer. Those who consign products or place orders for purchases frequently give him vast privileges. A commission agent handles the produce physically, arranges for its sale, collects the price from the buyer, deducts his expenditures and fee, and remits the remaining amount to the seller. If requested, all of these services are offered to purchasing firms as well. In unregulated marketplaces, there are two sorts of commission agents or arhatiyas: kaccha arhatiyas and pacca arhatiyas. Kaccha arhatiyas mostly represent sellers, such as farmers. Farmers and itinerant traders are occasionally given advance money on the condition that the produce be sold through them. In addition to the regular rate of interest, kaccha arhatiyas levy arhat or commission on the money they advance. In the consuming market, a pacca arhatia represents the traders. Pacca arhatiyas are used by processors (rice millers, oil millers, and cotton or jute merchants) and large wholesalers in the consuming markets to purchase a certain quantity of products within a given price range. In regulated markets, there is only one type of commission agent known as a “A” class trader. For his clientele, the commission agent maintains a business – a shop, a go down, and a rest house. He provides all services to his customers. Farmers prefer him to the co-operative marketing society when it comes to selling their produce. The following services are available to commission agents’ clients: –

They advance 40% to 50% of the expected value of the crop as a loan to farmers to enable them to meet their production expenses;

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•

•

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They act as bankers of the farmers. They retain the sale proceeds, and pay to the farmers as and when the latter require the money; – They offer advice to farmers for purchase of inputs and sale of products; – They provide empty bags to enable the farmers to bring their produce to the market; – They provide food and accommodation to the farmers and their animals when the latter come to the market for the sale of their produce; – They provide storage facility and advance loans against the stored product up to 75% of its value; – They arrange, if required by the farmer, for the transportation of the produce from the village to the market; and – They help the farmers in times of personal difficulties. Brokers: They provide personal services to their clients in the market, but they do not have actual ownership over the goods, unlike commission agents. A broker’s main job is to bring buyers and sellers together on the same platform for discussions. Brokerage is the term for their fee. Depending on the market and the service provided, they may seek brokerage from the buyer, seller, or both. They provide a useful service to potential buyers and sellers since they are fully aware of the market – the quantity available and the current prices. Brokers do not have a presence in the market. They merely stroll throughout the market, providing services to customers. They are not in danger. They do not provide any additional services besides connecting buyers and vendors on a single platform. Because items are offered by open auction in most regulated markets, brokers play no role. Their numbers are dwindling in the food grain marketing industry. However, they continue to play an important role in the selling of other agricultural products like gur, sugar, oil, cottonseed, and chilies. Speculative Middlemen: They are those who claim ownership to a product with the intention of profiting from it. They are not ordinary produce buyers or sellers. They specialize in taking risks. They buy at low prices when arrivals are high and sell at

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•

high prices during the off-season. They handle items as little as possible. They profit from both short- and long-term price swings. Processors operate independently or on a custom basis. Some processors hire agents to shop for them in the producing areas, store the food, and process it on a continuous basis throughout the year. They also participate in advertising to generate demand for their processed goods. Facilitative Middlemen: Some middlemen help with the marketing process rather than buying and selling directly. Even if they are not active, marketing can take place. When people engage in business, however, the system’s efficiency improves. Fees or service charges from individuals who use their services are how these intermediaries make their money. The following are key facilitators: – Hamal or Laborers: They physically move things throughout the market. They load onto bullock carts or trucks and unload from them. They help with bag weighing. They clean, sieve, and refill the bags, as well as stich them. The hub of the marketing wheel is Hamal. The marketing system would not function properly without their active participation. – Weighmen: They make it easier to weigh the produce correctly. When the quantity is tiny, they utilize a pan balance. The scale beam balance is commonly used. They are compensated for their services by a commission agency. Weighbridge weighing systems are also used in large markets. – Graders: These intermediaries classify the goods into different categories based on certain features and then sell them. They make the process of price negotiation between the buyer and the seller easier. The Transportation Agency aids in the movement of goods from one market to another. Railways and trucks are the primary modes of transportation. Food grains are also transported in communities using bullock carts, camel carts, and tractor trolleys. – Communication Agency: It aids in the conveyance of market information such as current pricing and available quantities. Transactions are sometimes conducted over

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–

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the phone. The main communication routes in agricultural marketing are the post and telegraph, telephone, newspapers, radio, television, the Internet, and informal contacts. Advertising Agency: It allows prospective purchasers to determine the product’s quality and make purchasing decisions. Advertisements are mostly distributed by newspapers, radio, cinema slides, television, and the Internet. Auctioneers: They help in exchange function by putting the produce for auction and bidding by the buyers.

Figure 5: The agriculture and food value chain (Source: KPMG International Cooperative, 2013).

3.10.3. Input Companies The input sector includes a wide range of products that help set the genetic potential of crops and animals by providing nutrition, protecting them from diseases, pests, and weeds, increasing the efficiency with which they can be cultivated and harvested, and providing services to farmers such as credit and insurance. In general, this step of the value chain has done well in recent years, benefiting from strong crop prices and farmer earnings while also taking use of new technological options. Many industries engage heavily in R&D, and seeds/biotech is one of the most R&D-intensive. The high legitimacy ascribed to food security challenges is driving an increase in R&D collaboration across the business and public sectors. Technology is

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blurring the lines between some industries – for example, developments in biotechnology are causing an increase in crop protection and seed integration – and a trend toward a more holistic and “systems” approach to agricultural production. Almost every industry has increased its involvement in emerging markets, which are becoming more important as a percentage of total sales. Overall, the input industry is experiencing a period of growth, with several new prospects and a strong political tailwind given by the food security agenda. The difficulty is getting a good picture of the agriculture landscape.

3.10.4. Traders Traders play an important role in the agricultural value chain, and their success can be used to gauge the sector’s overall performance. In terms of business portfolios, geographic presence, degree of vertical integration, and ownership, traders come in all shapes and sizes. Some have substantial food processing facilities. Traders play a critical role in providing the infrastructure investment needed to satisfy rising supply in emerging nations and rising demand. Overall output has the potential to take off and shift towards substantially different patterns than those seen today due to the combined impact of global warming on crop distribution and economically or politically driven regional changes in supply and demand. Traders would be crucial in facilitating such a shift.

3.10.5. Food Companies This segment of the food chain adds a significant amount of value, with margins typically ranging from 10% to 20%. There are various separate subsectors within the food processing sector, each with its own peculiarities, such as meat, dairy, drinks, sugar, snacks, and food service. Companies range in size from enormous corporations with over 100,000 employees, some of which date back to the 19th century, to small businesses. Emerging market corporations are fast advancing up the league table, despite the fact that western companies continue to dominate. Because agricultural and livestock prices account for the majority of COGS, profit is highly subject to price fluctuations. The importance of health and wellness is also growing. Within the industry, the $1 billion brand has a particular ‘cache.’ Various dynamics, including rising concerns about pricing, supply security, and traceability, are forcing corporations to form stronger ties with their suppliers.

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3.10.6. Retailers Retailers, like the other phases of the agri-food value chain, have a wide range of qualities, sizes, and formats. Food accounts for approximately half of all retail sales. Because margins are small, supply chain efficiency is critical. Retailer penetration varies widely by area, with the top five retailers accounting for over 80% of food sales in developed countries. Penetration in more developed emerging economies is well above 50%10, but in the least developed regions, spurred by GDP growth and urbanization, it is just getting started. Retailer development in emerging nations will result in more efficient supply chains, which will result in less waste, lower consumer prices, and safer food. India’s recent opening to foreign shops could result in a much-enhanced supply chain. Many merchants are expanding abroad, but others are primarily home-based and growing rapidly in their local markets: In 2011, China surpassed the United States as the world’s largest food market. This step of the value chain is not as global as the others. Retailers may obtain items from any of the three previous steps in the value chain: food corporations, traders, and farmers, depending on the type of food. In addition to responding to consumer preferences, retailers can play a considerable role in shaping them, particularly when it comes to healthy eating and sustainability.

4

CHAPTER

AGRICULTURAL PRODUCT PRICES

CONTENTS 4.1. Overview......................................................................................... 102 4.2. Agricultural Prices Characteristics.................................................... 102 4.3. Role of Prices................................................................................... 104 4.4. Approaches to Agricultural Price Determination.............................. 105 4.5. Pricing Objectives........................................................................... 127 4.6. Ways Markets Arrive at Prices (Price Discovery)............................... 133 4.7. Government Intervention in Agricultural Price................................. 138

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4.1. OVERVIEW Agricultural product pricing is important both economically and politically, despite the fact that the agricultural sector is falling in most countries. They have a significant impact on farm revenues, and food and fiber prices are crucial predictors of consumer welfare and export earnings in many nations. Prices of internationally traded commodities like sugar, coffee, and cocoa can fall by a few cents per pound, with major political and economic consequences in nations like Mauritius, Colombia, and Ghana. As Deaton (1999) pointed out, erroneous commodity price estimates resulted in bad policy recommendations for African countries. In the United States, there are also concerns concerning commodity pricing behavior. For example, a significant decline in hog farm prices is expected to put 24,000 pork producers out of business (Wall Street Journal, 1998). As a result, questions arose regarding why hog prices had plummeted so drastically in such a short period of time. Large rises in commodity prices and their possible impact on food costs, such as those seen in 2006, have been a source of concern, with several explanations offered, including blaming “speculators.” Or, since ethanol is mostly generated in the United States from corn (maize), have biofuel policies increased corn and food prices (de Gorter and Just, 2010)? This section lays the groundwork for dealing with such problems.

4.2. AGRICULTURAL PRICES CHARACTERISTICS Agricultural commodities are a particularly fascinating vehicle for studying price-setting forces. Markets with near-monopoly-like institutions, occasionally aided by government regulation and involvement, to approximations of the textbook definition of pricing under competitive settings are all examples of how commodity prices are established. As a result, studying agricultural prices necessitates studying a wide range of price determination methods and pricing organizations. Agricultural commodity prices are much more variable than the pricing of most non-agricultural goods and services. Commodity prices have been known to decline by 75% or surge by 100% or more in a matter of months. Sugar, corn, wheat, and cotton are all commodities with fluctuating pricing. A typical commodity price time series demonstrates both random and predictable activity. Spikes, as mentioned above, occur when prices soar to a high level quickly and then fall back to the original level or even lower. These generalizations apply to series of variable frequency, such as daily, monthly, or annual average prices, although distinguishing between inter-year and intra-year price behavior

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will be useful in following sections. The topic of our discussion will be the behavior of average prices, or why a series of monthly prices changes over time. The biological nature of the production process influences the characteristics of agricultural product pricing behavior. Between the choice to produce and the actual production, there are significant time gaps, and actual production may far surpass or far fall short of planned production. Producers must wait at least a year to change hog production, three years to expand beef supply, and 5 to 10 years to increase the yield of tree commodities like apples. Weather factors, as well as the presence or absence of illnesses or insect infestations, affect yields from year to year. Farmers’ production decisions are influenced in part by their expectations for future yields and prices (i.e., predicted profitability) of alternative commodities. Price and yield risks occur in farming because these expectations are not always achieved, and the way expectations are established and acted on by farmers may impart a cyclical component to supply and prices. Furthermore, the nature of agricultural resources, such as land and equipment, makes it difficult for farmers to make large modifications in output plans in reaction to predicted price changes. As a result, given a change in the price that farmers expected to prevail, the change in the quantity supplied is very minimal (at least over short periods of time), and supply is said to be price inelastic. Price volatility is also influenced by the nature of farm product demand. Farm commodities are frequently utilized as raw materials in the production of a wide range of end goods, as well as being exported and stored for future use. Demand at the farm level is derived from a wide range of uses, the magnitude of which is determined by factors such as population growth and income levels. Most commodity demand, like supply, is price inelastic; price changes have only a minor impact on the quantity of goods consumers are willing to purchase. To put it another way, tiny changes in production result in significant changes in prices. Furthermore, the various sources of demand mean that there is numerous potential “demand shocks.” A financial crisis in Southeast Asian countries, for example, can reduce demand for food imports and hence lower the cost of imported goods, or a health panic can, at least temporarily, reduce demand and prices (e.g., Attavanich, McCarl, and Bessler, 2011). Macroeconomic factors such as monetary policy, government budget deficits, exchange rates, commerce, and foreign aid (which impact countries’ ability to pay for imports) now have a larger role in influencing farm prices than they did four or more decades ago. Many agricultural markets now have a global reach. Soybean

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prices, for example, are affected by fluctuations in soybean output in Brazil, Argentina, and the United States, as well as increased demand for soybeans in nations like China. In agriculture, price determination at the first-handler level is more competitive and decentralized than in other industries. For many commodities, there are a large number of geographically scattered manufacturing units. Farms are increasing larger, although they still have a lower concentration than most other businesses. These marketplaces’ buying side is getting more concentrated, with only one or a few purchasers in local areas. However, when seen in a larger, national, or international context, many markets appear to be fairly competitive. In any event, commodities prices are definitely volatile, not only from year to year but also from day to day. Flex pricing markets, in contrast to fixed price markets, where prices move slowly and by tiny quantities, are frequently referred to as commodity markets. Automobile manufacturers set list prices, which may increase by 5% from one model year to the next, whereas commodity prices might fluctuate by more than 5% in a single day. Furthermore, it has been suggested that agricultural commodity prices can overshoot long-term equilibrium values in reaction to changes in economic forces, such as macroeconomic variables, in the short run (Saghaian, Reed, and Marchant, 2002). Overshooting happens in the nonfarm sector because many prices fluctuate slowly (Frankel, 1986).

4.3. ROLE OF PRICES In economic theory, prices play a crucial role in regulating production and consumption. We have no illusions, however, that prices are the primary determinant of farmers’ output decisions or consumers’ purchasing decisions. Farmers’ production options are clearly influenced by government initiatives, such as land retirement or conservation measures, as well as the limits of climate and soil types, the availability of equipment and production technology, and personal preferences. Advertising, convenience features, age, and experience, income level, and personal whims and habits, as well as costs, impact consumers. Consumers respond to changes in relative prices, such as the price of chicken versus beef, notwithstanding the difficulties brought by nonprice factors. Farmers have also proved that in reaction to somewhat favorable prices, they will produce more cabbage, corn, milk, onions, and other crops. As a result, understanding economic theory and how it applies to commodity markets can provide useful insight into how prices behave. The fact that neither consumers nor producers respond to price changes in

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the same way over time complicates assessing supply, demand, and pricing behavior. With the passage of time, the degree of quantity responsiveness to a given magnitude price adjustment may alter. Consumers’ purchases of certain food goods may become less responsive to price fluctuations (and changes in income), and farmers’ output may become less responsive to price changes as they become more specialized and make substantial fixed investments. Governments have had various degrees of influence over farm product price. Price-support programs in the United States altered the pricing of commodities that accounted for almost half of farm output from the 1930s to the 1980s. Many other countries’ pricings have been changed by government initiatives. Although government programs and regulations have not been totally abandoned, there has been a tendency toward reduced price-support levels and less trade barriers since the beginning of the 1990s. A potential challenge in evaluating the behavior of commodity prices through time is the changing type and role of government programs. It is critical to remember that price decisions, whether based on market forces or political considerations, have significant economic implications. As a result, analytical methods that can help predict the economic consequences of changes in government programs or private-sector decisions are still crucial. Farmers, marketing, and supply companies, and government officials must make several decisions that involve knowledge of what will happen if a commodity’s price rises or decreases. For example, meat packers want to know how much hog production will change in reaction to hog prices or, more importantly, hog prices relative to corn prices. Government officials need to know how changes in price-support levels will affect domestic use, exports, and production. Apple storage companies want to know how putting more apples in controlled-atmosphere storage, which extends the storage life of produce, would affect late-season costs. Prices students can assist in answering such inquiries.

4.4. APPROACHES TO AGRICULTURAL PRICE DETERMINATION The process of calculating the cost of goods sold (COGS) and services supplied to the market is known as price determination. Price decisions can be made based on a variety of criteria, including cost, demand, competition, value, or a combination of factors. While many marketers are aware that these elements should be considered, pricing remains somewhat of an art. We categorize the alternative techniques of establishing pricing as follows for discussion purposes:

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• • •

Demand-oriented pricing; Cost-oriented pricing; and Value-based approaches.

4.4.1. Basics of Demand Theory The individual consumer is the fundamental unit of demand theory. Every customer is faced with a decision difficulty. Basic necessities (such as food and shelter), personal qualities, and the social and physical surroundings all contribute to a vast number of wants. The consumer, on the other hand, has a limited budget. As a result, the challenge is to select the exact commodities and services that “best” satisfy these desires within the constraints of income. Economists describe best as a consumer’s attempt to maximize utility, which is a measure of happiness based on the consumption of goods and services. The utility method to demand theory can be expressed quantitatively. This entails maximizing a utility function while keeping a budget in mind. If we knew the algebraic form and coefficients of the utility function, we could provide empirical content to the theoretical concept of utility as a function of things consumed. The traditional mathematics of constrained optimization might then be applied to construct explicit customer demand relations. In practice, the utility function is employed to illustrate consumption theory as a conceptual instrument. Based on this idea, we can deduce that a buyer prefers more than less of a good, but will only buy more at a cheaper price. That is, the amount requested and the price have an inverse relationship. Furthermore, the idea of maximizing a utility function subject to a set of constraints has yielded a number of useful general theorems about relationships among elasticities, and empirical demand analyzes frequently employ this framework to obtain internally consistent estimates of demand elasticities.

4.4.1.1. Consumer Demand Consumer demand is defined as the various quantities of a certain good that an individual consumer is willing and able to buy when the price of that good changes, all other factors affecting demand remaining constant. A table of prices and quantities (a demand schedule) or a graph or algebraic function of prices and quantities can be used to describe the consumer demand relationship (a demand curve). The demand relation simply states the relationship between price and amount desired per unit of time when all

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other variables are held constant. The demand curve has a negative slope because price and quantity vary inversely. The law of demand is an inverse connection that can be stated in terms of the substitution and income impacts of a price shift.

4.4.1.2. Market Demand Market demand is defined as the alternative amounts of a product that all consumers in a given market are willing to buy if the price changes but all other variables remain constant. Individual demand relations can be summed up to form a market demand relation. This includes customers who enter the market as prices fall and exit as prices rise. As a result, price changes affect both the number of consumers and the amount of food they consume. Of course, because individual customers’ utility functions (indifference maps) are not observable, constructing a market demand curve from aggregating individual utility functions is impossible.

4.4.1.3. Static Demand Movements along a demand curve are referred to as a change in quantity demanded in the static definition of demand. It is static in the sense that we are only interested in the quantity response to price, with all other factors influencing demand assumed to be constant. Other things, on the other hand, change with the passage of time. As a result, the rigorously defined demand curve of economic theory reveals how much consumers are willing to buy at different prices at any given time. It is also believed that consumers can and will react immediately to price changes. The static concept, as just described, may appear artificial, but it allows one to think logically about demand and price influences. The ceteris paribus assumption allows you to look at the impact of one variable at a time.

4.4.1.4. Changes in Demand A shift in the demand curve, as opposed to movements along a demand curve, is defined as a change in demand (i.e., a change in quantity demanded due to a price change). The following are the primary elements that influence the level of demand: •

Population size, age distribution, ethnicity, gender, and other demographic variables;

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•

economic aspects, such as income and distribution, as well as product prices and availability; • Education levels, life experiences, information, and advertising, and the social setting in which consumers live can all influence consumer tastes and preferences (i.e., lifestyle effects). These elements are also known as demand determinants or demand shifters. Although economic theory stresses substitute and complement prices as demand determinants, actual study may need consideration of additional factors. As previously stated, for a given level of a demand function, all of these elements are considered to be constant.

4.4.1.5. Lengths of Run in Demand Analysis Now we will look at a second component of demand dynamics: the concept of run length. Simple static theory believes that price changes are adjusted instantly. There are several reasons why rapid changes do not occur in the actual world; the amount needed is more likely to alter gradually in reaction to a price change. The expenses of adjustment and the impact of consumer expectations are the two main reasons for slow transformation. The cost of adjustment model implies that consumers respond to market pricing, but that the long-run adjustment to these prices is delayed by costs of adjustment, making the long-run quantity unobservable. Search expenses are included in adjustment costs; consumers are unlikely to be aware of price changes quickly. Consumers’ established patterns of behavior are another issue to consider. It may be impractical (and expensive) for a consumer to rethink all of their purchases every time prices change. As a result, for some individual customers, the least-cost approach may be to delay responses to price changes, resulting in aggregate adjustments being scattered over time. Technological and institutional barriers to change can also be costly. If the price of diesel fuel falls relative to the price of gasoline, for example, consumers will be unable to switch to diesel immediately since they hold a stock of gasoline-burning automobiles. Durable items are worn out before being replaced by consumers. It is also feasible that some consumers’ salaries are already fully committed when the price changes. They have rent to pay, insurance premiums to pay, and electric and other utility bills to pay. As a result, their discretionary income (i.e., the income left after all cash commitments, including debt repayment) may be limited, and consumers may be unable to benefit from a price adjustment, at least not right away.

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4.4.1.6. Distributed Lag The concept of a distributed lag model arises easily from the concept of a delayed response to a price change. A lag is the time between a cause and its effect, and the effect is more likely to be spread out throughout time rather than occurring at a single point. As a result, a delayed reaction that is spread throughout time is referred to as dispersed lag. The price change is often given as the cause and the quantity change as the consequence in explaining consumer demand, although in some circumstances, focus may center on lagged responses of prices to changes in commodity supply. It is extremely likely that the impacts of an advertising program on purchases will be spread out over time when examining them.

4.4.1.7. Speculative Demand Perhaps the reader has only considered demand notions in terms of consumer desire for present usage. Speculative demand is a sort of demand that is based on expected use and pricing in comparison to existing use and prices. Because many agricultural goods are produced seasonally yet consumed all year, agricultural economists are particularly interested in the concept of storage or speculative demand. For example, inventory holders give the service of carrying stocks from harvest to marketing year. They anticipate a price increase sufficient to cover their costs from harvest through the end of the crop year. That is, the difference between the predicted and existing prices is high enough to pay all storage costs. Increasing the magnitude and frequency of price movements is sometimes seen as the sole purpose of speculation. It is said to be “bad.” However, price fluctuations tend to be moderated by speculation that correctly predicts future occurrences. Purchasing inventories by merchants at harvest season raises prices above what would otherwise be the case. Similarly, selling stocks during the year keeps prices lower than they would be if inventories were smaller. Similarly, if speculators accurately predict a small crop in the following crop year, carrying extra inventories into the current year helps mitigate the price effects of the tiny crop. Inter-temporal arbitrage is a term used to describe this.

4.4.1.8. Derived Demand The shape and location of the demand function for a final product are determined by the eventual consumer. Consumer demand relationships

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are typically referred to as main demand because of this. Primary demand functions are computed using retail pricing and quantity data in empirical studies. Demand schedules for inputs that are utilized to make final products are referred to as derived demand. This is a particularly significant topic for agricultural commodities, as their demand stems from a variety of sources.

4.4.1.9. Demand Elasticities •

•

•

•

Price Elasticity: It describes the link between price and the quantity that customers are willing and able to purchase, with all other variables held constant. The inverse link between price and quantity is suggested by pricing theory, but it says nothing about the responsiveness of quantity required to a price change. This response is likely to differ between products. It is reasonable to assume that the quantity of salt purchased is not highly responsive to price changes in salt, whereas the quantity of grapes purchased is substantially more responsive to price changes in grapes. Grapes have more replacements than salt from the consumer’s perspective. Income Elasticity: The income elasticity of demand is a measure of how responsive quantity is to changes in income when all other variables remain constant. Of course, the income-quantity relationship can be stated algebraically. A consumption, or Engel, function is a term used to describe this relationship. The income elasticity is a point on the function that typically fluctuates across the curve’s range. Cross-Price Elasticity: These of demand are measures of how the quantity purchased of one product reacts to price changes in another. Total Elasticity: The own-price elasticity of demand measures the percentage change in quantity demanded in response to a 1% change in price, with all other variables held constant. Because other parameters are not allowed to change, it is only a partial measure of the change in quantity requested. In competitive markets, however, if the price of one commodity changes, the prices of other goods, particularly substitutes, will vary as well. Substitute prices tend to move in the same direction, but by different amounts. A change in the price of one product causes changes in other prices and quantities, eventually resulting in a

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new price structure. When the price of beef falls, demand for beef substitutes (such as pig) falls as well. When a fixed quantity of pork is available, the price of pork falls, and this shift in price influences demand for (and thus the price of) beef. To assess the net final effect of a change in the price of beef on consumption, more than the partial own-price elasticity of demand for beef must be considered. The preceding discussion assumes that supply is constant in the short term. When one considers the effects of changes in the relative prices of competing commodities on the amounts supplied, the relationship becomes considerably more complicated. A thorough understanding of all own-price and cross-price elasticities of demand and supply is required to forecast the whole effect of a single initial price change. The structural supply and demand equations, as they are known in econometrics, could provide such information.

4.4.2. Basis of Supply At The most common assumption in the company under certainty theory is that the firm’s goal is to maximize profits. To comprehend market price behavior, we must look at the conduct of individual enterprises and examine market supply. The supply function is a vertical line in the very short run by definition; there is insufficient time for quantity supplied to respond to price changes; supply is fixed. For different commodities, the length of the extremely short-run time period varies. Production for an annual harvest crop cannot be adjusted until the next crop year. (It is vital to distinguish between production and total supply; production may be supplemented by stockpiles or imports, depending on the commodity.) Some resources are variable and others are fixed in the short term. The number of acres planted to a specific crop can be changed, as can fertilization rates. If prices do not cover harvesting costs, it is likely that some of a crop will not be harvested. The main idea is that the short-run supply function may now be thought of as the sum of short-run marginal cost curves. As a result, the short-run supply function illustrates the amounts that producers are willing to create and sell in the short term as prices fluctuate while all other variables remain constant.

4.4.2.1. Price Elasticity of Supply The price elasticity of supply is calculated in the same way that the price elasticity of demand is calculated. It shows the percentage change in amount

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delivered in reaction to a 1% change in price, with all other variables held constant. The elasticity coefficient on the supply function, like demand functions, often fluctuates in magnitude at different places. Although it is easy to refer to “the” price elasticity of supply, such a coefficient is normally calculated using the data’s arithmetic mean. As a result, inelastic supply should be understood as averaging historical experience.

4.4.2.2. Changes in Supply Price changes in a product often (but not always) explain a tiny part of the total fluctuation in farm commodity output. Short-term fluctuations in output are frequently impacted by weather conditions, diseases, and pests, whereas long-term supply trends are attributed to variables such as technological advancements that result in improved yields. These and other factors are referred to as supply determinants or supply shifters because they cause farmers to produce more or less at the same price. It is crucial to determine whether variations in output are caused by movements along a static supply curve (changes in quantity provided) or by shifts in the supply curve for forecasting or policy analysis (changes in supply) as shown in Figure 6 below.

Figure 6: Change in quantity supplied and change in supply. Source: pcsb. instructure.com.

A change to the right (increased supply) suggests a higher amount will be available at a given price; a shift to the left has the reverse effect. The following are the variables that are kept constant when designing the static supply schedule:

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• •

Changes in input (factor) prices; Changes in prices of commodities competing for the same resources or factors of production; • Changes in the prices of joint products (e.g., soybean oil and meal for soybean production); • Changes in the level of price and yield risks faced by producers; • Changes in technology that influence efficiency and the costs of production; and • Changes in institutional factors, like government programs. Random natural events, such as droughts, have an impact on agricultural commodity supply. These can also be viewed as supply function shifters, and specific events are occasionally modeled. They can also be considered as an inexplicable residual in statistical models as part of the random error term.

4.4.2.3. Input Prices Remember that static cost curves are defined with constant input (factor) prices. With all other variables maintained constant, an increase in factor prices pushes the supply curve to the left, reducing supply for a given product price. Input price reductions have the opposite effect. A change in input prices can thus reinforce or neutralize the effect of a change in product price on supply. A certain percentage reduction in the price of all components of production, accompanied by an equal percentage reduction in the price of the product, results in the same usage of input quantities. This can be seen as a downward movement along the static supply curve in reaction to a decrease in product price, and a shift to the right in the supply curve as a result of a similar decrease in factor price.

4.4.2.4. Competing Commodities If alternative commodities become more profitable to manufacture, the supply curve for that commodity shifts to the left; if other commodities become less profitable, the supply curve shifts to the right. Commodities that can be produced with the same resources are referred to as competing commodities. Because the price of B rises relative to the first commodity, A, or because the expenses of manufacturing B fall relative to A, a rival commodity, B, can become more profitable. If a new technology enhances B’s yield in comparison to A, the latter situation may happen. As a result,

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changes in relative product pricing, yields, or efficiency can affect the relative profitability of different crops.

4.4.2.5. Joint Product Relationships Joint connections play a role in the supply of various agricultural goods. Joint products are made in about equal amounts to the underlying product. In many circumstances, one of the joint products is minor, such as the value of beef animal hides, and is not taken into account apart from the principal component’s worth. However, in a few circumstances, both products have significant economic worth and should be considered in supply agreements. The size of a sheep breeding flock, for example, is affected by both lamb and wool prices. As a result, the price of lamb has an impact on the supply of wool, and vice versa. In the supply equation, both prices have a positive coefficient.

4.4.2.6. Price and Yield Risks Expected pricing and yields are used to make production decisions. Price and yield risks exist as a result of these expectations not being realized. The discrepancy between projected and finally realized prices determines price risk. From historical data, a variety of empirical risk indicators can be computed, such as measures based on lagged differences between expected and actual prices. The primary worry is price variations from the producer’s projected price (which may not treat positive and negative differences symmetrically). Although risk is difficult to quantify, it is plausible that producers’ estimates of price and yield risks influence the level of a supply curve. Assuming that most farmers are risk adverse, the higher the risk, the lower the likelihood of farmers producing at a given price, and vice versa. Producers who are risk averse can reduce risk by acquiring crop or revenue insurance and/or employing forward contracts, futures contracts, or options contracts (to be described), but all of these options come at a price. These instruments do not remove risk from the market; rather, they allow producers to shift risk to those who are ready to take it in exchange for a fee.

4.4.2.7. Technology Long-term adjustments in agricultural supply functions have been mostly driven by technological advancements. A technological advancement is described as something that allows businesses to produce more output with

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the same amount of inputs as before (or, equivalently, the same output with fewer resources). In technical terms, the production function adjusts such that producers can increase output while maintaining the same product-tofactor price ratio. The production function (technology) is often seen as a given in firm theory, hence a change in technology constitutes a structural change. The development of high-yielding crop varieties and livestock breeds; better methods of insect, disease, and weed control, including the need for fewer such inputs; mechanization and global positioning systems (GPSs) that allow for more timely and precise planting and harvesting; and better tillage techniques are among the more important technical changes that have increased agricultural supply. Biotechnology advancements are also making it feasible to change the characteristics of commodities, potentially increasing their value for specific uses. A steady stream of new technology enters the market as a result of ongoing research. The economics of adoption—that is, whether the economic benefits to producers equal or surpass the costs of adopting and employing the new technology—determine whether certain technologies are accepted. As a result, new methods and varieties are not adopted immediately (in fact, they may not be adopted at all), but rather through a process. The aggregate effect of new technologies is an upward trend in yields as a result of the flow of new technology and the varying rates of adoption by farmers. As a result, yield models frequently include a time trend (Just and Weninger, 1999). To account for the effects of new technology, total supply models may incorporate a trend variable.

4.4.2.8. Institutional Factors Institutional considerations, particularly diverse government programs and restrictions, have a significant impact on agricultural commodity supply. A variety of governmental programs and rules have influenced commodity supplies in the United States and around the world, including acreage allotments, incentive payments to keep land idle, varying levels and types of commodity payments, tariffs, and import quotas, zoning, land-use, and environmental regulations, marketing-order rules, and output bases and quotas. The supply of agricultural commodities rose faster than demand for much of the 20th century (especially in high-income nations), and government policies often aimed to curb supply and sustain farm prices. Since the late 1980s, this has been less true; prices have been mostly driven by market supply and demand. As a result, farm programs in the United

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States have evolved to provide a price and revenue safety net rather than to support prices above equilibrium. Because safety nets ostensibly lower risk, such regulations can nonetheless alter supply. The variety of farm programs, as well as changes in them, make empirical supply analysis challenging. It is difficult to find price and supply data that has not been influenced by government programs in many nations. As a result, supply analysts must choose between using a large sample of data to estimate the effects of changing government programs and using a small sample for a period when government programs had no influence (or were unchanged).

4.4.2.9. Supply-Response Relation As previously discussed, the classic supply function in economics ties amount supplied to price changes when all other elements remain constant. In actuality, however, a price adjustment in a product might trigger a cascade of modifications, resulting in a net change in quantity that differs from the ceteris paribus change in amount supplied. On the supply side, a concept similar to the total elasticity concept outlined for demand interactions can be constructed. Movements along a supply curve and alterations in the level of the curve provide the net response to a price change. This section focuses on a specific supply-response connection proposed by Cochrane (1955), which indicates an asymmetric or irreversible link. This idea is based on the idea that new technologies are more likely to be accepted when prices rise. Firms have strengthened their incentives to adopt new technologies as prices have risen. Additionally, increased pricing may make it possible to use retained earnings to fund investments in new technology. As a result, the price rise is expected to have two effects. Farmers will boost output along the static supply curve first, and then supply will move when the new technology is implemented. As a result, the rise in output will be more than could have been predicted based only on the static supply assumption. Even if the price of the product drops in the future, superior production procedures may be maintained. This is especially true when the technology requires a significant upfront investment that cannot be quickly modified. To the extent that this is correct, the response to a price reduction can be represented as movement along the new supply function. It does not revert to its previous state (Old technology). This means that the magnitude of the net response to a price decrease is smaller than the magnitude of the net response to an increase in price. The supply response is therefore irreversible in this sense.

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4.4.2.10. Constraints on Supply Responses Agricultural commodities are produced by a biological process, as previously stated, and it is vital to remember that biological and physical limits can limit supply responsiveness in the short term. The size of the breeding herd limits output in animal agriculture at any one time. Every year, ranchers must decide how many cows to cull and how many young females (heifers) to keep in the breeding herd. Culling and replacement decisions are based on economic considerations, but the point is that they are made in the context of the available animal inventory (constraint). Similarly, the amount of calves and yearlings available in appropriate weight categories at the time decisions are made affects the allocation of calves and yearlings into lots for grain feeding to produce grain-fed beef. And the marketing of finished (say, 1,100-pound) steers this month is contingent on the placement of a certain number of animals of various weight categories into feedlots in previous months; a 500-pound calf will reach market weight and be slaughtered for beef in about 6 months if fed a high-energy ration. Not only does the existing stock of animals constrain decisions, but it also gives supply and prices dynamic behavior. The current supply is based on previous herd management decisions (Rosen, 1987). As a result, cyclical behavior is possible. At any given time, the amount of land under cultivation is fixed, and thus represents a physical constraint. This may or may not be significant in a supply analysis for a single crop. Alternative crop cultivation can be brought in and out of land. However, under a system of supply equations that applies to all crops, the total area available for crops in the region or country cannot exceed the sum of areas planted to individual crops. The constraint is that the overall area available for crops must equal the sum of the individual crop areas.

4.4.2.11. Aggregate Farm Output There is occasionally a desire to examine the agriculture sector’s total output. For example, how total food output balances aggregate demand for food is of relevance. Is there enough food to feed the world’s expanding population? What impact does a shift in supply-demand balance have on farm and consumer prices? Shifts in the aggregate supply function, rather than movements along a static supply function, are related with changes in aggregate farm output across time. The main drivers of aggregate supply are new knowledge and technology (Johnson, 2000), and throughout the final half of the 20th century, food supplies more than kept up with demand growth (Tweeten, 1998). However, in the 21st century, the concern remains

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whether food supplies can keep up with demand, or whether demand will outstrip supply, resulting in price hikes. In most nations, the aggregate supply relation for agriculture is relatively price inelastic in the short run. This is owing to the fact that resources dedicated to agriculture tend to stay in use. Asset fixity is a term used to describe this occurrence. Outside of agriculture, land, buildings, and machinery are frequently undervalued. The salvage value of structures or equipment may be less than the value of agriculturally produced resources. Individual farmers’ businesses may fail, but their land and equipment can be resold for agricultural purposes. Of course, in the long run, resources such as land may be fully removed from agriculture, or new land may be added through reclamation projections. Old equipment may depreciate and not be replaced, or new equipment may be added at excessive prices. However, these modifications take time. Furthermore, as previously stated, output, and input prices are frequently connected. Input prices may also fall if product prices fall. Of course, the ratio of input to output prices fluctuates, but looking at product price changes in isolation from input price changes might be misleading about the net supply response. When product prices fall but supply remains stable, onlookers may mistakenly conclude that price changes have no effect on supply. This remark overlooks various points, including the fact that resources are generally constant in the near run, and input costs may have altered as well, resulting in very little change in relative prices. Finally, while supply analysis of agricultural products is firmly founded in basic economic principles, it must also take into account the special characteristics of the agricultural production process. The biological nature of the production process causes time lags and frequently prevents fast output adjustments. Random elements such as weather occurrences also have an impact on output. Farmers can change their production decisions, but analyzing them requires a grasp of the farmers’ price expectations. Concerns about price risk, on the other hand, may impact production decisions. Furthermore, asset fixity and adjustment restrictions may need to be considered. Although much progress has been made in understanding the processes that drive agricultural supply relations, analyzing supply decisions remains complex. Just (2000) gives a comprehensive critique of empirical production studies in agriculture, while Chavas, Chambers, and Pope (2010) evaluate the production economics literature.

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4.4.3. Market Type Basis Economists frequently classify markets by assuming a large number of buyers and then distinguishing between them based on the number and distribution of vendors. Markets can be classed as competitive (many vendors), monopolistic (one seller), or oligopolistic (one seller) (a few sellers). Monopolistic competition, which is defined as several enterprises selling similar but differentiated products, is another term that is occasionally used.

4.4.3.1. Perfectly Competitive This presupposes that there are numerous buyers and sellers, that the product is homogeneous, that all resources are completely movable, and that all buyers and sellers are fully aware of the relevant pricing factors. In the real world, such a market does not exist. For examining actual market arrangements, the concept of a fully competitive market is utilized as a benchmark. Despite the fact that no market is entirely competitive, certain markets get close to it. They will be classified as either purely competitive or atomistic markets.

4.4.3.2. Absolute Monopoly This market structure is distinguished by the presence of a single seller. The firm’s demand schedule corresponds to that of the industry. A monopoly is unlikely to exist unless the firm’s product or service has distinct characteristics. Perhaps the company has a product patent that prevents other companies from producing it, or the company has a monopoly in a certain place because it is prohibitively expensive for a competitor to enter. True monopolies appear to be uncommon because substitutes (or the threat of substitutes) are usually present. Nonetheless, the monopoly pricing theory is useful in analyzing some sorts of price behavior.

4.4.3.3. Oligopoly A market with a few significant vendors is referred to as an oligopoly. Because each firm contributes a significant portion of the industry’s overall production, the actions of one firm can have a significant impact on the actions of others. The sellers in a pure oligopoly provide a uniform product. One example is aluminum smelting. In a differentiated oligopoly, the firms

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manufacture items that are comparable but not identical. One example is the breakfast cereal sector. Because each oligopolistic industry develops its own set of interrelationships among firms, this market structure is the least vulnerable to pricing and output generalizations. To put it another way, economists have devised a variety of distinct oligopoly models, each assuming different sorts of industry behavior.

4.4.3.4. Monopolistic Competition This is a market in which a big number of merchants offer things that are comparable but different. Consider the cattle feed industry. Although these products are likely to be near equivalents, individual vendors can differentiate their products based on style, quality qualities (actual or perceived), linked services, location, and other factors. This condition means that the firm has some pricing power, but that power is constrained due to the presence of close substitutes. Individual sellers’ demand relationships, while not totally elastic (horizontal), are presumably fairly elastic at current market prices. Actual market arrangements do not always fit neatly into the aforementioned categories. Different levels of product differentiation exist in many marketplaces. The farm-level market for apples, for example, is generally competitive, but some apple growers can differentiate their product by providing a service (e.g., via a roadside stand or a “you-pick” orchard) or features valued by specific customers (e.g., organic and localorigin products). As a result, even though apples from different farms appear to be identical, there is some product variability. In addition, an industry may be made up of a small number of large firms and a large number of small firms. This makes determining whether or not an oligopoly exists in a market based on the number of sellers more difficult. One method is to utilize a concentration metric, such as the proportion of total industry sales generated by the four largest companies. The market may be classed as an oligopoly if the four largest companies in the industry account for 90% of total revenues, but there is no precise amount of concentration that distinguishes an oligopoly from a competitive industry. Furthermore, in fluid milk markets, a low degree of concentration at the national level may disguise a possible high concentration in local market areas. In practice, the analyst must look at how market behavior is related to market features. It is sufficient to classify markets as having flex or fixed price behavior for various purposes. Many agricultural goods have a wide range of prices at the farm level (flex). Prices may climb by 50%, 100%, or even 200% in

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less than a year, only to fall back to their previous level a few months later. When marketplaces are competitive, this type of behavior occurs. Firms have some price control in fixed-price markets. Prices may rise more or less with inflation, or they may drop as new technologies are introduced. Such changes are usually gradual rather than abrupt. Automobile manufacturers, for example, may raise prices by 5% from one model year to the next, or give price reductions in response to competition challenges. Auto prices, on the other hand, do not quadruple or treble before falling by the same amount. Despite the fact that farm product markets are flex pricing markets, they may contain flaws such as asymmetrically held knowledge or a few purchasers with market power. Similarly, wholesale and retail food markets may exhibit both competitive and monopolistic characteristics. As a result, we will look at how prices are set in both competitive and monopolistic marketplaces.

4.4.3.5. Price Determination Under Pure Competition Models of agricultural product prices at the farm level frequently presume a competitive market structure, and many agricultural items are undoubtedly produced by a large number of suppliers. However, there are two major doubts about the model’s applicability. One possibility is that government programs may have an impact on price behavior. This was true in the United States for much of the 20th century, when farm programs controlled the pricing of roughly half of farm output, and it has also been true in many other nations across the world. More recently, legislative reforms have reduced the impact of government programs on farm commodity pricing in the United States. Nonetheless, it is necessary to ask if government programs influence the price behavior of a specific commodity. The number of purchasers is a second concern concerning the competitive model’s appropriateness for agricultural products. In the United States, there is a trend toward more concentration among food manufacturers, grain exporters, and other commodity importers. When researching certain markets, it is crucial to determine whether the structure is an oligopsony (a market with a small number of buyers) and whether this structure influences price behavior. With these restrictions in mind, we will look at price determination in a competitive environment first. An equilibrium price is one of the notions used. This is the price at which the amount requested in the market equals the quantity provided. The two functions will intersect at some price if the demand curve has a negative slope and the supply curve has a positive slope. The quantity consumers are willing to buy is less than the quantity producers are willing to sell at prices above equilibrium, while the quantity requested exceeds the quantity

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provided at prices below equilibrium. As a result, assertions like “demand surpasses supply” are useless unless they are tied to a specific price.

4.4.3.6. Price Determination Under Monopoly Because pure, unfettered monopoly is a relatively unusual occurrence in practice, the examination of pricing under monopolistic conditions may appear academic. The monopoly pricing hypothesis, on the other hand, helps us understand price behavior by contrasting it with competitive pricing behavior. Firms can also face monopoly-like situations on occasion. A company may create a new product with no near substitutes, or it may exist in a market where only one company can profitably compete. Of course, the scope of such a local monopoly is restricted, because customers may go elsewhere or, if the price is too high, another firm may find it beneficial to enter the market despite its small size. Finally, in some sectors of agriculture, governments may allow monopolistic pricing by groups or organizations; a farm organization or cooperative may be excluded from various rules, allowing farmers to “collude” to achieve higher prices. Milk marketing orders in the United States can employ discriminatory pricing practices. A monopoly is defined by the fact that the monopolistic firm’s (or monopoly organization’s) demand schedule matches with the industry demand schedule. The price or quantity produced and sold can be determined by a monopolist, but these two variables are not independent. If the monopolist sets the price, consumers have the option of purchasing any amount at that price. The aggregate demand schedule determines this quantity. Alternatively, the monopolist can choose the volume of output, but the price at which it can be sold will be determined by the demand schedule. In fact, mistakes are made; for example, a temporary excess in output can develop if the monopolist sets a price that is greater than the current demand allows. Price will be set at the level where marginal costs equal marginal receipts, assuming the monopolist’s goal is to maximize profits. However, under monopolistic conditions, pricing does not equal marginal revenue (MR; as it does under competition). In this circumstance, the monopolist faces a downward-sloping demand function, and price will be higher than MR.

4.4.3.7. Price Discrimination A monopolist can occasionally boost income and profits by charging higher prices to some customers than to others. For a monopolist to benefit from discriminatory pricing, the following conditions must exist:

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It must be feasible to distinguish between two or more distinct sets of purchasers (markets) with varying demand elasticities and, as a result, different MRs at a given price. • The markets must be well divided in order to prevent product flow between them; it should not be possible to buy a product at a low price and economically sell it at a high price. If these conditions exist, increasing revenue can be accomplished by charging a higher price in the market with less elastic demand and a lower price in the market with more elastic demand. If the marginal cost of discrimination does not exceed the MR from discrimination, profit is also raised. By assuming only two sets of customers with differing price elasticities of demand, the principals involved in optimizing returns by using discriminatory pricing can be illustrated. Initially, marginal costs are zero and can be ignored if the product to be sold has a fixed supply and the cost of allocating supply between markets is zero. The profit-maximizing rule is to transfer quantities between the two markets until the MR generated by the last unit sold in each market is equal. Distinct pricing elasticities necessitate different demand relations, and thus different MR curves, for successful price discrimination. If both groups of buyers were charged the same price, the MRs would be different. The equalization of MRs raises total revenue by shifting a portion of available supply from the market with the lowest MR (rising the price in that market) to the market with the highest MR (reducing the price in that market) (lowering the price in this market). Because derived desires for agricultural commodities are often price inelastic at current prices, using price discrimination concepts might be difficult. When demand is price inelastic, MR is negative. If the company (or farmer association) genuinely had a monopoly, total revenue might be enhanced by lowering supply and boosting prices in both markets. Demand would presumably become price elastic as prices grew, as it would with a linear demand function. As previously stated, when MRs are zero, maximum revenue (not profit) happens. If a group of farmers produces an aggregate output such that market clearing prices occur at levels where demand is inelastic, reallocating supplies between markets still makes sense as long as the MR in one market is less negative than in another. Although price discrimination may appear enticing to a monopoly, the criteria required for success are frequently difficult to meet (at least at low cost). Separating markets successfully may be difficult (i.e., prevent arbitrage among the markets). Price differences cannot be maintained if purchasers can buy goods on the lower end of the

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market and resell them on the higher end. Furthermore, price discrimination may be outlawed by law, while marketing orders for agriculture commodities in the United States have been allowed to utilize discriminatory pricing principles for a select commodity. The location or application of the raw commodity is generally used to successfully separate agricultural markets. Discrimination based on location is a typical distinction between domestic and export markets, with the assumption that demand in the export market is more elastic or less inelastic. The assumption behind price discrimination based on usage is that the resulting demand for alternative applications differs. On rare occasions, sellers may be able to discriminate amongst buyers based on the time of sale. Film distributors, for example, frequently charge more for the first run of a picture than for a later showing of the same film, and theaters frequently charge less for matinees than for evening plays. Demand for matinée shows is likely to be more price elastic than demand for evening shows. In theory, during the holiday season, you might charge more for a commodity with less elastic demand. Another way a monopolist can profit from price discrimination is to charge different prices to different customers depending on their income levels. It is a reasonable assumption that consumers with different income levels have varied demand elasticities for different items and services. Even though both consumers receive the same service, a professional service provider (e.g., a medical doctor) may be able to charge a greater cost to a high-income buyer with less elastic demand than to a low-income buyer. Price discrimination concepts are rarely used in agricultural commodity marketplaces. The lack of reliable information on MR and marginal cost functions is one of the causes for this. It is not easy to get accurate estimations of these correlations. When markets are potentially interconnected, determining MR functions is extremely complex. Processed items obtained from lower-cost raw materials, for example, may undercut sales in the fresh-product market.

4.4.3.8. Price Behavior under Oligopoly Because an oligopoly is defined as a small number of enterprises, the recognized interdependence among suppliers is a distinguishing feature of oligopolistic markets. Each company must consider what other companies will do in reaction to a price (or quantity) choice. Because several types of interrelationships can exist, generalizing about price behavior is difficult when the number of enterprises is limited. A company can be a leader or a follower, and multiple companies can make decisions at the same time. As a result, different oligopoly pricing models exist, and price solutions

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are dependent on assumptions made about individual company decision behavior. One probable conclusion is that the sellers will conspire. Cooperative behavior is one example of collusive behavior. The best answer in this scenario is to set a price that maximizes industry net revenue. This can be accomplished by capping total sales at what a monopolist would produce, i.e., allowing total output and sales to be set by the point when industry MR equals industry marginal expenses. As a result, price is dictated by and fluctuates with market demand and costs. Producers must still decide on market shares, and it may be difficult to get an agreement on how the overall market will be divided. Even when an agreement is formed, one or more firms may have incentives to violate the cartel agreement. The Organization of Petroleum Exporting Countries (OPEC) accord, which includes major oil producing countries, is possibly the most well-known cartel. The agreement in this scenario is between countries on the total quantity to produce and the distribution of that production among countries. However, the countries’ oil production costs are not comparable, therefore determining the ideal output and price is a matter of judgment. As of 2012, it looked that OPEC members were seeking to set output levels that would keep oil prices in the $90–110 per barrel range; this level might be changed over time to account for inflationary pressures faced by large buyers. Under US law, collusion to manipulate prices is prohibited (Robinson-Patman Act of 1936). Leaving aside the possibility of cooperation, most oligopoly price research begins with the simplistic assumptions of a duopoly (two firms) producing a homogeneous product. The pricing and quantity for each firm are determined by market models (four variables). Quantity leadership, price leadership, simultaneous quantity setting, and simultaneous price setting are all feasible models with this configuration. Quantity leadership implies that one firm picks its production first and the second follows; pricing leadership, on the other hand, implies that one firm chooses its price first and the second follows. Because the leader is likely aware that his or her actions will impact the follower’s decision, the follower’s predicted reaction influences the leader’s decision. A sequential game is a term used to describe this procedure. It is also feasible that when each firm makes its decision about price or quantity, it is unaware of the other firm’s decision. In the context of a simultaneous game, decisions are taken. Again, it is customary to distinguish between simultaneous pricing and quantity selection. The model that is most closely applicable to a particular oligopoly must be based on an understanding of the sector, and none of the models is likely to be exact in real-world scenarios.

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4.4.3.9. Price Behavior under Monopolistic Competition Monopolistic competition is a competitive market structure that differentiates products. For example, livestock feed has many varieties that are close but imperfect alternatives. As a result, a firm’s demand curve is likely to be relatively elastic, though not perfectly elastic. Costs are believed to be similar, but not necessarily identical, for companies who produce similar but differentiated products. Small differences in costs can be created by the distinct qualities of unique products, but firms with high costs in comparison to others in the industry are unlikely to survive the competition. The firm’s optimal price is calculated by equating MR and marginal costs, and this price is expected to approximate the average total costs, assuming profit maximization. It is expected that entry and departure costs are low under monopolistic competition (as in the competitive model). In such conditions, any temporary surplus earnings will assist entice new entrants into the business, pushing the demand functions for existing firms to the left. In other words, competition will tend to keep prices close to the average total cost minimum. Even Nevertheless, monopolistic competition may result in higher prices than pure competition, especially in the near run. When monopolistic competition exists, the cost structure is higher. As with an oligopoly, differentiated product makers may face higher costs due to additional packaging, advertising, and other overhead. They may also try to expand market share by changing the product’s design or contents, giving it new and somewhat different characteristics. Product differentiation can vary in degrees and types between markets. Soaps, toothpaste, and other amenities are among the various brands and types of produced items available to consumers. These items are made by companies of various sizes, and the changes in features are sometimes minor and difficult to assess. A farmers’ market, on the other hand, sells produce from a variety of small businesses, and the veggies, fruits, baked goods, and other items may be fairly similar. Nonetheless, vendors can differentiate their products to some extent. Obviously, sellers in a farmers’ market have limited price flexibility, but they can typically build a premium for their product based on its characteristics (real or imagined). This premium may be required to compensate the increased cost of delivering the service or feature that sets it apart from the competition. Some customers may be ready to pay more for organically cultivated vegetables than for commercially farmed crops, for example. Imperfect knowledge of qualities contributes to imperfect competition (Steenblik,1998). Consumers may find it costly to evaluate differentiated products. As a result, pricing disparities between practically

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identical products may persist because consumers are unaware of the similarities. Competitive commodity markets have clearly more frequent and bigger price changes (during a given time span) than oligopolistic or monopolistic markets. Competitive markets have price flexibility, and they react fast to new information about present and future economic conditions. Markets with monopolistic characteristics have more inflexible prices and respond to changing economic situations more slowly. It is less obvious if the average price level in a competitive and oligopolistic market would differ (if one could observe the same product being priced under the two market structures). In general, economists favor competitive pricing to monopolistic pricing since monopolies, in theory, result in lower outputs and higher prices than competitive markets. Large enterprises, on the other hand, may benefit from economies of scale and be able to do research and development (R&D) that improves product quality while lowering costs. To summarize, the question is whether the advantages of scale, when they exist, are more or less offset by greater costs and non-competitive profits. As a result, it is not unexpected that entirely theoretical generalizations are impossible. It is necessary to conduct empirical market studies.

4.5. PRICING OBJECTIVES Whilst pricing objectives vary from firm to firm, they can be classified into six major groups: • Profitability; • Volume; • Competition; • Prestige; • Strategic; and • Relationship objectives. The way in which each of these objectives is expressed can take different forms.

4.5.1. Profitability Objectives The ability of commercial firms and their management to make acceptable profits is used to evaluate them. Profits can be expressed in monetary terms, as a percentage of sales, or as a proportion of total capital invested. The

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profitability of strategic business units (SBUs), product lines, and individual items is frequently assessed in addition to the overall profitability of the firm. Marginal analysis is the most common method for determining the point at which earnings will be greatest. When it comes to pricing, prudent managers are more inclined to take a strategic approach. That is, they will not always attempt to maximize short-term profits at the expense of longterm goals. For example, profitability may be low or even negative while the company is trying to break into a new market. Heavy investments in capital equipment and/or R&D may hurt an organization’s short-term profitability, but they are likely to provide the groundwork for long-term commercial success.

4.5.1.1. Target Return on Investment (ROI) ROI targets are prevalent in business, and they can be short or long term, with profit expressed as a percentage of sales or assets. This is a pricing strategy that is based on cost. The goals set will be heavily influenced by the economy in which the company operates. If firms are vying for limited funds from prospective shareholders, financial institutions, and possibly even the government, their rate of return must be competitive with the kind of returns achieved by others in the economy. Potential investors should think about the opportunity cost of investing in one business over another. A 20–25% annual rate of return on investment (ROI) (after tax) and a 5–8% return on sales are common pricing objectives. Particular targets for SBUs, product lines, and individual items are likely to be set.

4.5.1.2. Maximizing Revenues Because calculating cost functions is challenging (e.g., when costs are indirect and/or shared by multiple products), marketing managers frequently aim to maximize revenue when determining pricing. They do so because they just need to forecast demand patterns and assume that if present revenues are maximized, profits will be maximized in the long term.

4.5.2. Volume Objectives Managerial pricing decisions are sometimes motivated by sales maximization rather than profit maximization. In these situations, businesses establish a minimum acceptable profit level and then set out to maximize sales within that profit restriction. This is typical when a company’s objective is to focus on mass marketing rather than serving specific market segments. In some

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cases, minimum sales numbers may be more crucial than profit maximization. If their factories and experienced workforce are kept employed, agricultural machinery makers, for example, will attempt to maintain volume, even if it means foregoing prospective earnings. Because production facilities and a skilled workforce are difficult to reinstall once they have been retrenched, this typically occurs if the company feels that a slowdown in business would be short to medium term.

4.5.2.1. Maximizing Market Share The maximization of market share is another volume-related price goal. The organization’s specific objectives could be to retain or enhance its market share. Because the greater volumes help lower unit manufacturing costs, there is often a favorable relationship between large market share and profitability. Commercial enterprises are more likely to establish pricing in the context of their portfolio and corporate strategy in practice. Each product, product line, and SBU in the company’s portfolio will contribute in a unique way to the company’s goals. However, while the prices set for individual products, product lines, and SBUs will take into account their individual circumstances in the short term, such as stage in the product life cycle, degree of market competition, relative competitive strength in the market, and average prices prevailing in the particular market, their prices must be set in accordance with corporate strategy in the long run to contribute to corporate objectives.

4.5.3. Competitive Objectives Pricing decisions, like any other marketing decision, must take into account current competition activity and attempt to predict future competitor conduct. If the price strategies and techniques being considered are really applied, a corporation will want to predict competitors’ reactions.

4.5.3.1. Going-Rate Pricing Occasionally, competitors will set out to match the industry leader’s prices. As a result, the emphasis is shifted away from price competition and toward competitiveness in other aspects of the marketing mix. Pricing is a useful technique for acquiring a competitive advantage over competitors, but it is easily copied. When competing enterprises in a market allow pricing to be the primary basis of competition, the entire industry’s profitability can suffer. Competitors may try to maintain price stability by focusing on

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product/service strategies, advertising, and distribution, or the non-price parts of the marketing mix.

4.5.3.2. Anti-Competitive Pricing On rare occasions, a company will price its products in such a way as to discourage or drive competitors out of the market. This is accomplished by keeping prices and profit margins low. The extent to which this type of pricing can be used is determined by the firm’s own return-on-investment objectives as well as the severity with which anti-competitive behavior is policed within a country.

4.5.4. Prestige Objectives Profitability and volume goals are unrelated to prestige goals. These include setting relatively high costs in order to generate and maintain a quality and exclusivity image that appeals to status-conscious consumers. Such goals indicate an understanding of the importance of price in shaping the image of a company and its products or services.

4.5.5. Strategic Marketing Objectives •

•

•

Price Stabilization: The goal of price stabilization is achieved in the same way as the goal of removing price as a competitive basis is achieved. In other words, the corporation will try to keep its own rates at or near those of competitors. The goal is to reduce the range of price differentials and volatility, not to eliminate price as a prospective marketing advantage. Supporting Other Products: Pricing decisions are frequently made with the goal of maximizing overall earnings rather than profits from any specific product in the portfolio. To that purpose, some products may be designated as loss leaders, with their price set at a level that generates low or even negative returns in order to boost sales and profitability of other products in the range. For example, a crop protection product maker may sell a knapsack sprayer at or below cost in order to boost sales of the high-margin chemicals it is designed to apply. Maintaining Cash Flow: Many businesses fail not owing to a

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lack of demand for their products and services, but rather due to cash losses exceeding cash inflows. As a result, maintaining a healthy cash flow situation is a key managerial goal. Much of a company’s business will be conducted on credit rather than cash. The pricing mechanism can help with cash flow management. Prices can be set in such a way that customers are encouraged to pay cash or repay credit cards sooner than they would otherwise. Target Markets: Varied market sectors have different levels of pricing sensitivity. Some customers see things as commodities and buy them primarily or entirely based on price. Others will notice distinctions between rival brands and make their decision based on qualities such as quality, freshness, and convenience rather than price. Prospective purchasers’ impressions of the actual price they are being asked to pay also differ. When evaluating a purchase, some farmers, for example, will look at the retail price of agricultural equipment. Others will take into consideration the item’s credit conditions. Others will compare the trade-in value of used equipment offered by one dealer to that offered by another vendor. Product Positioning: The position within the market refers to the category in which a product is classified by consumers, as well as its relative standing within that category. Depending on which segments of the market are being considered, the same product can have multiple places. Hodzeko, a Zimbabwean brand of fermented milk, is a good example. This product is popular among low-income people who see it as an inexpensive way to add taste to their maize porridge (or sadza). Consumers in upper income categories also purchase the product, which is used as a substitute for soured cream in baking. These differing perspectives on the goods may allow for variable pricing based on market position. Hodzeko’s pricing as a condiment for a staple food must be kept low, but with some repackaging and a new brand identity, more affluent consumers might be convinced to pay a higher price for a product that still costs less than soured cream. Price-makers must also consider perceived price-quality links. The product must be priced in accordance with the desired quality image and market placement.

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4.5.6. Relationship Marketing Commercial businesses have a number of significant publics with whom they must create and maintain positive working relationships. Consumers, members of the distribution channel, suppliers, the general public, shareholders, and the government are all examples of publics, also known as stakeholders. Stakeholders are individuals or groups who influence and/ or are influenced by an organization’s operations. As a result, corporations have relationships with entities other than their trading partners, which must be carefully managed. Indeed, managing those relationships could be considered part of a company’s broader marketing strategy.

4.5.6.1. Channel of Distribution Members When establishing pricing decisions, all players in the organization’s product distribution chain must be considered. An organization can better retain channel members’ loyalty by adopting pricing policies and structures that help intermediaries accomplish their own profit goals. When there is fierce rivalry for distribution outlets, the company that demonstrates to be the most knowledgeable and attentive to the demands of intermediaries will win.

4.5.6.2. Suppliers The organization must be concerned about the wellbeing of its suppliers, just as it must be concerned about the interests of its distributors. Japanese automobile manufacturers have transformed global supplier-manufacturer relationships. When a new model was ready for mass production, North American and European automakers used to have would-be component suppliers compete in a tender process. The fact that a supplier had previously produced and supplied components for earlier models adequately was no guarantee of participation in the supply of components for the new automobile model. Japanese manufacturers, on the other hand, tend to form long-term ties with component suppliers that have previously delivered satisfactory service. Rarely does work go out to open tender. The component supplier is viewed as an extension of the Japanese mentality. A component supplier to a North American or European vehicle manufacturer, on the other hand, could expect to be brought in once the car’s engineering design was complete. The component’s specs are not provided by the Japanese manufacturer to the supplier. Instead, the component supplier is informed on the proposed new car’s concept and requested to build a component that would aid in transforming the concept into a tangible product. Suppliers to

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Japanese automakers have a sense of stability, which allows them to plan for the long term and encourages them to invest in new technology. Other car manufacturers have begun to recognize the need of developing stronger relationships with their suppliers. For example, General Motors has adopted the Japanese approach to supplier relations.

4.5.6.3. The General Public Even if they do not buy or use the products or services of commercial organizations, the general public is interested in their activities. The public, for example, will be concerned about an organization’s business ethics and issues such as the impact of its activities on the environment, the extent to which the organization contributes to the local community (e.g., charitable works and contributions), the manner in which it responds to community complaints and concerns, and the size of its profits. Companies must be cautious when reporting pricing and profits, as these can easily be interpreted as excessive.

4.5.6.4. Government Governments are frequently concerned about the costs paid, especially if the commodity is a staple food. Because the pricing of basic consumables is a politically sensitive subject in most nations, this is true even where organizations have been emancipated from government price control. The government will want to appear watchful in its efforts to avoid profiteering at the expense of the general public. The situation is particularly tough for agricultural marketing parastatals, which, after years of price suppression, must significantly raise prices in order to become financially viable. Market liberalization may allow them more price flexibility, but significant price rises must be ‘marketed’ to both the government and the general public.

4.6. WAYS MARKETS ARRIVE AT PRICES (PRICE DISCOVERY) The phrase “price discovery” refers to the institutional structures that enable buyers and sellers to agree on specific prices and terms of trade. It is more concerned with the mechanics of pricing than with price determination theory. Price discovery mechanisms fluctuate as the economy changes, and they can influence price behavior. Pricing mechanisms can influence the quality of information and how it is communicated, and alternate price

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discovery methods can influence how price risk is divided among market participants. This section focuses on agricultural product pricing at the farmer – first handler level, however the main price-making institution does not have to be on the farm. A soybean buyer in Iowa, for example, is likely to base his bid on a price quotation for a nearby futures contract sold on the Chicago Board of Trade (with delivery, if made, on the Illinois waterway system). As a result, our consideration of pricing institutions is inevitably broad. The phrases pricing mechanisms and pricing arrangements are used interchangeably in this chapter to refer to the institutions and procedures used to price agricultural products.

4.6.1. Alternative Pricing Mechanisms 4.6.1.1. Price Discovery in Theory In an ideal market, all participants have free and equal access to knowledge about the factors that influence prices. Because there are no costs associated with discovering prices represent current economic conditions, and whenever new information enters the market, prices quickly adjust to the new, right equilibrium level. Using a re-contracting process, economists have outlined how buyers and sellers may theoretically arrive at “the correct” equilibrium price. This model implies that supply and demand (information) are known, as well as a single equilibrium price. Buyers and sellers want to enter into contracts that benefit them, but after a tentative contract is signed, both buyers and sellers maintain the right to re-contract if a better price becomes available. Price information is publicly available through an unbiased market reporter. Potential purchasers may, for example, place bids at a lower price than the true, but unknown, equilibrium price, but they will discover that supply is insufficient to fulfill the quantity needed at the lower price. As a result, the price is bid up, and a bigger amount is delivered at the higher price, and the initial seller’s re-contract at the higher price. This method is repeated until the quantity delivered matches the quantity required. The final equilibrium price is paid by buyers and received by sellers. Re-contracting is unusual in reality, and it is not always free. Despite this, the model shows two feasible points. First, price discovery can be considered as a dynamic search process, but there is a certain amount of “noise” in the market for every given information set. Not every trader will have the same information, and not every trader will assess the data in the same way. Different methods of “searching” are used in alternative price discovery techniques. Second, as a result of the price discovery process, transaction prices may gravitate toward

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equilibrium. When new information becomes available, prices adjust as part of the adjustment process; prices seek a new equilibrium based on the new data. It is also worth noting that, in fact, determining the values of specific lots of a commodity can be quite difficult. The pricing mechanism must determine both the overall price level, or reference price, and the specific features and conditions that add or deduct from the reference price for each transaction. Commodities have characteristics that differ from one lot to the next, and these characteristics have an impact on prices. Individual pricing is also influenced by other aspects of the transaction, such as delivery and payment dates. For example, the transaction may provide the seller a choice about delivery schedule; the seller may have 5 days to make delivery. Such an option has value in and of itself, and if the seller receives a benefit, the buyer is unlikely to pass that benefit on to the seller without a compensatory offset in the transaction price. To summarize, even theoretically, each transaction price for commodities does not have to be identical.

4.6.1.2. Taxonomy Agricultural transaction prices sometimes involve a variety of institutional arrangements, and unlike price theory, economists do not have a fully agreed-upon taxonomy of price discovery methods. However, categorizing price discovery methods is useful since it allows for certain generalizations about the benefits and costs of different procedures. We distinguish between the procedures or processes that lead to price determination and the results of these activities. A particular mechanism, such as negotiation, can produce several outcomes (i.e., different contracts). The costs of price discovery and how price risks are addressed can be influenced by pricing arrangements. As a result, pricing mechanisms do have an impact on prices, at least indirectly through the results they produce. We adopt a straightforward three-category system: •

•

•

Private contracts between individuals and/or businesses, as well as formal collective bargaining between, instance, a group of farmers and a processor; Auctions, which can involve bids (buyers) and/or offers (sellers) at public marketplaces, on electronic exchanges, or via sealed bids, and can be of many different sorts and institutional arrangements; and Administrative pricing made by private firms or by public entities.

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A negotiated price is the result of a formal or informal negotiation process. In a structured market environment, auctions entail some type of bidding (and/or offering) method. A decision maker with the capacity to set or post a price is said to have an administered price. In determining the current price, a variety of rules or procedures may be utilized, all of which take into consideration current economic conditions in some way. As a result, all methods of price discovery require information, and prior prices are one type of information to consider. By definition, price changes are dependent on a previous price. Different price structures can transmit information in different ways. Furthermore, markets for various items may contain varying volumes of information and proportions of informed traders at any given time. This could be due to the pricing strategy or market structure.

4.6.1.3. Negotiated Prices Many commodity prices are still determined by informal negotiations between individuals around the world. When one farmer wants to buy alfalfa hay from another, they negotiate a price informally. Both parties are likely to be aware of current hay pricing in their area, and the buyer may have examined the hay to determine its quality. Other terms of trade would be discussed, such as who pays for transportation and when the hay will be delivered. In this case, the time required to reach a pricing agreement is likely to be brief. For commodities with varied quality from one lot to the next and sold in a local market, informal negotiating may be the most cost-effective way of price discovery. Only one transaction is involved in the alfalfa hay example, and bargaining is not time-consuming. When the opportunity costs of negotiating are low, a decentralized pricing mechanism can be used to sell many lots. If family labor’s alternative uses are limited, as they are for small producers in both developing and wealthy countries, the opportunity cost of spending half a day selling food at a farmer’s market or bazaar is low. Traders can also learn about other sellers’ asking prices by visiting to a central area. It is a location for exchanging and receiving information. Formal, systematic negotiating methods are part of negotiation. The creation of labor unions and the bargaining of pay and other benefits with employers is perhaps the most well-known example. The end product is a formal contract that sets rewards and duties for a certain time period. Farmers have formed bargaining clubs (or cooperatives) in an attempt to negotiate prices with purchasers due to dissatisfaction with commodity price levels. Farmers seek to attain similar results to those of more successful labor unions, but this has rarely happened. The ability of producer bargaining associations to

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negotiate better prices is predicated on their ability to control a significant share of the overall supply.

4.6.1.4. Auctions Auctions are pricing institutions that use clear rules to establish prices through bidding and occasionally simultaneous offers. There are several types of auctions, including English and ascending auctions. Oral auctions, bid auctions, sealed bidding, Vickery auctions, double-auctions, centralized auctions.

4.6.1.5. Administered Prices Prices established by administrative choices of firm managers or by government law or policy are referred to as administered prices. In most retail establishments, pricing is decided by store management. A grocery shop with thousands of items requires an administrative system that reduces what are known as “menu costs,” or the costs of adjusting pricing. Clearly, negotiating pricing with their many consumers would be too expensive for food retailers. Managers are influenced by economic factors such as the degree of competition and the firm’s marketing and pricing strategies in its economic context when setting prices, but the point is that prices are set by administrative decisions involving rules developed by managers, not by negotiation or auction can influence pricing, and administrative choices can influence farm prices in this way. These are explored in the chapter’s final section. Retailers of high-ticket commodities, such as vehicle dealers, will, on the other hand, negotiate prices. They have also published (list) prices. As a result, the transaction price will almost certainly be the result of a combination of administrative decision and negotiation. Individual farmers are rarely able to manage pricing, that is, set the price they want for their output. One of the requirements is that their output have certain features that distinguish them from alternatives. This could happen, for example, at a farmers’ market when selling produce. Farmers, on the other hand, have little, if any, price-setting discretion for large, relatively homogeneous commodities. As previously said, commodity prices are typically determined through negotiation or auction processes. In some cases, the buyer sets (administers) the price paid to the farmer. For example, there is a listed bid price for number two yellow corn delivered to a certain buyer’s area. The buyer can be an independent handler, a producer cooperative, or a bargaining association in this situation. The farmer can choose whether or not to deliver

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at the advertised price. However, the quoted price is most likely taken from a futures price determined through an auction process. As a result, the listed price varies from day to day, and the price paid to the farmer is a mix of prices discovered through an auction and prices set by an administrative decision. Government policy can also influence agricultural commodity prices. Indeed, there are numerous government programs around the world that can influence pricing, and administrative actions influence farm prices in this way.

4.7. GOVERNMENT INTERVENTION IN AGRICULTURAL PRICE Almost every country’s government has tried to affect the price of at least some agricultural products. The goal is sometimes to lower the prices of food paid by urban customers. The goal is frequently to support farmer prices and incomes and/or eliminate price and income instability, particularly in developed countries. Associated goals could include preserving small farms and achieving food and fiber self-sufficiency (Or to decrease dependence on imports). The government’s policies to attain these goals can be divided into two categories: • Domestic policies; and • International trade policies. Government programs to sustain or raise farm prices have different economic effects depending on the quantity of support and the tactics used to raise prices. Direct payments or subsidies can also be used to boost agricultural incomes; these payments can influence prices indirectly by affecting farmers’ motivations to produce. If the program’s goal is to impact market pricing, however, supply must be limited (e.g., through acreage restrictions or herd buyout programs) or demand must be increased (e.g., through food subsidies or generic advertising). We now move on to a consideration of specific programs.

4.7.1. Price Supports If the government is ready to create demand for the surplus production generated by the support price, commodity prices can be kept above the equilibrium level. The government can buy and keep inventories of storable commodities. The amount that must be obtained, as well as the cost (to taxpayers), are determined by the level of assistance in relation to the

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equilibrium price, as well as the slopes of the relevant supply and demand schedules. Political decisions influence the degree of support; however, the secretary or minister of agriculture may be allowed some price-setting discretion. High support fees may also encourage the development of less expensive alternatives. One reasonable theory is that the United States’ price support program for cotton offered a shelter for the development of synthetic fibers. Similarly, the price support for butter made butter more expensive than its main alternative, margarine. As a result of the drop in demand associated with the introduction of replacements, stocks might grow over time (which were, in turn, encouraged by the price support program). Another issue with operating a price support and related government purchase program is that support prices should be modified to take into account the quality and geographical characteristics of individual lots of the commodity. When there are no price supports, markets tend to establish meaningful price differences quite efficiently. However, doing so administratively is more difficult, and with insufficient administrative differentials, the government will acquire low-quality stocks in unattractive places. One solution to inventory acquisition concerns is to try to limit production, while another is to try to subsidize exports.

4.7.2. Direct Payments Rather of seeking to affect supply or demand in order to improve agricultural prices, a scheme may be developed to pay farmers directly. Because it permits market forces to establish prices, this type of scheme may be more acceptable. Agricultural product purchasers pay market-clearing prices. The government does not have to handle surpluses since market prices distribute inventories. Direct payments are made to farmers if market prices are below those deemed equitable to farmers. The size of the payments is decided by politics, and the money comes from taxpayers. The slopes of the demand and supply schedules influence the cost of the program to the government, just as they did in prior discussions of comparable programs. The size of payments is also affected by changes in the functions. In theory, demand may grow faster than supply, causing market prices to rise above guaranteed levels and government payments to fall to zero. Of course, the opposite is also conceivable. The price of key grains in the United States was low relative to support levels around the turn of the 21st century, and the federal government paid considerable payments to crop farmers. Dairy farmers have recently received deficiency payments as part of the United States’ dairy policy. However, since 2005, agricultural product prices have

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grown significantly, raising doubts about the need for direct payments. Furthermore, free-trade proponents attack shortfall payment programs because they have comparable effects to export subsidies, in that they boost exports by artificially lowering domestic market prices.

4.7.3. Stabilization Schemes Because agricultural product prices are so volatile, buyers, and sellers of commodities incur a significant price risk. A price support scheme could aid in price stabilization. It establishes a floor price, and if demand rises to the point where market prices exceed the support level, stocks can be released to limit price increases. Indeed, some initiatives, such as the dairy price support program, were designed to mitigate seasonal milk price highs and lows. A program may theoretically be designed to lessen the amplitude of price variations without altering the average price level. This could be accomplished through inventory management for storable commodities. When output is high and prices are low, stock purchases are made. When output is low, these inventories are released, keeping prices from climbing as much as they would otherwise. Of fact, maintaining prices exactly at the long-run equilibrium level is impossible, but maintaining prices within a band may be doable. Even this is difficult to do in practice, partly due to the difficulty in predicting the long-run equilibrium price and so establishing appropriate acquisition and release prices. Prices can be visualized as shifts in a supply function along a static demand function when a stabilization procedure is implemented. When a random shock (e.g., good weather) results in a huge crop, the supply function shifts to the right compared to the regular supply. The government agency buys stocks to assist keep prices stable; the supply that enters market channels is then consistent with typical conditions. When a random shock reduces supply, inventory from government-held stocks is released, lowering price relative to where it would have been otherwise. A reserve program that reduces the amplitude of price volatility may aid producers in surviving a period of low prices, but it will not always result in more consistent returns for farmers. High prices tend to counteract poor production when prices are free to fluctuate in reaction to changes in production, and vice versa. Only under specific circumstances will price stabilization lessen revenue instability relative to what would occur in the absence of a stabilization scheme. To summarize, governments can potentially administer prices and reduce price fluctuation, but this does not always diminish the unpredictability of farmer profits.

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Attempts to stabilize prices using storage methods, in general, have failed. Another issue arises when there are several periods of high (or low) output, since inventories are at capacity (or near zero) and the government is unable to buy (release) additional stocks, making it hard for the government to influence market prices.

4.7.4. Cooperative Actions and Marketing Orders Governments can have an indirect impact on agricultural product prices by providing the legal power and climate for farmers to band together. The Capper-Volstead Act in the United States permits farmers to market their products together. Farmers’ cooperative acts are protected from antitrust legislation within certain parameters. As a result, farmers may be able to employ price discrimination principles to increase returns, collaborate to manage the quality/quantity of the commodity marketed, and collaborate to collect funds for an advertising effort. Marketing orders are one channel for joint action in the United States. For example, milk marketing orders define formulas for the price given to dairy farmers. An order specifies prices for several classes of milk used in fluid and industrial applications. Higher prices are set for milk sold in retail outlets as fluid milk, which is thought to have a higher price inelastic demand than processed items like butter and cheese. Farmers receive a weighted average of these class prices depending on overall market usage, while processors pay these class prices according to how they use the milk. As a result, categorized pricing should boost overall profits. Other marketing orders have an impact on prices by defining the minimum product grades and sizes that can be sold. The amount of produce that enters a market each week is sometimes regulated. The main idea is that farmers can band together to control the quantity and quality of produce sold, hence influencing prices. Another indirect method of influencing commodity prices is through advertising. Although an agricultural commodity may have a variety of characteristics, it is sometimes difficult to distinguish and brand farm produce. Milk, for example, might vary in fat and protein content (and these traits can influence the price obtained by farmers), but farmers normally do not attempt to brand their milk. As a result, individual farmers have minimal incentives to promote. Farmers, on the other hand, may benefit if they could band together and combine funds to promote a commodity like milk. The hope is that by increasing aggregate demand as a result of advertising, agricultural prices will rise enough to cover the expense of advertising. Only empirical examination on a commodity-by-

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commodity basis may provide an answer to this question. The economics of generic advertising has been studied extensively, and farmers appear to gain from it frequently (e.g., Kaiser et al., 2005). As a result, farmers permitted collective actions can impact agricultural product pricing. These collective activities, in turn, are reliant on the USDA’s legislative and administrative support.

5

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AGRICULTURAL COOPERATIVES

CONTENTS 5.1. Overview......................................................................................... 144 5.2. Origins and History......................................................................... 145 5.3. Types of Cooperatives...................................................................... 148 5.4. Underlying Principles of Cooperation.............................................. 153 5.5. Common Cooperative Functions...................................................... 155 5.6. Economic Concepts that May Encourage The Formation of Cooperatives...................................................... 158 5.7. Limitations in Cooperatives.............................................................. 163 5.8. Cooperatives Equity and Debt Considerations.................................. 166 5.9. Legal Organization of Cooperatives................................................. 171 5.10. Cooperative Management Characteristics...................................... 173 5.11. Cooperative Influences on Public Policy........................................ 180 5.12. Relationships and Linkages Between Cooperatives Types............... 181 5.13. Sources for Additional Information on Cooperatives...................... 183 5.14. Agricultural Marketing Cooperatives.............................................. 185

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5.1. OVERVIEW A cooperative (also known as a co-operative, co-op, or coop) is a selfgoverning group of people who have come together voluntarily to achieve their common economic, social, and cultural needs and ambitions through a jointly-owned business. Members own cooperatives democratically, with each member having one vote in the election of the board of directors. Cooperatives may consist of: •

People that use their services own and operate enterprises (a consumer cooperative). • People who work in the organization manage it (worker cooperatives). • Multi-stakeholder or hybrid cooperatives in which several stakeholder groups share ownership. Consider care cooperatives, in which both caregivers and recipients share ownership. Nonprofits and investors are examples of stakeholders. • Cooperatives in the second and third tiers whose members are also cooperatives. • Platform cooperatives facilitate the selling of goods and services by using a jointly owned and administered website, mobile app, or protocol. According to research from the United Kingdom (UK), cooperative enterprises are often more productive and economically resilient than many other types of business, with twice as many co-operatives (80%) surviving their first five years as other business ownership patterns (41%). The Mondragon Corporation (established by Catholic priest José Mara Arizmendiarrieta) has been in continuous operation since 1956, making it the world’s largest worker-owned cooperative. Cooperatives usually have social objectives that they hope to achieve by reinvesting a portion of their trading revenues into their communities. As an example, retail co-operatives in the UK invested 6.9% of their pre-tax revenues in the areas where they operate in 2013, compared to 2.4% for other supermarkets. Cooperatives have been distinguished on the Internet since 2002 by the usage of the .coop domain. The International Co-operative Alliance (ICA) launched the Cooperative Marque in 2014, which allows ICA cooperatives and WOCCU credit unions to be recognized by a coop ethical consumerism label.

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5.2. ORIGINS AND HISTORY Cooperation has existed since humans began to organize for mutual advantage. Tribes were structured as cooperative systems, dividing tasks and resources among themselves and only trade with other tribes. To maintain a useful condition of constructed roads such as Viamala in 1472, trade could only be maintained through organized cooperatives in mountainous regions. The first industrial cooperatives were founded in pre-industrial Europe. The cooperative movement’s roots can be traced back to a variety of sources and span the globe. As early as 1795, in the English-speaking world, postfeudal types of collaboration between workers and owners existed, which are now known as “profit sharing” and “surplus sharing” agreements. When the British government drastically altered its Poor Laws in 1834, the major ideological influence on the Anglosphere branch of the cooperative movement was a rejection of the charity values that supported welfare reforms. As governmental and religious organizations began to frequently distinguish between the “deserving” and “undeserving” poor, a movement of friendly societies based on the idea of mutuality and committed to selfhelp in the welfare of working people arose throughout the British Empire. In Fenwick, East Ayrshire, Scotland, the Fenwick Weavers’ Society was founded in 1761 to supply reduced oatmeal to local employees. Its services grew to include savings and loan aid, as well as emigration and education. In 1810, Robert Owen, a Welsh social reformer from Newtown in midWales, and his partners bought the New Lanark mill from Owen’s fatherin-law, David Dale, and implemented better labor conditions, including cheap retail outlets where earnings were passed on to his workers. Owen moved away from New Lanark to study alternative forms of cooperative organization and to advance coop principles through writing and lectures. Although unsuccessful, cooperative villages were established in Glasgow, Indiana, and Hampshire. William King, who had already established a cooperative business in Brighton, founded The Cooperator in 1828 to promote Owen’s ideas. Rev. Henry Duncan of the Rothwell Presbyterian Church in Dumfriesshires, Scotland, founded a friendly society in 1810 to create a cooperative depository institution where his poorest parishioners could hold savings accounts accruing interest for sickness and old age, which was the first established savings bank that would be merged into the Trustee Savings Bank between 1970 and 1985. The Rochdale Society of Equitable Pioneers, formed in 1844, is widely regarded as the first successful cooperative organization, with the ‘Rochdale Principles’ serving as a model

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for current coops. The club was founded by a group of 28 weavers and other workers in Rochdale, England, who wanted to create their own store selling food they could not purchase elsewhere. Within 10 years, the UK had over 1,000 cooperative societies. Samuel Jurkovi formed “Spolok Gazdovsk” (The Association of Administrators or The Association of Farmers) in 1845, which was Europe’s first cooperative (Credit union). The cooperative supplied members with a low-cost loan using cash generated through regular savings. Cooperative members were required to live a decent life and plant two trees in a public spot every year. Despite its brief history, from 1851 to 1851, it served as the foundation for Slovakia’s cooperative movement. Ľudovít Štúr, a Slovak national thinker, said of the association: “We would like to see such good constitutions adopted throughout our region. They would aid in the liberation of people from evil and sorrow. A lovely, brilliant concept, a lovely, amazing constitution!” Other incidents, such as the Tol-puddle Martyrs’ founding of a friendly society in 1832, were pivotal in the formation of organized labor and consumer organizations. Friendly Societies established forums in which organization decision-making was done by one member, one vote. The principles questioned the notion that a person must own property before being allowed political power. There was a rise in the number of cooperative groups, both in business activity and civic society, operating to advance democracy and universal suffrage as a political ideal throughout the second half of the 19th century (and then every 20 years or so). Prior to the advent of trade unions and industrial factories, Friendly Societies and consumer cooperatives became the primary form of organization among working people in Anglosphere industrial societies. According to Wein-Bren, over 80% of British working-age men and 90% of Australian working-age males were members of one or more Friendly Societies by the end of the 19th century. Mutual organizations accepted these concepts in economic operations beginning in the mid-19th century, initially among tradespeople and later in cooperative stores, educational institutes, financial institutions, and industrial firms. The principle that an enterprise or association should be owned and controlled by the people it serves, and share any surpluses based on each member’s cooperative contribution (as a producer, laborer, or consumer) rather than their capacity to invest financial capital is the common thread (enacted in various ways and subject to the constraints of various systems of national law). The ICA was the cooperative movement’s first international organization, founded in 1895. The World Council of Credit Unions is part of it. The International Cooperative Alliance was created on August 19,

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1895, during the 1st Cooperative Congress in London, England. Delegates from Argentina, Australia, Belgium, England, Denmark, France, Germany, Holland, India, Italy, Switzerland, Serbia, and the United States were in attendance. A second organization, the International Raiffeisen Union, was founded subsequently in Germany. The National Cooperative Business Association (NCBA CLUSA; the abbreviation retains the initials of the organization’s former name, Cooperative League of the USA) is the sector’s oldest national membership association in the United States. Its goal is to ensure that cooperative enterprises have the same chances as other firms in the country, and that consumers can shop at cooperatives. Artturi Ilmari Virtanen was awarded the Nobel Prize in Chemistry in 1945 for developing the AIV silage. This discovery expanded Finnish butter exports by improving milk output and creating the AIV salt, a way of preserving butter. He began his chemistry career at Valio, a dairy farmer’s cooperative where he led the research department for 50 years and where all of his significant ideas were first implemented. Online banking was first introduced by cooperative banks. In October 1994, Stanford Federal Credit Union became the first financial organization to offer online internet banking to all of its members. In 1996, OP Financial Group, a cooperative bank, became the world’s second online bank and Europe’s first. The United States Federation of Worker Cooperatives was created in 2004 to focus on worker cooperatives. Economic democracy principles have propelled the cooperative movement around the world. Economic democracy is a socioeconomic concept that advocates transferring decision-making authority from a small group of business shareholders to a larger group of public stakeholders. There are numerous approaches to considering and constructing economic democracy. Anarchists believe in libertarian socialism and have focused on local organizing, such as locally run cooperatives, which are linked through confederations of unions, cooperatives, and communities. Marxists, like socialists, have an aim of democratizing productive and reproductive ties, but they often put a higher strategic focus on tackling wider dimensions of human organization. They battled to take the state’s collective political ability from the capitalist class in the early 20th century because they saw the capitalist class as politically, militarily, and culturally mobilized for the sake of sustaining an exploitable working class. Despite their dislike for the state as an unduly oppressive institution, Marxists saw capturing national and international-scale capitalist institutions and resources (such as the state) as a crucial first step towards fostering solidaristic economies. With the USSR’s (Union of Soviet Socialist Republics) waning power after

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the 1960s, socialist techniques became more diverse, however economic democratizers have failed to develop a major challenge to global neoliberal capitalism’s predominance. Many cooperatives follow the seven Rochdale principles: • • • • • • •

Voluntary and open membership; Democratic member control, with each member having one vote; Economic participation by members; Autonomy and independence; Education, training, and information; Cooperation among cooperatives; and Concern for community.

5.3. TYPES OF COOPERATIVES The ICA published a list of the top 300 largest cooperatives in 2007. More over half were from the United States, Italy, or France, and 80% worked in agriculture, banking, or retail. The following are examples of cooperatives: •

•

•

Consumers’ Cooperative: A consumer cooperative is a company that is owned by its members. Members elect the board of directors from among themselves and vote on critical issues. The earliest of these, in the North-West of England, was founded in 1844 by 28 weavers who wished to sell food at a lower price than the local shops. Retail Cooperative: Customers own grocery stores and other retailers in retail cooperatives. They are not to be confused with retailer cooperatives, which have retailers rather than customers as members. A consumer-owned cooperative holds the biggest market share in the grocery store sector in Denmark, Singapore, Italy, and Finland. Consumer cooperatives own both the main and second largest retailers in Switzerland. Housing Cooperative: Residents either hold shares (share capital co-op) reflecting their equity in the cooperative’s real estate or have membership and occupancy rights in a not-for-profit cooperative (non-share capital co-op), and they pay subscriptions or rent to subsidize their home. There are three fundamental equity models for housing cooperatives:

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•

Members of market-rate housing cooperatives can sell their shares at any time for whatever price the market will bear, just as they would any other residential property. In New York City, market-rate co-ops are fairly common. • Limited equity housing cooperatives, which are frequently employed by affordable housing developers, allow members to possess some equity in their property while limiting the sale price of their membership share to the amount paid. • Members of group equity or zero-equity housing cooperatives do not hold equity in their homes and frequently have rental agreements that are significantly below market prices. Members of a construction cooperative (also known as a self-build housing cooperative in the UK) pool their resources to construct dwellings, usually with a high percentage of their own labor. When the structure is complete, each member becomes the sole owner of a homestead, and the cooperative may be disbanded. Many of Britain’s construction societies arose from this common effort, but eventually evolved into “permanent” mutual savings and loan organizations, a phrase that lingered in some of their names (such as the former Leeds Permanent). Self-construction can now be financed using a step-by-step mortgage that is disbursed in phases as the structure is completed. Worker cooperatives in the construction industry are another example of the word. •

Utility Cooperative: It is a form of consumer cooperative that is responsible for delivering a public utility to its members, such as power, water, or telecommunications. Profits are either re-invested in the cooperative’s infrastructure or distributed to members in the form of “patronage” or “capital credits,” which are effectively dividends paid on a member’s investment. As part of the New Deal in the United States, many cooperatives were founded to offer rural electrical and telephone service. RUS stands for Rural Utilities Service. In the case of energy, cooperatives are either generating and transmission (G&T) co-ops, which generate and transmit power over the transmission system, or local distribution co-ops, which collect electricity from various sources and distribute it to homes and businesses. In Tanzania, the cooperative technique has been shown to be effective in water distribution. People are more concerned when it comes to their

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•

•

•

own water because the quality of their work has a direct impact on the quality of their water. Credit Unions, Cooperative Banking and Co-Operative Insurance: Credit unions are member-owned and managed cooperative financial institutions. Credit unions offer similar financial services to banks, but they are non-profit organizations that follow cooperative ideals. Worker Cooperative: Also known as a producer cooperative, is a cooperative controlled and owned by its “worker-owners.” A “pure” workers’ cooperative has no outside owners; only the workers own shares, while hybrid forms exist in which consumers, community members, or capitalist investors own some shares. In practice, worker-owners can exercise control by retaining individual, collective, or majority voting rights, as well as individual, collective, or majority ownership by the workforce (exercised on a one-member one-vote basis). As a result, a worker cooperative has the feature that the majority of its workers possess shares, and the workers own the majority of the shares. Employees are not always required to join, although in most cases, only employees can join either directly (as shareholders) or indirectly (via membership in a trust that controls the company). The impact of political ideology on practice limits cooperative development in various countries. In India, there is a type of workers’ cooperative that requires all employees to join and all members to work. The Indian Coffee Houses take this shape. A. K. Gopalan, an Indian communist leader, advocated for this approach. In the 1970s, common ownership (indivisible group ownership) was popular in areas like the UK. Slaney’s Act, passed in 1852, made cooperative societies legal in the UK. In 1865, there were 651 registered societies with well over 200,000 members. In the UK, there are now over 400 worker cooperatives, the largest of which is Suma Wholefoods, which has a turnover of £24 million. Business and Employment Cooperative (BECs): These are a subgroup of worker cooperatives that propose a novel method to assisting new business startups. BECs, like other company creation assistance programs, allow aspiring entrepreneurs to test their business ideas while earning a steady income. The innovation introduced by BECs is that after the enterprises are

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created, the entrepreneurs are not obliged to leave and start their own firms, but can instead stay and join the cooperative as full members. The micro-enterprises are then combined to establish a multi-activity enterprise whose members give each other with mutual support. BECs thus facilitate the shift from inactivity to self-employment for aspiring entrepreneurs, but in a group setting. They open up new possibilities for those who have desire but lack the skills or courage to strike out on their own – or who just want to engage in a self-employed economic activity while being part of a supportive community. Purchasing Cooperative: A “buying cooperative” is a sort of cooperative agreement, usually amongst firms, to agree on aggregate demand in order to obtain lower pricing from specified suppliers. A type of purchasing cooperative is a retailer’s cooperative. Best Western, ACE Hardware, and CCA Global Partners are all major purchasing cooperatives. Agricultural service cooperatives offer a variety of services to its individual farming members as well as agricultural production cooperatives, which pool production resources including land and machinery and allow members to farm together. Agricultural supply cooperatives pool its members’ purchasing, storage, and delivery of farm inputs. Supply cooperatives lower members’ costs by taking advantage of volume discounts and other economies of scale. Seeds, fertilizers, chemicals, fuel, and farm machinery are all available from supply cooperatives. Some supplier cooperatives also run machinery pools that provide mechanical field services to their members (such as plowing and harvesting). Ocean Spray, an American cranberry-and-grapefruit cooperative, community farms in communist regimes, and Israeli kibbutzim are all examples. Producer Cooperatives: These are made up of producers that provide services that help a product get from the point of production to the point of consumption. They allow firms with many employees to join, unlike worker cooperatives. Cooperatives in agriculture and fisheries are two examples. Planning production, growing, and harvesting, grading, packing, shipping, storage, food processing, distribution, and sale are all tasks that agricultural marketing cooperatives engage in. Cooperatives for

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•

•

•

agricultural marketing are frequently created to promote certain commodities. India’s Amul (dairy products), the world’s largest producer of milk and milk products, the United States’ Dairy Farmers of America (dairy products), and Malaysia’s FELDA are examples of commercially successful agricultural marketing cooperatives (palm oil). Small enterprises can also form producer cooperatives to pool their savings and access finance, acquire supplies and services, or advertise their products and services. Multi-Stakeholder Cooperatives: Different stakeholder groups, such as consumers and workers, are represented in multistakeholder cooperatives. Social Cooperatives: Traditional cooperatives blend social benefit and capitalistic property-right objectives. Cooperatives combine social and capital goals by democratically directing distribution decisions among equal but non-controlling members. Capital ownership is structured for social benefit within the company, with democratic scrutiny of choices to equally divide assets and other benefits. By embracing the operating principle of cooperative cooperation, external societal benefit is also encouraged. Cooperatives got together in the final year of the 20th century to form a number of social business agencies that have moved to adopt the multi-stakeholder cooperative model. The EU and its member states steadily updated national accounting systems between 1994 and 2009 to “make public” the growing contribution of social sector groups. SCIC: The SCIC (Société Coopérative D’intérêt Collectif) is a multi-stakeholder co-operative structure first introduced in France in 1982. A SCIC must have members from at least three different groups, including users and staff. Volunteers, public agencies, and other individual or corporate supports may also be represented as stakeholders. Voting is based on the principle of “one member, one vote,” though voting in colleges is permitted in certain conditions. SCICs must have a goal of ‘general interest.’ Up to 20% of the capital can be subscribed by public organizations. The status enables an organization to transition to a cooperative without changing its legal structure. The structure’s relative rigidity, along with the government’s refusal to provide tax relief, has limited its use.

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Multi-Stake Holding in Retailing: In the retail industry, multistakeholder co-operatives also exist. Farm, a Belgian wholefood retailing cooperative created in 2015 with a preference for organic and local produce, is one example. It has 16 locations, 11 of which are in Brussels. Governance: Each member is entitled to one vote. At the annual general meeting, the members elect the board of ten. Each member category is represented by at least one board member. A novel governance provision prevents one set of members from dominating the others. In practice, the board makes decisions by consensus. In the event of a vote, each director has one vote, and decisions are made by a simple majority of those present or represented, unless the cooperative’s registered or internal rules allow otherwise. In the event of a tie, the votes of the other categories take precedence if a group of voters all belong to the same category. Shares are not transferable for four years to ensure that members are committed to the cooperative’s beliefs, vision, and objectives, to secure long-term finance, and to discourage financial speculation. New Generation Cooperatives (NGCs): These are a modern, capital-intensive industry adaption of classic cooperative arrangements. They have been compared to a cross between regular co-ops and limited liability companies (LLCs) or public benefit corporations. They were created in California and spread throughout the United States in the 1990s. They are now widely used in Canada, mainly in agricultural and food services, where their major goal is to add value to raw materials. Producing ethanol from corn, pasta from durum wheat, or gourmet cheese from goat’s milk are just a few examples.

5.4. UNDERLYING PRINCIPLES OF COOPERATION Cooperatives are founded to do something that individuals could not do for themselves or through a noncooperative business model. Perhaps the goal is to gain market strength so that products can be sold at higher prices or new markets can be entered. Some cooperatives are formed to make it easier to obtain and transport inputs like feed, seed, gasoline, and fertilizer. Others ensure that needed services are available or pool risk. Members might take advantage of economies of scale or create bargaining power by

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working together. The cooperative tries to provide member needs for the least amount of money possible. The cooperative must, however, charge competitive market pricing to cover all costs and meet capital requirements. When the cooperative provides surplus money (dividends) to members at the conclusion of the fiscal year, the at-cost basis becomes a reality. The following are the fundamental concepts that underpin modern cooperatives: •

The User-Owner Concept: The people who own and finance the cooperative should be its users. • The User-Control Concept: The controllers and users of a cooperative are one and the same. • The User-Benefits Concept: The cooperative’s sole purpose is to provide and distribute benefits to users based on the amount of their use. A cooperative benefit its members both directly and indirectly. Direct benefits could include more reliable supply sources and easier access to product markets, which could boost their companies’ net profitability. Indirect benefits could include enhanced input and output market influence, increased business expertise, and engagement in research and development (R&D). Cooperatives can focus on their principal mission of delivering required products and services to members by limiting payments to invested cash. Users contribute to the cooperative in proportion to how much they use its services. The member’s money is normally refunded on a regular basis. Cooperatives obtain funds largely in three ways. •

•

•

Direct Investments: Members can make direct investments. A prerequisite of membership, for example, could be a one-time charge that buys equity in the cooperative. Retaining Part of Net Income: Some net income is kept rather than paid out as patronage reimbursements, which helps to raise capital. The resulting retained patronage returns are distributed to members based on how much business (patronage) they did with the cooperative during a specific time period, usually a fiscal year. Members receive these retains in installments. Create Capital Retains from Earnings: The third method of producing equity is to use earnings to generate capital retains. Rather than returning earnings to members, a portion is distributed as equity capital stock. This stock is typically issued in proportion to a member’s degree of patronage.

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Some agricultural cooperatives are testing the selling of preferredtype stock to non-members. Voting rights are not granted with preferred stock. These investors expect the cooperative to pay dividends on a regular basis, and they are only concerned about losing their money. They pay their standard tax rates on dividends. A cooperative’s broad economic decisions are usually guided by a vote of its members. Many cooperatives use a democratic decision-making process in which each member has one vote regardless of how much money they have invested in the cooperative or how much they use its services. Cooperatives are increasingly implementing or exploring “member control” voting methods, which are based on how much business each member does with the cooperative. The majority of agricultural cooperatives are not fully open to new members. Commercial operators are frequently excluded from membership. In this sense, “commercial” refers to a product or service created for profit. In other circumstances, membership may be further restricted to account for perceived market limitations.

5.5. COMMON COOPERATIVE FUNCTIONS Throughout the agriculture sector, cooperative business organizations can be found. They range in size from a few growers trying to increase the marketability of their crop to major agribusiness corporations catering to the complex needs of thousands of members. Cooperatives are frequently categorized according to the commodities they manage or the activities they perform. Many cooperatives provide multiple purposes.

5.5.1. Marketing Bargaining and processing cooperatives are examples of marketing cooperatives. Marketing cooperatives frequently participate in some of each activity. Their main responsibility is to move member products through marketing channels to the final consumer. Some marketing cooperatives just do a few things, while others handle everything, including receiving, grading, processing, packaging, labeling, branding, storing, shipping, distributing, and merchandizing. By expanding their ownership and control of facilities beyond the first-buyer level, marketing cooperatives are becoming increasingly vertically integrated. They may own retail shops that sell to the final consumer in some situations. Hotels, restaurants, and institutions are key channels for many marketing cooperatives. Another area that is expanding is export. Nuts and nut products, fruits, and related preparations, cereals, and related products, and oilseeds and oilnuts are

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the most popular exports. While some cooperatives are strictly bargaining groups (associations), many others go beyond pricing and terms-of-trade negotiations. The majority of its members are represented at the firsthandler level. Pure bargaining cooperatives are usually found in the fruit and vegetable business, and they do not handle or own the commodity they represent.

5.5.2. Supply Purchasing cooperatives are a common term for these types of organizations. They deal with a wide range of farm goods and machinery. Members frequently profit from a supply cooperative’s capacity to maintain a consistent, reliable supply of items at affordable costs, even during times of scarcity. To improve sales to both members and nonmembers, supplier cooperatives are increasingly establishing general retail categories. Many supply cooperatives have begun to merge vertically. In many situations, they make the items they sell, particularly in the feed, fertilizer, and petroleum industries. Cooperatives, for example, play an important role in supplying petroleum products to agricultural industries. Cooperatives explore for crude oil and natural gas through regional organizations, although they are primarily focused on refining and manufacturing petroleum products, as well as maintaining wholesale and retail distribution networks. Some, on the other hand, perform research and product testing. Many cooperatives offer bulk distribution and application services to their members, as well as full-service facilities with on-farm maintenance, service stations, parts, maintenance, and accessories like tires and batteries.

5.5.3. Service Agriculture benefits from a wide range of cooperative services, including financing, utilities, insurance, and specialty services. Cooperatives sometimes incorporate special subsidiaries to provide these services to their members. Trucking, storage, drying, grinding, and a variety of additional services are among the specialty services available.

5.5.4. Nonagricultural Traditional agricultural marketing and supply cooperatives have a very modest number of memberships. Consumers, employees, nonagricultural enterprises, public institutions, and nonprofit groups own the majority of cooperative firms. To address the needs of goods and service customers,

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a variety of consumer-owned cooperatives have been formed. They are frequently small, sometimes insecure organizations that provide high-quality or natural foods, housing, burial services, or day care. Other cooperatives, at least on the surface, resemble any huge retail operation. They could work in a variety of industries, such as general commerce, medical services, utilities, or banking. While consumer-owned cooperatives have remained popular in Europe, the situation has been more mixed in the United States. Disinterest and failure have followed periods of widespread enthusiasm and triumph. During the Great Depression, when people were yearning to escape unemployment, poverty, and the idea that monopolists were collecting large profits by overpricing consumer products, consumer-owned cooperatives grew in popularity. The credit union is the one consumer-owned cooperative that has stayed robust and increasing over time. Credit unions and other surviving cooperatives, particularly natural food retail cooperatives, have four distinct characteristics: •

A need for the cooperative as expressed and acted upon by the members; • Competent managers and directors; • Adequate capitalization to meet both operating and long-term investment needs; and • Supportive, well-informed, and educated members. Employee-owned cooperatives have increased in both number and scale in the United States. Job preservation, productivity increases, capital spreading, encouraging employees to invest in the enterprises where they work, and the formation of a democratic workplace have all sparked interest in this form of collaboration. Employee participation in business ownership has been fostered through the establishment of pension benefit schemes that include employee stock ownership plans. Many agricultural and non-agricultural cooperatives are exploring ways to create hybrid forms of cooperative membership that would give their employees a stake in the cooperatives in which they work. Many attempts to organize cooperatives by non-agricultural industries have been successful. Many functions, including as bulk purchasing, the development of automated distribution and invoicing systems, the establishment of a shared identity, and advertising, can be accomplished more efficiently through cooperatives. One-business, one-vote democratic governance and distribution of net profits to members based on use are common cooperative arrangements.

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5.6. ECONOMIC CONCEPTS THAT MAY ENCOURAGE THE FORMATION OF COOPERATIVES The desire to solve a common problem and so promote well-being is a major motivator for forming a cooperative. Increasing the net income generated by member businesses is often the primary goal. Cooperatives are frequently seen as a method to that end by rational entrepreneurs.

5.6.1. Elements of Market Imperfection There would be no reason to form a cooperative—or any other type of business—if all markets were flawless. Cooperatives are usually viewed as a way to address flaws in the economic system. There are numerous reasons for these flaws. Businesses develop to accommodate a bigger volume of goods or services at a lower cost per unit, which results in size economies. This condition generates a market power imbalance for producers, as a small number of major purchasers or sellers of production inputs face a huge number of small producers. When input providers are few in number, they may frequently sell inputs for more than cost. When there are a small number of purchasers for an agricultural commodity, they may pay less than competitive pricing when there are many sellers. Agricultural producers may be deterred from searching outside their local areas for higher product prices or input costs due to transportation costs. As producers find themselves with only one firm to service their selling or purchasing needs, a market power imbalance may arise. This environment encourages producers to charge low prices and incur large costs, lowering their profitability. Market flaws may be caused by a lack of good market intelligence. Information on commodity pricing and terms of sale may only be available for a fee. The expense of market knowledge may be prohibitive for many businesses. False cost/price signals may result in resource misallocation, lowering earnings. These are only a few examples of market imperfections that could prompt corporations to act. A company’s activities may be expanded into other levels of the marketing system, or it may grow in its current level. Contracts can sometimes help to compensate for flaws. Often, though, these roadblocks can be addressed by working together.

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5.6.1.1. Increasing Member Returns through Collective Action Cooperatives are regularly used to create large economies. Per-unit expenses are projected to drop as the size of the operation grows and fixed expenditures (such as management charges) are dispersed over a bigger volume of goods and services. Labor-saving gear and equipment, as well as the operation of larger production and distribution facilities, can all help to increase efficiency. However, as inefficiencies associated with bigger facilities begin to emerge, per-unit prices are projected to rise. Cooperatives must examine the optimal size that will provide the highest return to members when determining the scale of their operations. Creating a cooperative could be a technique to integrate vertically into the marketing system at higher or lower levels. Buying an existing firm, such as an input supplier or processor, in bulk might yield higher returns. Creating a new firm can sometimes result in efficiency. The location and scale of these businesses should be determined by cost effectiveness. Cooperatives are occasionally created to provide services in quantities and quality that are not accessible elsewhere. However, it is critical to consider why other entrepreneurs are not providing those services. Are the services truly required, and will producing them provide a sufficient return on the expenditure made to acquire them? Sometimes the truthful response is no. In other circumstances, good managers can use cooperative action to obtain commodities and services that would otherwise be unavailable at a lower cost. Cooperatives are sometimes created to ensure a reliable source of supplies or market outlets, especially in difficult market conditions. After all, the main priority of a cooperative is to serve its members, not the highest bidder. Noncooperative firms may relocate produce to nonagricultural outlets ready and able to pay the greatest price when supplies are scarce. Market outlet continuity can also be improved by focusing on the demands of members rather than existing marketplaces for larger profits elsewhere. The coordination of supply, production, and marketing operations in an integrated cooperative firm has a lot of promise for higher returns. Two-way communication between marketing and production units can help cut costs and raise prices. The cooperative may guarantee the quantity and quality of product required to meet market needs, resulting in higher profits for members. Supply operations can then be modified to meet those needs. More efficient investment is typically encouraged by the creation of long-term supply, production, and marketing links. Transaction costs, such as those associated with periodic contract renegotiations, can also be reduced, or avoided. Risk sharing could be a genuine advantage of cooperative business operations. Unfavorable market prices or other situations can be absorbed

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(averaged out) by pooling with other product lines that are not affected. Also, by balancing countercyclical pricing swings, vertical integration can help maintain returns. Higher prices for a lesser crop, for example, may be offset by the cooperative’s potential strengths and weaknesses, such as reduced processing earnings due to the smaller volume of produce. Furthermore, by diversifying input supply operations, cyclical issues in one line may be countered by strong returns in another. However, risk-reduction methods should not be used to mask inefficiencies in management by members or cooperative managers. Members, for example, should not be charged average prices for low-quality goods that may be improved with better management. Cooperative action could lead to increased market power. If other businesses are making abnormally high profits at the expense of individual enterprises, collective action may be able to redistribute some of that market strength and earnings to members. If done correctly, establishing a reputable brand name can help to generate customer loyalty and transfer some market power to the cooperative. Cooperatives can sometimes gain enough market power to drastically modify trade terms in their members’ advantage. However, having so much market power usually means being able to regulate the quantity and quality of member output. Creating a cooperative by itself does not guarantee power. All of these factors have an impact on the cooperative’s ability to run competitive and efficient processes for its members’ benefit. Lower resource per-unit costs can be encouraged by a cooperative business model, while higher pricing for member commodities can improve revenue.

5.6.2. Prospective Strengths and Weaknesses of a Cooperative Business Form A well-run cooperative can provide numerous benefits to its members, but it is not a panacea for their financial woes. When creating a cooperative, it is critical to weigh the potential benefits against the potential drawbacks. You will have a more practical understanding of how a cooperative could benefit your specific firm. The benefits and constraints of a cooperative are often dependent on the sort of commercial activity conducted. In some circumstances, advantages can be measured in terms of member businesses’ bottom lines. Other benefits may be more indirect and intangible, such as effects on market prices, quality improvements, and improved services. With time, the benefits may become less quantifiable. Benefits and restrictions may be unquantifiable in economic terms but subjectively quantifiable in social terms in some circumstances.

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5.6.3. Potential Benefits Individual operations may profit from improved returns if members work together to identify objectives, secure financing, and establish operational rules and mechanisms for benefit distribution. A variety of factors can contribute to higher returns. Higher product prices or decreased input costs are both common. Reduced per-unit handling or processing expenses are frequently visible. Improvements in quality attained through better operating procedures could be significant. Alternatively, a cooperative might be able to create a new market or brand identity. In competitive markets, cooperatives frequently have a positive impact on overall price levels. Cooperatives may have some pricing flexibility. When members confront a price-cost squeeze, for example, a cooperative may be able to lower input prices. As a result, some of the cooperative’s economic benefits would shift from the end of the year to the middle of the season. It is vital to include both immediate cash payments (returned at the end of an operating year) and noncash returns that be spun out as cash payments in the future when evaluating savings returned to members. Cooperatives regularly offer large payments to members in exchange for deposits held for short- and long-term financing. These revolving funds might account for a significant amount of the patronage payouts granted to members each year. Improved service to better fulfill the demands of members is frequently a benefit of cooperative business operations—either by improving existing services or by creating services not accessible elsewhere. In some circumstances, services are provided for a little fee in order to support the cooperative’s goal of meeting member needs. Other, higher margin services are found by well-managed cooperatives to give an overall blend of returns that sufficiently meets the needs of members. A cooperative can assist its members in maintaining high product quality, resulting in higher market returns. Cooperatives can encourage the most profitable production and marketing techniques by providing information and guidance. Field representatives, for example, may work one-on-one with members to ensure that timetables and quality standards are met. Payment is typically based on members satisfying standards like as grades, harvest schedule, and container restrictions, reinforcing the emphasis on good quality. Even during times of market surplus, efforts to maintain high standards for product quality and reliability can pay off when purchasers consistently acquire products at above-average prices. In terms of supply, a cooperative can sell inputs that result in the highest yield gains rather than those that generate the highest profit margin. In reality, the better cooperatives have

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smaller margins on farm supplies, in part because they feed productivity information to members from sources such as agricultural experiment stations, allowing them to get the most value out of their purchased inputs. Cooperatives may have field representatives to assist with this procedure in various circumstances. Many cooperatives sell alternative higher margin lines to offset lower margins on farm input lines. Many supplier cooperatives, for example, include retail facilities that sell high-volume, high-margin pet food and supplies. Members profit because the things are usually purchased by non-members. Patronage dividends are provided to members in the form of increased after-tax net returns. A reliable source of supplies could be a major motivator for forming a cooperative. Even in times of severe shortages and rising prices, members want a consistent, reasonably priced source of supply. Because of their focus on member needs, cooperatives can tolerate lower margins rather than diverting goods to higher margin purchasers. The operations of petroleum and fertilizer supply cooperatives during acute shortages in the 1970s are a wonderful example of cooperative attention to member needs. Many cooperatives limited sales to member-patrons in order to maintain supply moving to their members. Many cooperatives increased their transportation and storage capacity by purchasing additional petroleum. Capacity for refining and manufacturing was enhanced, and to purchase oil, a group of supplier cooperatives formed an international petroleum trading and purchasing cooperative. Simultaneously, cooperatives campaigned in the legislative arena to gain priority for petroleum products required for food and fiber production. Furthermore, supply cooperatives took the lead in assisting members with fuel and fertilizer conservation. Cooperatives were vigorous in long-range planning after the petroleum crisis passed, in order to avert future crises. Their actions were aimed at bolstering their members’ supply positions. Some cooperatives, for example, increased their refining capability to gain more control over their fuel supplies. The entry of a cooperative into the market could have a substantial impact on the competitive climate. Product prices may rise, but input prices may fall. In general, the quality of company services may improve. Many cooperatives have discovered that pooling items of a certain grade can lead to new market opportunities. A cooperative can be purchased by large scale buyers who would not deal with individual members. In addition, the cooperative may be better able to meet the needs of international buyers. Value-added food products processed by a cooperative may appeal to both foreign and domestic buyers. Many well-known brands are owned by cooperatives. Cooperative action can help corporations increase their political impact.

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Cooperatives frequently band together in state or regional groups to push for legislation and administrative rules that benefit their members. Influencing tax law has received a lot of attention. Cooperative educational programs can benefit member business practices in addition to assisting managers and directors. Universities and other organizations can use cooperatives to distribute information on marketing, production practices, and farm management. Members can gain actual business experience in addition to formal education by participating in cooperative committee or board activities. All of these options help members develop their leadership skills in their communities. Family farms may be able to benefit from cooperative operations. Credit and supply cooperatives may be able to assist family businesses in expanding and capturing economies of scale while remaining self-sufficient. Cooperative marketing and processing can assist secure markets and sales timing in favorable circumstances. Individual family farm members can benefit financially from a cooperative’s ability to regulate product flow farther up the marketing channel.

5.6.4. Broader Benefits to the Community Members gain from cooperative business activity. Individual consumers and the community may also benefit. These advantages could be local or regional in scope. A large portion of the extra cash generated by cooperative company operations is returned to local firms as payment for goods and services. Employee pay in cooperatives contribute to this economic activity. Cooperative enterprises also pay taxes and spend money on local goods and services. Cooperative employees and members frequently participate in community events and participate in governmental activities. When customers shop at cooperative enterprises, they profit in a variety of ways. The key benefit in certain circumstances is having access to high-quality, moderately cost goods and services. In others, customers have access to a greater range of products than they would otherwise have. Cooperatives are frequently at the forefront of new product and process development. Their more efficient production and marketing processes may make more competitively priced goods and services available.

5.7. LIMITATIONS IN COOPERATIVES Cooperatives have the same limits as any other firm in many ways. They share a comparable economic context, many legal constraints, and interpersonal issues. Furthermore, several issues are peculiar to the

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agricultural business in general and cooperative groups in particular. Many of the pricing issues with agricultural products are caused by the demand for those things. Demand is frequently price-sensitive to variations in volume. Overproduction often results in a sharp drop in market prices, resulting in a considerable drop in total revenue for producers. To solve this difficulty, cooperatives cannot legally manage the production of their members. They may be able to limit the number of acres under production for members in some situations. In other circumstances, they may be able to stimulate the development of a marketing order under government auspices in order to promote orderly (controlled) marketing initiatives that could help to mitigate market conditions. However, there is little evidence that market orders are a good way to raise prices. Some proponents of cooperative development in this country claimed that producers could regulate pricing early on. This turned out to be a myth. Controlling production, even among its members, is impossible no matter how large the cooperative is. Cooperatives have been able to affect demand for their goods and services in some industries by improving production techniques, handling, and bargaining power. A cooperative, however, can have minimal impact on the overall demand for agricultural output, regardless of its size. Consumers have far too many choices. The free-rider effect allows producers who do not want to join the cooperative to benefit from the cooperative’s beneficial market impacts without paying any of the related costs. Creating a cooperative is not always a good way to gain market power. The quantity of equity money available to expand the business may be limited. As a result, getting to the size required to impact market conditions and prices may be difficult. Lack of long-term planning, management failures, and poor visioning abilities are all common issues that limit market dominance. For a few years, new cooperatives can have a positive impact on prices, margins, and supplies. Longer-term benefits in this area, however, may not be obvious. Market functions cannot be anticipated to be eliminated by a cooperative. Instead, it might be able to offer more efficient marketing services, lowering the marketing margin required to transfer products and services through marketing channels. Cooperatives that provide high-quality services and materials to their members may actually boost marketing margins. In order to best serve the bottom-line interests of its members, the cooperative’s prices may need to be raised. In the United States, cooperatives that combine member labor, land, and other capital for producing operations have typically failed. Minimal net gains, decision-making issues, and arguments over net return distribution

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have all been known to derail these cooperatives. Cooperatives founded to share specialized machinery and equipment have had some success in some circumstances. An organization characterized by user-owners exacerbates the “people difficulties” that any firm faces. Members,’ directors,’ and management’s misunderstandings and high expectations can lead to poor performance or even insolvency. Cooperatives and other types of enterprises servicing the agricultural community may face significant competition and duplication of services and facilities due to disagreements on objectives, policies, and tactics. Some members’ restricted ambitions can be a hindrance. Some members may be put off by the prospect of building longterm financial strength through retained patronage refunds because they demand higher short-term rewards. The cooperative’s potential to cut perunit expenses through higher volume may be limited if it refuses to carry a diverse range of goods and services of interest to the general public. When critical decisions must be made quickly, the cooperative’s democratic nature might be a challenge. Decisions are routinely postponed due to the need to balance strict commercial decisions with member connections. Although boards of directors have the authority to make these choices, they are usually debated with the entire membership before being made. This procedure causes delays in large organizations, which can have a significant impact on decision-making. Agricultural cooperatives are dependent on voluntary involvement if they do not have marketing or purchasing agreements with their members. Members may avoid yearly meetings, be fickle in their support of the cooperative, and refuse to contribute their fair part of the capital required to build the cooperative’s full capability for member service. As a result, large expansions of the cooperative’s services could be constrained, and improvements, if they happen at all, could be postponed. The following are the limitations in summary: • • • • •

Inability to raise prices for members’ products; Disagreements among members; Difficulties in building long-term equity when members want to receive dividends immediately; Slow decision-making; Unreliable member participation.

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5.8. COOPERATIVES EQUITY AND DEBT CONSIDERATIONS An agricultural cooperative, like any other business, requires capital to sustain the short-, intermediate-, and long-term assets required for operations. Inventory, accounts receivable, and cash are examples of short-term assets. Machinery and equipment are intermediate-term assets, while buildings and land are long-term assets. Traditional bank debt instruments or the countrywide farm credit system (FCS) may provide funds. FCS, a producerowned cooperative, offers a variety of financial services to agriculture in the United States. The Agricultural Credit Bank (ACB) is one of the system’s units, with the authority of a Farm Credit Bank to lend money to agricultural, aquatic, and public utility cooperatives. ACB is also qualified to provide international banking services to farmer-owned cooperatives. Cooperatives typically collect and manage cash from equity sources in a way that is unique to their user-owner character. Members put their money into the assets of the cooperative. Typically, investments are made in proportion to the benefits received in the past or projected in the future. Members contribute to the cooperative’s ability to acquire credit, weather financial hardship, and make a long-term commitment to delivering essential goods and services by maintaining a strong equity stake. Furthermore, a significant equity commitment may persuade lenders to provide cooperatives better rates and terms on loans. In many ways, a stock investment in a company might be considered risk capital. It acts as a safety net during difficult times when losses are possible. To the point of exhaustion, those losses are deducted from the business’s equity balances.

5.8.1. Unique Aspects of Equity Investment in a Cooperative It might be difficult to calculate the rate of return on a cooperative’s equity investment. Investment appreciation is usually not a consideration, and there is usually no open market for selling the investment. Members must consider intangibles such as greater access to markets and more reliable sources of supplies when comparing returns with alternatives in noncooperative firms. How has cooperative participation benefited members’ overall business returns? Only qualified producers are allowed to make stock investments in most agricultural cooperatives. The power to vote on cooperative policy is provided by this investment, which is commonly represented by common stock or membership certificates. Unlike shareholder-owned companies, cooperative members’ voting rights are not determined by the quantity

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of equity shares or certificates they own. Although some agricultural cooperatives enable voting weighted by member patronage, the majority adhere to the one vote per member concept. Members of some agricultural cooperatives are given preferred stock (as well as nonmembers). Preferred stock normally guarantees a predetermined rate of return on investment (ROI), but it does not grant voting rights. Because the board of directors may control the amount of equity redeemed returned to the membership and the amount of current net earnings preserved for developing equity reserves, equity balances in cooperatives can be handled more readily than in other types of businesses. Retained patronage dividends or per-unit capital retains are common deductions from net earnings. Customers furnish the equity capital for the business, which is unheard of in an investor-owned company. The majority of equity in a cooperative is just ephemeral. The cooperative is normally under an implied responsibility to redeem it, though not on a set schedule. As a result, a cooperative’s board of directors is allowed to pick the timing of equity holds and redemptions in order to maintain the cooperative’s financial integrity. The cycle can sometimes last more than 20 years. Cooperative operations rarely include mandatory duties to redeem shares.

5.8.2. Cooperative Equity Sources •

•

Direct Investment: An agricultural cooperative’s initial equity finance is often secured through direct investment from its members. Well-established cooperatives occasionally solicit direct investments from members to boost their equity reserves. These sources normally contribute a limited amount of capital in either instance. The willingness of members to invest directly in small, beginning cooperatives might be a significant test of their interest in joining the cooperative. The cooperative’s ability to maintain acceptable patronage levels may be jeopardized by a lack of interest in direct investment. However, it could simply be a reflection of cash-strapped producers. It is considerably easier to keep money from net earnings in this situation. Retained Patronage Refunds: These are a second method for raising equity cash. The cooperative keeps a percentage of the net income distributed to members under this structure. Members are essentially investing new funds in the cooperative based on their patronage levels. This method raises the majority of equity for most agricultural cooperatives. Its appeal arises from how simple

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•

and methodical it is to generate equity capital from the most recent operational period’s net earnings. Retained patronage refunds are especially well suited for supply and service cooperatives, where determining rates per purchase unit might be problematic. Nonmember patrons may also be enticed to join because retained patronage refunds can usually be used to purchase membership stock or certificates, obviating the requirement for a direct monetary commitment. Retained patronage refunds, on the other hand, may make the cooperative unduly reliant on earnings as a source of finance. The cooperative’s ability to generate equity investment and redeem earlier equity investments is harmed by fluctuations in net income (including losses). Misunderstandings may also arise if members believe patronage retains are a debt owed to them. They are, in fact, equity risk capital that members contribute to generate future advantages. They can be lost or delayed owing to poor operating outcomes, rash capital investments, or premature corporate expansions. Per-Unit Capital Retains: These are a third strategy that is frequently used in conjunction with retained patronage refunds. Member patron investments are based on cooperative usage rather than a percentage of net earnings. This method is useful to some marketing cooperatives. A processing cooperative, for example, would charge a $1.00 retain for each ton of grain provided for processing. The money is deducted from the member’s payments. Patronage retention is a less common strategy. Per-unit capital retains are popular among cooperatives because they create more consistent equity investment that is independent of the cooperative’s net income (given a regular flow of product). Perunit capital retains also have the same benefits as patronage retains. To be effective, the board of directors must select a retain rate that generates the required amount of equity capital, determine the rate at which it is generated, determine the rate at which equity is redeemed, consider the cooperative’s competitive environment, and ensure adequate communication with the membership about the need for a capital retain and plans for its accumulation and redemption. Many cooperatives minimize per-unit capital retains because they risk drastically reducing cash returns to members. Members of the per-unit capital retain system may assume that their equity risk investment is a debt owing to them with interest,

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similar to how patronage retains do. Furthermore, because they are generated regardless of operating performance, per-unit capital retains may be perceived as an overly simple source of equity. Unallocated Equity: It is a somewhat problematic method of accumulating equity. This method creates equity accounts that are not assigned to specific individuals. Nonoperating interest and rent income, acquisition of company assets at prices below their assessed value, and net income earned by nonmember (or even member) services that is not required to be allocated are some of the sources of these monies. Unallocated equity accounts have the particular advantage of being perceived as more permanent by lenders, which may encourage them to offer better rates and conditions of repayment. In addition, creating these accounts through nonmember patronage may be a more appealing approach for members to earn equity. The risk with this method is that members may lose control over the cooperative’s equity because it is not linked directly to member equity accounts with matching member monitoring. This erosion of member power may encourage management to make capital investment decisions for the cooperative, reducing the board of directors’ policy responsibility. Unallocated equity can make up a significant portion of overall equity at times. Member loyalty to the cooperative may weaken if membership-allocated equity interests decline. With a growing percentage of nonpatronage income, patronage dividends may become less closely linked to cooperative member usage.

5.8.3. Cooperatives Equity Redemption Systems Cooperative equity redemption programs, from a philosophical standpoint, must ensure that members invest in the cooperative based on use. If members who have built up equity through direct investments, patronage retains, and per-unit capital retains reduce their use of the cooperative, they will be overinvested. Similarly, members who raise their usage should not have their equity investment funded by those who decrease their usage. Equity redemption schemes further promote the notion that members’ equity investments are supposed to be short- to medium-term. Equity is normally expected to be returned in a timely way unless it is influenced by diminishing net income or losses. There are numerous advantages to a solid

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cooperative equity redemption plan. It eliminates friction between active and inactive members over the rate of redemption. It may also stimulate patronage from members. Members can understand the link between investment and benefits more clearly. Consistent equity redemption can increase the value of a member’s equity investment as collateral for loans. Perhaps more importantly, the cooperative is forced to execute effective financial planning as a result of continuous, timely redemption. The benefits of a solid cooperative equity redemption plan must be weighed against the drawbacks. Revolving equity back to members may jeopardize the cooperative’s financial situation. Current members’ patronage returns may be lowered in the process of redeeming previous equity, causing a rift. In addition, cooperatives that are trying to stay price competitive may not be able to earn enough revenue to return their investments on time. The basic types of equity redemption plans include revolving fund plans, the base capital plan, the percentage-of-all-equities plan, and the special situation plan. These types frequently are used in combination.

5.8.3.1. Revolving Fund Plan The revolving fund model repays equity in the sequence in which it was obtained. The duration is determined by the time required to accumulate replacement capital. Although a 10-year average is common, shorter periods, such as seven years, may better illustrate the link between investment and utilization. Depending on the product or service line that generated the invested funds, payback durations may vary. Because they are simple to understand and operate, revolving fund schemes are popular. If the rotating time is not too long, the relationship between investment and utilization is strengthened. Furthermore, by simply extending the revolving period, bad operating years or unusual needs for equity investment can be absorbed. However, doing so will enrage members who have unreasonable hopes of redemption on a set timeline.

5.8.3.2. Base Capital Plan A yearly capital requirements assessment and proportionate member use of the cooperative’s services are combined in a base capital plan. Members who are underinvested are assessed an additional amount of equity, which must be paid or carried at interest to compensate overinvested members. Depending on the proportion of underinvested members who increase their equity participation, members who are overinvested begin to get

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a partial, if not complete, redemption of their overinvestment. The base capital plan approach is appealing because it emphasizes the link between member investment and cooperative utilization. Retained earnings are not a consideration. As a result, the cooperative can alter membership equity levels immediately. Its principal disadvantage is that cash-strapped and underinvested members may be unable to respond swiftly to requests for increased equity participation. When a revolving fund plan’s return period is simply extended, tension within the cooperative rises—especially when the cooperative has a high member turnover rate. Furthermore, base capital plans are difficult to run and comprehend.

5.8.3.3. Percentage-of-All-Equities Plan The percentage-of-all-equities scheme, which is used by a few cooperatives, includes retiring a certain percentage of each member’s equity stake regardless of issuance date. This strategy has the benefit of rewarding new members for their patronage more immediately. It is easier to charge full margins for goods and services since members see those profits back more rapidly. The system is very simple to comprehend and administer, which is a bonus. It can also be quickly changed to reflect changes in operating performance. However, one significant downside is that the structure makes balancing member equity investment and utilization more challenging. It is also tough to put in place if patronage and membership positions are constantly changing.

5.8.3.4. Special Situations Plan Member death or retirement, member bankruptcy or termination of agricultural business activities, member removal from the cooperative’s trade area, resignation of membership, and application of the member’s equity to uncollectible accounts receivable are all examples of special circumstances. When it comes to equity payback, special scenarios are typically prioritized.

5.9. LEGAL ORGANIZATION OF COOPERATIVES Cooperatives are incorporated under state law because there is no federal law. Cooperative incorporation laws exist in every state. Chapter 62— Cooperatives of the Oregon revised statutes governs incorporation (ORS 62). In 1995, this portion of the law was considerably revised. In later legislative sessions, minor adjustments were made, and the 2001 edition is available on the Web (http://www.leg.state.or.us/ors/062.html). The

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legislation addresses themes including why cooperatives are formed, how to construct and alter articles of incorporation, and how to create and amend bylaws. Anyone interested in forming a cooperative in Oregon should review ORS 62 and a cooperative law practitioner. The articles of incorporation and bylaws are the most important documents that the incorporators prepare. These documents are approved and filed at the Corporation Division of the Secretary of State’s Office in Oregon and many other states. The purpose of the articles of incorporation is to describe the company and its basic components. The cooperative’s name, purposes, powers, and limitations, place of operation, initial board of directors’ numbers and terms, membership qualifications and rights, and capital stock structure are usually provided. If the cooperative requests a certificate after receiving approval for formation in Oregon, the Corporate Division will issue one. That certificate verifies the cooperative’s name as it appears on its Oregon registration and validates that the cooperative is properly incorporated in Oregon. Each cooperative incorporated in Oregon must submit an annual report to the Corporate Division to verify the corporation’s name and address, the president and secretary’s names and addresses, the primary business activity, the federal employer identification number, and any other information required by the Corporate Division’s rules. The cooperative’s bylaws outline the organization’s structure and internal activities. Regular and special meetings, as well as associated voting rights, capital structure, regulations for distribution of net savings and the use of capital retains and revolving capital accounts, and rules for altering the bylaws or dissolving the corporation are all detailed in them. The bylaws also include a list of director and officer qualifications, responsibilities, and election regulations. The manager’s responsibilities are frequently defined in great detail. Many cooperatives that market member goods have marketing contracts with their members in addition to the powers and constraints granted by their articles of incorporation and bylaws. Members may be compelled to deliver specific quantities and grades of products to the cooperative, which has the authority to serve as the member’s agent in handling and marketing the items, under these agreements. Members contribute related capital as determined by the board of directors, as well as pay fines for commodities that fail to satisfy specifications. In exchange, the cooperative commits to account for any earnings from sales as well as any funds held for investment. Cooperatives, like all other enterprises, are obligated to keep up with changes in the legislation. Contracts, the Uniform Commercial Code, banking, and insurance, workers’ compensation, unemployment insurance, securities, and

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taxation are just a few of the rules that need to be kept an eye on. There are also several federal laws and regulations to obey.

5.10. COOPERATIVE MANAGEMENT CHARACTERISTICS Over time, the nature of cooperative management has evolved. It has progressed from a normal one-person firm in which the manager handled everything, including customer service, bookkeeping, and facility maintenance. Even tiny cooperatives now frequently invest in a professional management staff that is typically well educated and capable of leading the cooperative’s day-to-day operations. Much of the emphasis on having a highquality management team stems from the failure of cooperatives owing to incompetent management. Overextending credit, poor collection techniques, speculating on member commodities, poor-quality products and services, overexpansion of facilities, insufficient financial planning (including overly generous pooling of profits to members), and a single manager’s domination are just a few examples. It is vital for a cooperative’s survival—especially a new business—to avoid typical management blunders.

5.10.1. The Role of Management A successful mix of ideas, procedures, materials, facilities, financial resources, and people is required for good cooperative management to generate products and services that suit the needs of member-owners. It is responsible for not only day-to-day operations but also for creating and implementing policies, fostering efficiency, providing high-quality service, and ensuring the cooperative’s financial strength. Management must also take steps to keep the business focused on enhancing its cooperative nature—member control, prioritizing member needs, and a fair distribution of returns to user members. While many of the decision-making procedures employed in other firms are similar, a successful cooperative manager must alter success measures. Low-margin services may be supplied if it is in the best interests of the owner-patrons. Marketing cooperatives may continue to accept commodities from their farmer members and do their best to sell them in overstock conditions; other enterprises would not. Managers usually devote a large amount of work to issues concerning the cooperative’s owner patrons’ fair treatment. Patronage returns can be challenging when a cooperative offers a diverse range of services, commodities, and value-added activities. Furthermore, distributing responsibility for cooperative member

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financing via patronage retains might lead to disagreement. Cooperative administrators are often in frequent contact with its owner-members. The members formed the cooperative to offer needed goods and services, and they are frequently active in assessing the performance of the company they own—almost every time they interact with the cooperative. Managers come into direct contact with their members on a regular basis, not just at the annual meeting. A manager faces distinct personal hurdles when working in a patron-owned corporation that integrates democratic control principles. Superior performance, political maneuvering, or outright ownership are no longer viable options for attaining control of the company. Instead, a cooperative management must accept the role of employee, take steps to involve the majority of members in significant decisions, and submit to democratic membership control.

5.10.2. Resource Management Many agricultural cooperative administrators say that working effectively with employees and demonstrating outstanding leadership qualities is the most significant factor in their success. Personnel selection, training, empowerment, and evaluation are all important aspects. Good supervisors may plan for the workload, allocate authority and related responsibilities, establish performance criteria and review job performance, implement grievance procedures, and provide leadership. Management should seek to motivate employees and design a compensation system to match. The remuneration and benefits package for each employee should incentivize them to do everything they can to help the cooperative and its patronowners. Establishing goals for employees, inspiring and recognizing good performance, developing a sense of mission through teamwork and a high degree of esprit de corps, creating an environment that encourages employees to be innovative, and maintaining two-way communication between supervisors and other employees are all critical in this regard. Successful cooperative administrators must also devote a significant amount of time and attention to relationships with members, government agencies, and the general public. Communication between management and members should be promoted in both directions. The cooperative can then maintain its membership active and recruit new members, communicate information about product and service quality and financial requirements, and update its regulations and operating procedures. Maintaining a focus on the cooperative’s aims, accomplishments, benefits, and limitations, as well as growing public acceptance and knowledge of its mission, requires

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reaching out to government agencies and the general public. Agricultural cooperative managers are constantly concerned with capital resource management. This problem extends beyond day-to-day cash, receivables, inventories, equipment, facilities, and payables to encompass investments in other cooperatives and securing attractive long-term financing. It also entails putting in place processes that stimulate member patron investments, maintain a financial position that is acceptable to lenders, suppliers, and purchasers, and guarantee that financial operations are in line with solid business and cooperative values. Equipment and facilities, like any other firm, can account for a major amount of a cooperative’s assets. To guarantee optimal efficiency, excellent managers devote significant resources to maintaining, updating, and replacing these assets. Furthermore, worries about safety, health, and the environment are becoming increasingly significant.

5.10.2.1. Management Functions and Tools Cooperative management usually focuses on functions that are common to all businesses. Establishing policies and procedures that are in line with the cooperative’s objective is part of planning. Following the development of plans, all available personnel, capital, and physical resources must be efficiently coordinated to carry out the plan. The cooperative’s resources are then directed to the day-to-day tasks required to carry out the strategy through explanation and education. Along the way, management must guarantee that the cooperative’s many units are coordinated so that it may achieve its objectives smoothly and without internal strife. Management must verify results against standards on a regular basis and take corrective action as needed to minimize undesired events or increase operational efficiency. Accounting systems, control reports, security and safety measures, training, and evaluation programs, personnel incentive packages, communications systems such as membership and employee publications, periodic, and annual reports, member, and employee meetings, and reports by educational and government agencies; and long-term planning efforts aimed at encouraging growth in services, facilities, and capital are examples of tools that can cheval these functions. Financial statements such as balance sheets, profit, and loss statements, enterprise accounts, and member equity and patronage accounts; proforma budgeting and cash flow management systems; and both internal and external audit systems to prevent errors or other leakages are all part of a proper accounting system (e.g., employee, member, or nonmember theft). This technique can assist management in comparing actual and

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predicted results, as well as planning and control. Accounts receivable and inventory assessments, financial ratios, and information on operating performance are commonly included in control reports. Employee and asset insurance; monitoring employees who handle assets such as cash; protecting against inventory, equipment, and facility theft and vandalism; programs to protect the safety and welfare of employees, patrons, and the general public; and strict adherence to environmental protection standards are examples of security and safety measures.

5.10.2.2. Management’s Role in Strategic Planning Management, along with boards of directors and employees, is typically involved in developing a cooperative’s strategic plan, which includes defining the cooperative’s mission and operating environment, setting objectives and strategies to achieve them, and establishing feedback systems that tell leadership whether these steps have been identified and implemented correctly. Cooperatives can benefit from continuous planning in an everchanging agricultural economic environment, but it takes time and money. It can also be utilized as a strategy for becoming proactive rather than reactive in charting the cooperative’s future course. Strategic planning, on the other hand, necessitates the participation of everyone in the company, including managers, directors, employees, and member-owners. A strategic strategy must include six things to be effective: • A mission statement; • An assessment of the current condition and outlook for the future; • A statement of objectives and goals; • A strategy to meet those objectives and goals; • A means of implementing the strategy; and • A feedback mechanism. When properly implemented, the planning process has a significant impact on the cooperative’s short- and long-term character. It allows you to identify and examine issues, challenges, opportunities, and alternate courses of action in a systematic manner. More effective decisions can be made in a strategic thinking environment, giving the company a competitive advantage in the marketplace. The mission statement, which clearly expresses the cooperative’s goal by specifying the path it will pursue and the boundaries within which planning will take place, is an important component. An assessment of the existing operating environment and the expected future

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environment is a vital stage in establishing a mission statement. The cooperative’s overall operation is evaluated as accurately and objectively as feasible in relation to its external environment and strategic issues. Then, compatible objectives and benchmarks for monitoring both short- and longterm results are developed. Following that, strategies are designed to define an exact set of actions that will drive the cooperative toward its goals while staying within its carefully examined resource restrictions. The initiatives’ implementation necessitates the mobilization of all available resources. Finally, the feedback process assesses how successfully the strategic plan was implemented and offers suggestions on how the planning process might be improved in the future to strengthen the cooperative’s position.

5.10.3. The Nature and Role of Cooperative Directors A cooperative’s board of directors provides leadership and oversees its operations. Strategic planning revolves upon it. Directors are usually cooperative members that are elected at the annual membership meeting. Director eligibility, manner of selection, length of office, and board organization are all specified in the cooperative’s bylaws. Board membership comes with a lot of responsibility. Those chosen must be able to contribute to the board’s function of listening to management and engaging with memberowners. Board members must be able to provide sound recommendations and counsel to both management and membership as an advisory body. The board’s position as a policymaking body in an agricultural cooperative, directors, and managers play distinct duties. Directors are usually more concerned with the long term and policy issues, such as board/manager functions and connections; member, employee, and public relations; organizational concerns; and operational policies related to credit, pricing, purchasing, marketing, and membership services. When directors stray too far into the day-to-day management position, problems develop. Instead, directors should represent the entire membership in defining goals and objectives, which management will subsequently put into action through its daily operations control. One of the board’s main responsibilities is to keep in touch with the general membership so that member concerns can be considered during decision-making. Furthermore, the board of directors’ policies must be presented to the membership. Communication about the board’s decision on year-end earnings distribution to owner patrons is especially vital. When a portion of earnings is kept as an operating or equity investment, the decision must be thoroughly explained. Another

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key responsibility of the board is to safeguard the financial assets of the membership. The membership has put their faith in the board to invest those assets prudently in order to maximize member benefits. Furthermore, the board is responsible for distributing those advantages equally to a varied membership. The board’s single most significant responsibility is to hire the general manager and evaluate his or her performance at least once a year. The manager must have outstanding leadership characteristics, have attitudes, and aims that are compatible with the board’s views, and comprehend the particular nature of a cooperative firm, in addition to having solid business sense. An effective review requires a defined job description, attainable business objectives, and clear performance standards. The board should conduct regular self-evaluation. Much of such assessment might be considered objective. Is the cooperative on track to accomplish its financial objectives? Were board meetings held on the scheduled dates? Was the business concept put into action? Was the manager’s performance reviewed on time? Furthermore, more subjective evaluation is required, which frequently necessitates the directors’ joint opinion. Questions like: Does the board of directors and the manager have a strong working relationship? Were board meetings held in a pleasant atmosphere? Were the members’ needs prioritized over the directors? Is there a good rapport between the cooperative and the rest of the community?

5.10.3.1. Directors as Individuals One of the most significant tasks of a cooperative member is to elect a board member. Board members can have a direct impact on the cooperative’s success, and thus on the profitability of individual members’ businesses. Above all, a potential director must be a strong supporter and patron of the cooperative, as well as appreciate its distinctive function in the marketplace. A key attribute is the ability to get along with others. Regular attendance at cooperative meetings is also important. A board member must be able to work through business challenges independently and communicate effectively because he or she takes business choices for the cooperative. Current events that may affect the cooperative should be known to the prospective board member. Leadership qualities and a commitment to serving the membership’s needs are also vital. Directors must be open to new ideas that could improve the benefits of cooperative membership or reduce its drawbacks. Integrity, honesty, and a commitment to the rule of law are essential. Board membership often necessitates the director devoting a large amount of time away from his or her own business. Directors must be

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able to perform tasks other than attending formal meetings. Communicating with members, planning meetings, representing the cooperative at public events, and communicating with politicians and regulators all take time.

5.10.4. Membership Responsibilities An agricultural cooperative membership comes with a lot of duties. Member engagement and voting at membership meetings are vital in a democratically run organization. Patronage of the cooperative by its members is also important.

5.10.4.1. Members Distinctive Features Owner-member-patrons are a term used to describe people who are members of a cooperative enterprise. They are usually agricultural producers who own the cooperative, which is in business to serve producer members who are expected to utilize (purchase/use) the cooperative’s services. To vote, many cooperatives ask their members to shop at the cooperative. The return on member investment is intentionally kept modest to put the focus on the benefits of membership. As a result, increased returns to members’ private company operations are a priority. For many members, a cooperative is essentially an extension of their own company, serving specific purchasing and marketing needs. In essence, members create cooperatives to provide non-profit services to themselves. They receive monetary rewards in proportion to their patronage. Members must understand that the cooperative may keep some net returns to fund operations or expand its equity base. As fresh retains become available, this money is repaid to members over time.

5.10.4.2. Requirements for Members A cooperative’s members must actively participate in overseeing its organization, sound administration, and functioning in order for it to be effective. Members must express their preferences. Their cooperative will be able to better address their requirements as a result. Members must comprehend the nature of their cooperative, including its goals, aims, benefits, and restrictions, as well as its operating structures, finances, and long-term planning processes. They must be knowledgeable with the cooperative’s articles of incorporation and bylaws, as well as the legal restrictions placed on the cooperative’s activities and directors, as well as the criteria for member engagement and quality control. Members must be aware of the cooperative’s long-range planning process for identifying

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future services, facilities, and capital needs in order to assist the cooperative in staying ahead of membership demands for new technology and other resources. They should also be conversant with the cooperative’s legal documents so that they can vote wisely on modifications and help the group meet its contractual commitments. Every member should have a broad role in the cooperative’s management. Members are responsible for staying updated about the cooperative in this regard. They can then elect outstanding members of their own ranks to represent them in most managerial matters. Members must devote time and effort to comprehending and evaluating board actions while avoiding putting undue pressure on board members. However, in order for the cooperative to deliver required services, directors need members to encourage and challenge them. Members must patronize their cooperative sufficiently to ensure that it has enough business. The link that members have with their cooperative is crucial to its success. This connection indicates commitment to the cooperative’s objectives and goals. In turn, the cooperative has an impact on the member’s personal business and community’s growth, development, and business climate. Member participation in the cooperative’s business concerns offers it a competitive edge and helps it stay in touch with its members’ demands. As a result, members gain a sense of ownership and responsibility for the success of the cooperative. However, it is evident that maintaining a cooperative’s loyalty needs the organization to deliver not only competitive products, prices, and service, but also honesty and timely, accurate information. Many cooperatives rely on its members to recruit new members to replace those who quit the farming industry or relocate. In many circumstances, new members are required to improve the cooperative’s financial strength or expand its dollar volume. Members frequently have the ability to persuade their nonmember neighbors to patronize the cooperative and eventually join. Members must be extremely cautious when proposing others for participation in a processing or marketing cooperative, advocating only producers who can achieve high quality and consistent volume standards.

5.11. COOPERATIVE INFLUENCES ON PUBLIC POLICY Policy choices affecting agricultural cooperatives are made by both elected and appointed officials on a regular basis. Progressive cooperatives have created programs to influence those decisions. Cooperatives have the capacity to positively change the policy environment in which they operate by involving

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directors, managers, other staff, and members. Following the completion of a cooperative’s long-term business strategy, a complementary public policy program can be developed to help the cooperative realize its goals. To avoid missing opportunities to positively influence government decision-making, it is essential to be proactive rather than reactive in this regard. Written policy resolutions are the foundation of a cooperative’s public policy agenda. These resolutions are made to foresee issues and possibilities. The policies can help cooperative leaders influence governmental and legislative choices. While some of these policy resolutions may come from directors, management, or other advisors, it is critical for members to have a role in policy declarations and the ability to amend or reject them. A resolutions committee comprised of elected members has proven to be an effective tool for many agricultural cooperatives to sort through resolution ideas. Members can be persuaded to support positive grassroots projects through education and communication efforts. Direct interaction between cooperative members and policymakers can be a powerful tool for influencing legislation and administrative norms. This interaction can take place at cooperative functions or through one-onone interactions outside of the cooperative setting. Financial support for officials running for major cooperative positions can also be beneficial. Direct communication between cooperative leaders and legislators, as well as their staffs, can be equally beneficial. Building alliances with trade groups and other industries that have similar concerns may be beneficial to cooperative leadership. Cooperative leaders can take this method to create credibility with policymakers and encourage them to seek input from cooperative members, directors, managers, and other leaders.

5.12. RELATIONSHIPS AND LINKAGES BETWEEN COOPERATIVES TYPES Links between independent, federated, and centralized cooperatives are examined here. A cooperative’s need for expansion may outstrip its internal capacity to expand volume and services. Strategic partnerships may be required. Several economic factors drive strategic alliances. Capturing economies of scale, gaining market stability, or smoothing seasonal trends are all possible motivations. Alternatively, forming an alliance could just be a less expensive, faster, and risky approach to expand geographic territory, introduce new services, or build facilities. Consolidation of activities may minimize duplicate overhead costs, redundant advertising, or superfluous

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buildings and record keeping as markets grow and economies of scale improve.

5.12.1. Independent Cooperatives Small, independent cooperatives can form joint ventures with one another, allowing them to pool resources for specific commercial goals while maintaining their independence. They maintain individual business identities while jointly benefiting from expanded services, increased efficiency, and better control of operating costs and margins. Joint ventures often eliminate some of the disadvantages of mergers. They do so by avoiding the problems and hostility that come with closing redundant sites, revising ineffective procedures and policies, laying off extra workers, and upsetting community identities.

5.12.2. Federated Cooperatives Individual cooperatives form federated cooperatives. While participating in the federated cooperative, the member cooperatives retain their separate identities. Individuals are occasionally permitted to join federated cooperatives. Cooperatives may be able to deliver greater services to their members by forming such an entity than they could with their own resources. Federated cooperatives are formed to promote collaborative marketing efforts, as well as to provide supplies and specialized services. The development of marketing-in-common agencies and purchasing agencies for more cost-effective supply acquisition are two frequent federated corporate operations.

5.12.3. Centralized Cooperatives Individuals are members of centralized cooperatives, and satellite facilities are maintained in critical places to serve those members. They are frequently founded through the merger of previously independent cooperatives to form a new cooperative. When the names, images, geographical locations, product lines, or philosophical orientations of the original cooperatives are incompatible, such a change is warranted. By removing previous legal entities, names, and operating structures, forming a new cooperative can create a neutral atmosphere. With a fresh start, the new cooperative can build on the former cooperative’s strengths while eliminating perceived flaws. However, there is a chance that legal fees will rise. Furthermore, the

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new cooperative may be unable to maintain the positive identities associated with the previous cooperatives. Consolidations can be tough to do successfully. One-on-one interactions between each cooperative’s agricultural members and their boards of directors are essential for success. People can form trusted relationships and open doors to leadership as they get to know one another. All perspectives, ideas, and concerns among the participants must be made explicit during the conversation process. There must be a sense that everyone is working objectively toward solutions if any difficulties are detected. The emphasis must be on the future and collaborative problem solving. It is necessary to create a positive “we” environment. Strategic planning is essential for avoiding potential deadlocks and negotiating issues and options. The ultimate goal should be to create a strong, unified, and efficient cooperative that is forward-thinking in its approach to effective planning, negotiating, and problem-solving. The new cooperative will be more likely to have the financial and organizational capabilities to give greater benefits to all of its members.

5.13. SOURCES FOR ADDITIONAL INFORMATION ON COOPERATIVES Those who work for an agricultural cooperative should continue their education and training. Such activities can help directors, managers, and other staff control, finance, and administer a cooperative more effectively. The manager of many smaller agricultural cooperatives may be in charge of educational and training activities, such as regular newsletters, employee, and member meetings, or even one-on-one contact with members and directors. Even nonmembers might be motivated to explore the benefits of cooperative ideas and practices through education. Organizations chosen for awareness include: •

The Agricultural Cooperative Council of Oregon (ACCO): It is an Oregon-based trade association that represents around 25 state and regional agricultural cooperatives. ACCO focuses on supporting agricultural cooperative educational programming as well as lobbying efforts on legislative matters of general concern to its members. The focus of an annual meeting is usually on educational issues relevant to agricultural cooperative management, directors, and members. In addition, ACCO

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•

•

significantly supports the Executive Institute for Northwest Cooperatives’ annual Cooperative Leadership Seminar. The program aims to educate agricultural cooperative directors and managers on topics such the changing business climate, decision-making responsibilities, financial analysis and control, and enhanced communications and working relationships in an agricultural cooperative setting. The National Council of Farmer Cooperatives (NCFC) is a member of ACCO. The National Council of Farmer Cooperatives (NCFC): It is a national organization of farmer-owned and managed cooperative businesses, including food and fiber marketing, agricultural financing, and agricultural supply cooperatives. Its main objectives include promoting farmer cooperatives, liaising with government authorities, and providing as a communication connection between agricultural cooperatives and growing problems of importance. Another purpose is to provide a venue for the promotion of important educational programs for cooperative directors, managers, and members, as well as legislators and regulators and the general public. Department of Agriculture (USDA): The Agricultural Cooperative Service of the United States Department of Agriculture (USDA) has been working to assist agricultural cooperatives flourish and prosper for more than 80 years. USDA recently reorganized in order to improve service. Each state has a cooperative development specialist under the new Rural BusinessCooperative Service. This new organization will, among other things, assist farmers in determining the feasibility of a planned agricultural cooperative enterprise, organizing potential members for the corporation’s launch, and developing and implementing a business strategy. It can also assist new cooperatives in developing and completing producer surveys, doing research, and disseminating results on problems and difficulties, evaluating, and determining the optimal corporate structure for the cooperative, and obtaining information on federally guaranteed loan programs. Agricultural cooperatives have received USDA aid for the majority of the previous century. While agricultural marketing and supply cooperatives will continue to be a significant focus of USDA’s efforts, the Rural Business-Cooperative Service intends to progressively broaden the cooperative program to include

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assistance to other types of rural cooperatives. Rural BusinessCooperative Service’s Cooperative Services program not only provides technical assistance, but it also conducts cooperativerelated research and creates information to help the general public understand cooperatives.

5.14. AGRICULTURAL MARKETING COOPERATIVES Farmers own a marketing cooperative, which allows them to sell their products jointly. It enables producers to complete functions that they could not complete on their own. The majority of agricultural producers have little control or influence over the giant agribusinesses or food companies that buy their products. Joining a cooperative with other producers can offer them more clout in the marketplace. Furthermore, by allowing producers to circumvent one or more middlemen in the market channel, cooperatives can give them more control over their products as they make their way to consumers. Farmers are able to keep a larger portion of the profits that would otherwise go to others. Cooperatives for agricultural marketing serve a variety of purposes. They may combine the products of several producers into larger lots for easier handling and more competitive sales, then grade and transport these lots to market. Some marketing cooperatives perform first-stage processing such as cotton ginning or nut hulling, while others vertically integrate by processing products for the consumer or industrial markets. Producers can benefit from marketing cooperatives. •

Correct market failure where prices are too low or buyers have left the market; • Provide a service not available otherwise; • Gain market power (negotiating power) against much larger buyers; • Spread risks and costs; and • Have enough volume to operate a processing plant efficiently or enough to meet the demands of buyers. Agricultural bargaining cooperatives are a sort of marketing cooperative that is unique. They negotiate on behalf of their producer-members with purchasers, mainly processors, for price and other terms such as quality and delivery time. Bargaining coalitions with big volumes of products have more market power and are more effective in negotiations than individual

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producers. These cooperatives typically do not own the farm commodity and do not handle it physically. Farmers sell directly to processors at the cooperative’s agreed-upon price. Fruit, vegetable, specialty crop, dairy, and sugar beet processing cooperatives are the most frequent. Marketing cooperatives are classed based on how they are constituted, which is often based on membership affiliation, control, and, in certain cases, the geographic region served. Organizational structures can be classified as centralized, federated, or mixed: •

Centralized Agricultural Marketing Cooperatives: Individual producers make up the membership of centralized cooperatives. Producers’ control and product volume pass directly to the cooperative. Patronage refunds are returned to the producer by the cooperative. These cooperatives mainly cater to a certain neighborhood or community. Their responsibilities are typically limited to the initial stages of marketing, such as assembling and grading. A few big centralized cooperatives operate across multiple states and perform more complicated functions, such as food manufacturing. Cooperatives are typically centralized. • Federated Agricultural Marketing Cooperatives: Local, centralized cooperatives are members of federated cooperatives, which are owned by local producers. Federated cooperatives are frequently quite large and span a huge geographic area. The local cooperatives that make up the federation are in charge. The federation serves as a sales agent for its members on occasion. Cooperatives do more complex manufacturing functions in some circumstances. • Mixed Agricultural Marketing Cooperatives: Finally, a small number of cooperatives have structures that blend centralized and federated aspects, with individual producers as well as local cooperatives as members. These are usually enormous enterprises that have been structured to match certain industrial scenarios. Despite the existence of a few cooperative auctions and commission brokers, most cooperatives have traditionally acquired and marketed goods through one of two methods: buy/sell or pooling: •

Buy/Sell: Most noncooperative agribusinesses function in this manner. At the time of delivery to the cooperative, the producer is paid in cash. After grading, sorting, packing, or conducting other value-adding tasks, the cooperative resells the goods. After the

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cooperative resells the goods, any earnings are distributed to the producers based on their volume of business with the cooperative. One issue with buy/sell is that it limits the cooperative’s ability to make marketing decisions because it does not know how much product will be available in advance. As a result, it may be tough to respond to market purchasers. The utilization of marketing agreements or advance cash contracts, which allow the producer to negotiate with the cooperative for future delivery, considerably reduces this problem. Knowing how much product will be available allows the cooperative to properly plan its marketing strategy. These contracts can take a variety of formats and include a variety of pricing and delivery terms. Every contract requires the producer to supply a specific amount of product to the cooperative. The buy/sell approach of marketing compensates manufacturers when their product is delivered rather than when it is advertised afterwards. Non-cooperative enterprises also utilize this strategy to buy and market items, but cooperatives provide a guaranteed market for their members and return any profits back to them. Pooling: In marketing, cooperatives also employ “pooling.” Members’ output is “pooled,” or marketed jointly (it may or may not involve the physical mixing of product). A pool manager makes all marketing decisions. The average net price is paid to members after running costs are deducted from the pool revenues. Some pools compensate for quality, while others compensate for transportation. Pooling is a method of sharing risk, costs, and profits with other producers. When a producer delivers a product to a pool, he or she is frequently given a “advance payment.” The costs of operating the pool are deducted as the product is advertised, and “progress payments” are provided to pool members. The remaining revenues from the pool, as well as any disparities in the quality of product produced by individual producers, are reflected in a final “equalization payment.” Producers obtain an average price for their goods in this manner, which is frequently greater than the prices they would have received if they had used the buy/sell approach. Producers also profit from the risk being shared among all pool members and the potential to tap into the cooperative’s marketing experience. As a result of having a known volume and quality of product to sell,

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the cooperative is more effective in the market and can thus enjoy some market power. Many variations allow marketing cooperatives to meet specific goals or respond to specific situations: •

•

•

Marketing Agencies-in-Common (MACs): This is a strategic alliance amongst marketing cooperatives, akin to federated cooperatives, that band together to market under a shared agreement. MACs act as marketing agents for their members, allowing them to take advantage of economies of scale when marketing similar or complementary products. In other sectors, member cooperatives maintain operational autonomy. MACs also share the high costs of building brand names and offer a way to buy and sell non-member products to extend product ranges. MACs can function in both domestic and international markets. In most cases, the agency will have exclusive rights to sell the products of its members in some or all markets. Export Trading Companies (ETCs): An ETC is a marketing agency-in-common founded for the purpose of shared product exporting. An ETC can include cooperatives, investor-owned firms, commodities groups, and other organizations. ETCs can apply for an export certificate of review (COR) under the Export Trading Company Act of 1982, which gives limited antitrust immunity. While cooperatives now enjoy minimal antitrust immunity under the Capper-Volstead Act, when noncooperative enterprises are involved in the ETC, the COR gives some protection. Antitrust preclearance has been granted to 45 agricultural marketing cooperatives to jointly export their products in 13 ETCs since 1983. ETCs have been used by cooperatives to boost their negotiation strength (and market power) with overseas customers, improve profit margins by avoiding intermediaries, accelerate foreign market expansion by sharing the cost among members, and manage the risks connected with international trade. New-Generation Cooperatives: These are cooperatives with unique ownership and operating features that allow producers to get a larger proportion of the value-added operations’ profits. Keeping these high-value activities close to home benefits the rural economy by creating jobs. New-generation cooperatives

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have unique ownership and operational qualities that set them apart from more traditionally formed marketing cooperatives. For starters, most new-generation cooperatives offer stock with delivery rights and obligations for a particular quantity of product. Because of these distribution rights, the cooperative’s membership is limited to those who purchase the shares. Second, purchasing equity and distribution rights in a new or existing new-generation cooperative frequently requires a significant upfront investment. Delivery rights may appreciate in value over time. Producers, on the other hand, typically have the option of selling their membership and delivery rights to other qualified producers and profiting from the increased value. Anyone who wants to sell product can join many traditional cooperatives, and membership usually needs little or no upfront investment. Dakota Growers Pasta Company, North American Bison Company, and American Crystal Sugar Company are examples of newgeneration cooperatives.

6

CHAPTER

AGRICULTURAL TRADE

CONTENTS 6.1. Overview......................................................................................... 192 6.2. Type of Trade................................................................................... 193 6.3. Structure and Trends in Agricultural Trade........................................ 205 6.4. Agricultural Policy Objectives and Instruments................................ 206 6.5. Agriculture Commodity Trade Trends............................................... 215

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6.1. OVERVIEW The buying and selling of commodities and services, with compensation provided by a buyer to a seller, or the exchange of goods or services between persons, is a basic economic notion. Within an economy, trade can take place between producers and consumers. International commerce allows countries to access markets for goods and services that they might not otherwise have had access to. It is why an American automobile buyer can choose between a Japanese, German, or American vehicle. As a result of foreign trade, the market has more competition and thus more competitive prices, resulting in a lower price for the customer at home. Trade refers to a wide range of interactions, from the exchange of baseball cards between collectors to multinational laws establishing norms for cross-border imports and exports. Trading is facilitated by three basic types of exchanges, regardless of transaction complexity. Global trade allows consumers and countries to access items and services that are not available in their own country. Food, clothing, spare parts, oil, jewelry, wine, stocks, currencies, and water are just a few of the items available on the worldwide market. Tourism, banking, consultancy, and transportation are among services that are exchanged. An export is a product that is sold to the global market, whereas an import is a product that is purchased from the global market. In the balance of payments, imports, and exports are accounted for in the current account. International commerce not only improves efficiency, but it also helps countries to engage in the global economy, which encourages foreign direct investment (FDI), which is the amount of money that individuals invest in foreign enterprises and other assets. As a result, economies can theoretically grow more effectively and become more competitive economic players. For the recipient government, FDI is a means of bringing in foreign funds and experience. These increase employment levels, which should presumably contribute to an increase in GDP. For the investor, FDI allows the company to expand and grow, resulting in more income. A trade imbalance occurs when a country spends more on aggregate foreign imports than it receives from aggregate exports. A trade deficit occurs when domestic currency is transferred to overseas markets. A negative trade balance is another term for this situation (BOT).

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6.2. TYPE OF TRADE There are two types of trades (Figure 7). Which are: • •

Internal and domestic trade; and External and foreign trade.

Figure 7: Types of trade. Source: Google Images.

6.2.1. Internal and Domestic Trade Home trade is another name for internal trade. It takes place within a country’s political and geographical limits. It can happen on a local, regional, or national level. Home commerce refers to trading between dealers of US farms, for example. Domestic trade is significant because it permits the exchange of goods within a country. This also ensures that production factors reach the appropriate locations, allowing the country’s economy to expand. Allowing all types of goods and services to reach all sections of the country increases the level of living of the country’s population as well as the country’s employment rate. It also aids an industry’s expansion by ensuring the availability of raw resources. Because it is difficult to travel straight into another country and obtain the essential products, traders from outside the country will have to contact internal traders. Internal commerce is further separated into two categories:

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Wholesale Trade: It entails purchasing huge amounts from producers or manufacturers and reselling to merchants in lots to consumers. The wholesaler serves as a middleman between the manufacturer and the retailer. A wholesaler holds a major position because both manufacturers and retailers are reliant on them. Wholesalers serve as a link between manufacturers and retailers. Wholesale merchants or wholesale commission agents engage in wholesale trade. Retail Trade: It entails buying in smaller numbers from wholesalers and selling to consumers in extremely tiny quantities for personal use. The retailer is the final link in the distribution network. He makes the connection between wholesalers and consumers. There are various types of stores, both small and huge. Hawkers, peddlers, and general stores are examples of small-scale retailers. Manufacturers and wholesalers, on the other hand, may engage in retail distribution of goods to avoid the intermediate store and gain higher profits.

6.2.2. External Trade No country in the world has everything that its citizens require. As a result, they must all rely on others to supply their needs for specific products. A country may be rich in iron and steel but deficient in aluminum, for example. As a result, it must source aluminum from countries that have a surplus of the metal. Furthermore, countries with excess production of particular commodities find it advantageous to sell them to other countries in exchange for items in which they are deficient. It has also been noticed that certain countries achieve specialization in the manufacturing of specific items as a result of sophisticated technological adoption, but others find it impossible or expensive to produce in their own country. They prefer to purchase the former’s goods. As a result of the unequal distribution of natural resources and specialization in the production of specific things, goods, and services are exchanged across countries. “External Trade” is the word for such a transaction. It is also known as international trade or foreign trade. External trade can be categorized into three types based on the selling and purchase of products and services. Import, export, and Entrepôt Trade are the three types of trade: •

Import Trade: It refers to the acquisition of goods and services from another country. The word ‘import’ comes from the

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word ‘port,’ which refers to the fact that things are commonly transferred to distant countries via ship. Imports, like exports, are the lifeblood of international trade. When the cost of a country’s imports exceeds the value of its exports, the country has a negative balance of trade (BOT), also known as a trade deficit. Most countries import goods and services that they cannot generate domestically, often because they cannot produce as efficiently or cheaply as another exporting country. Few countries occasionally import commodities and raw materials that they do not have on hand. Many countries, for example, import oil because they cannot produce it domestically or in sufficient quantities to meet demand. Import trade goals include accelerating industrialization, meeting domestic demand, overcoming natural calamities, raising living standards, and ensuring national defense. Export Trade: These are commodities and services produced in one country that are purchased by citizens of another one. Anything can be exported as a good or service. This exchange can be carried out via shipping, e-mail, or personal luggage on an aircraft. A product is considered an export if it is manufactured in the United States and sold in another country. Exports are one of the components of international trade. The other component is imported goods and services, which are commodities and services produced in another country and purchased by citizens of that country. The country’s trade balance is influenced by both export and import. When a country’s exports exceed its imports, it is said to have a trade surplus. A trade deficit, on the other hand, occurs when the imports exceed the exports. Import commerce aims to sell excess production, maximize the use of domestic resources, create jobs, earn foreign exchange, and boost national income. Entrepôt Trade: An entrepôt, also known as a transshipment port or historically as a port city, is a trading station, port, city, or warehouse where items can be imported, held, or traded before being re-exported with no further processing or customs taxes. The expansion of long-distance trade during the age of windpowered transport gave birth to these port cities. Countries’ customs zones have rendered entrepôts obsolete in the modern era. However, the phrase is still used to describe duty-free ports where a significant amount of re-exporting occurs.

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6.2.2.1. Importance of External Trade External trade is a key measure of a country’s economic health. External commerce benefits both importing and exporting countries. While the exporting country gains more foreign exchange by selling its surplus, the importing country gains the ability to employ better products and raise its people’s living standards. Let us go deeper into the significance of international trade: •

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Promotes Specialization: Specialization is encouraged by international trade. When demand for a particular commodity increase, producers are encouraged to specialize in its production. Japanese electrical items, for example, are in high demand all over the world. As a result, Japan’s efficacy in this field has greatly increased. Similarly, our country has specialized in the manufacturing of tea, coffee, and sugar. Improves Standard of Living: Import commerce allows a country to consume goods that it does not create. It earns foreign exchange through export commerce, on the other hand. Import and export trade so contribute to a country’s rising level of living. Enhances Competition: External trade increases competitiveness, forcing domestic enterprises to improve their production technologies, processes, and product quality. It eventually benefits consumers by allowing them to obtain higherquality products at lower prices. It also offers a wide range of products. Generates Employment Opportunities: External trade promotes the expansion of agricultural, commercial, and industrial activity, resulting in more employment prospects for individuals. Price Equalization: External commerce causes global price equalization of goods and commodities. When commodity prices rise due to a lack of supply, the problem can be alleviated by importing more goods. Similarly, when product prices fall due to the availability of an excess item, the country may export the surplus to other countries. International Relation: External trade brings people from two different countries closer together and helps them comprehend each other’s needs and requirements. They also take part in a

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variety of trade and cultural events. All of these activities foster peaceful and friendly relations between nations. Economic Growth: Every country’s economic growth is largely determined by the volume of its external commerce. If a country specializes in a certain commodity, it must produce more to meet global demand. As a result, by producing and exporting more goods and services, the country’s economic growth can be accelerated. Proper Utilization of Natural Resources: External trade is a technique of effectively utilizing the natural resources of diverse countries. For example, a country may be mineral-rich but unable to extract such materials from the earth due to a lack of technological innovation. As a result, it may import advanced countries’ latest technology and machinery and make proper use of such natural resources.

6.2.2.2. Difficulties Faced in External Trade Internal trade typically brings buyers and sellers together and transactions take place at their leisure. However, the position in international trade is rather different. Purchasing and selling products and services is a lengthy process. In the course of international trade, businesspeople encounter a variety of issues. The many problems that buyers and sellers in international trade experience are discussed below: •

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Distance: Except for surrounding countries, external trade entails the shipping of products over considerable distances. The distance between countries makes it difficult for importers and exporters to develop swift and close trade contacts. Greater Risk: External trading exposes items to a higher level of risk. Because of the lengthy distance, the risk of goods transit is higher. Ships bring goods, but they may sink in a storm or clash with submerged rocks. Enemies may also capture ships or cargo. These hazards may be covered by marine insurance, but this would raise the cost of commodities. Difficulties of Transport and Communication: Long distances associated with foreign trade make proper and timely transportation and communication problematic. Modern communication has solved this problem, but it is highly expensive and cannot be used to secure all types of information. Loading and unloading

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products takes a long time and costs a lot of money, which raises the cost of commodities. Restrictions: Customs, tariffs, quotas, and exchange rules all impose limits on overseas trade, limiting its scope. Lack of Personal Touch: Transactions in external trade are conducted with unknown parties via writing and other modes of contact. The buyer and seller do not have any direct communication. As a result, the danger of a disagreement or bad debt is always present. Study of Foreign Markets: Varied products have different features in terms of demand, competition strength, buyer preferences, and so on. For success in international trading, a thorough understanding of foreign markets is essential. This is difficult to do from the perspective of a single exporter or importer. Cost: Due to the high cost of transportation, insurance, intermediaries, and the expense of completing formalities, both import and export of commodities are very expensive activities. Change in Rules and Regulations: To defend its economic and political interests, each country has developed its own set of laws and regulations for international trade. These rules are subject to modification. As a result, traders find it difficult to become familiar with the various countries’ rules, regulations, and procedures. Frequent Price Change: The price of a product in external trade fluctuates often due to changes in foreign exchange rates, import, and export levies, and other factors.

6.2.2.3. Facilitators of External Trade We examined some of the issues and challenges that importers and exporters encounter in the preceding section. Do you believe that the traders will be able to run the business successfully on their own after learning all of this? Obviously, the answer is no. In order to acquire and sell, merchants require assistance from others. Facilitators of external commerce are individuals or organizations who provide various types of assistance. Let us take a look at some of these facilitators: •

Indent Houses/Indent Firms: They assist importers and exporters with sending and receiving product orders as well as other instructions.

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Export Houses: These are organizations involved in export promotion activities, such as STC, MMTC, Handicrafts, and Handloom Export Corporation (HHEC) and Central Cottage Industries Corporation (CCIC), etc. Forwarding Agents: They fulfill all of the formalities for loading the products onto the ship on behalf of exporters. Clearing Agents: These act on behalf of the importer, completing all necessary paperwork for the goods to be cleared from the port of destination. He receives the products from the customs administration and transports them to the importer’s location by rail or road. Shipping Company: It transports products in exchange for freight payments and promises to deliver them to the importer. Insurance Company: It is responsible for the loss or damage to products caused by insured risks from the exporter’s point of departure to the importer’s point of departure. Trade Commissioners: The government appoints these officials to represent the country’s commerce interests abroad through its embassy. They gather knowledge about commercial contacts and spread it to other traders. They also provide advice to traders on import and export issues. Trade Representatives: On behalf of their own government, these officials provide advice to exporters in other countries. They work to ensure that items are paid for and provide legal advice.

6.2.2.4. Documents Used in External Trade The main documents which are used in external trade are discussed below: •

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Indent: It is a purchase order for items to be imported. It is sent to the exporter for the purpose of receiving products. It contains detailed information on the goods to be imported, such as amount, quality, packing, and marking methods, delivery dates, payment methods, and other shipping and insurance instructions. Letter of Credit: In international trade, the importer must demonstrate his creditworthiness to the exporter, who may need a deposit or even full payment of the due price before products are shipped. The importer arranges for a letter of credit to be issued

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in favor of the exporter with his bank. As a result, a bank in the importer’s nation issues a letter of credit in favor of the overseas dealer. It includes an assurance from the bank that the bill of exchange drawn by the foreign dealer on the importer would be honored upon presentation to the amounts mentioned in the bill. It confirms the importer’s creditworthiness and ensures payment of the price to the exporter for the items he exports. Bill of Lading: It is a document signed by the ship owner or the master of the ship admitting receipt of commodities and promising to deliver them to the destination port. This serves as proof of receipt of the items stated therein on the one hand, and as a document of title to the commodities on the other. The exporter sends the paperwork to the importer, who can pick up the goods at the port of destination with the bill of lading and other shipping documentation. Advice Letter: It is a document generated by the forwarding agent and sent to the exporter stating that all export formalities have been completed and the products have been sent. The forwarding agent also sends a statement detailing the expenses incurred on the products sent as well as his compensation. Similarly, the clearing agency prepares and sends to the importer a letter of advice confirming that all processes for clearing the imported items have been completed. The clearing agent also delivers the railway receipt as proof of items supplied to the importer, as well as his statement of account for expenses incurred and commission charged, along with this letter. As a result, it is a document that is utilized in both export and import trade. Documentary Bill: It is created when the documentation of title to goods are provided along with a bill of exchange written by the exporter on the importer. There are two types of it: (a) documentary bill of exchange; (b) documentary bill opposing approval. When a documentary bill of exchange is used, the documentation of title to exported goods are only handed to the importer once the bill of exchange has been paid in full. The documents of title to the exported products are supplied to the importer when he accepts the bill of exchange produced by the exporter in the case of documentary bill against acceptance. Insurance Policy: The insurance provider issues the policy to

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cover the risk of loss or damage to items due to defined causes. If there is no insurance, the owner of the goods, the exporter or importer, will be responsible for the damage. The exporter ensures the cargo under a CIF (cost insurance freight) contract, whereas the importer insures the cargo under a FOB (free on board) contract. Different types of insurance plans exist to cover various risks in international trade. Shipping Order: The exporter or his agent must sign into a contract with the shipping firm in order to rent space on the ship. Following the conclusion of the agreement, the shipping firm issues a shipping order, which instructs the captain of the ship to receive the stated number of goods from the exporter on board. Shipping Bill: It is a document prepared by the exporter or forwarding agent that the customs authority uses to determine the duty the exporter must pay. Mate’s Receipt: A dock receipt is a document provided by the dock authority when items are taken to the docks for shipment. The dock authority is responsible for loading the items onto the ship. If things are transported directly into the ship, however, the captain or his aide (mate) issues a receipt as verification of commodities loaded. Mate’s receipt is the name given to this receipt. If the mate is unhappy with the way the products were packed, he will issue a foul Mate’s receipt; otherwise, he will provide a clean Mate’s receipt. Dock Challan, Dock Warrant and Dock Receipt: The exporter is required to complete a dock charge payment form. This is referred to as a ‘Dock Challan.’ Following the payment of dock fees, a document is issued allowing the items to be carried to the docks for loading. Dock Warrant is the name given to this document. The Dock Receipt is the paperwork issued as proof of delivery when the items are actually carried to the docks and handed over to the dock authority for loading into the ship. Consular Invoice: The exporter completes a customized invoice form detailing all aspects of the items sent and attesting to the accuracy of the pricing displayed. The consul of the importer’s nation stationed in the exporter’s country signs this invoice. Consular invoices are a type of special invoice. This certificate is collected to minimize under-invoicing and over-invoicing, as

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well as to facilitate customs clearance of goods in the importer’s nation. Certificate of Origin: It is a document that is issued as proof that the items were manufactured in the country specified on it, i.e., a certificate certifying the genuine origin of the commodities shipped. This text is based on trade agreements between countries that agree to cut import duty rates on items produced by them. Such certificates are only issued by certain chambers of commerce. Airway Bill: This document is required when commodities, particularly perishable products, are shipped to the importer by air. It is a receipt issued by the airline for the cargo it is transporting. The importer must relinquish it at the destination before goods can be released. It includes information such as the exporter’s name and address, the importer’s name and address, the description of the goods, the number of packages, the weight and volume of the goods, the freight rate and total freight, the loading and destination airports, the flight number and date, and so on. Export Invoice/Foreign Invoice: The exporter creates the international invoice and sends it to the importer after the products are delivered. The name of the ship, the port of shipment, the port of destination, the number of indents, details about packaging and labeling, the price of the products, and additional expenses such as freight, dock fees, and insurance charges are all listed on this invoice. Bill of Entry: It is a document that the importer must complete when receiving goods. It is a document that is used to clear imported goods from the port. Bills of entry are divided into two categories: bills of entry for personal use and bills of entry for warehousing.

6.2.2.5. Export Promotion Measures Both policymakers and academic academics have paid close attention to the encouragement of export activities by government and other public or private organizations. This interest stems from an awareness of the potential value of export promotion for individual enterprises, as well as the belief that export promotion policies have a significant impact on firms’

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competitiveness abroad, and hence on a country’s economic well-being. The economic role of export promotion can be understood as contributing to the international division of labor by involving as many enterprises as feasible in international trade from a theoretical standpoint. Export promotion, on the other hand, is not universally recognized as beneficial and is sometimes seen as a barrier to free trade. In this perspective, export promotion and import prohibitions are grouped together as “beggars.” Some trade promotion methods are listed below: •

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Export Processing Zones (EPZs)/Special Economic Zones: These are fenced-in industrial estates where manufactured items for export are produced. They are, in a nutshell, trade enclaves that import raw materials, process them, and then export to the global market. EPZs are being developed for a variety of reasons, including job creation, foreign exchange earnings, export promotion, providing a catalyst effect on local firms about how to export to the global market, using trade enclaves to diffuse knowledge, know-how, and management skills to local firms, and stimulating industrial development in the host country. EPZs are established in unique conditions, such as when developing countries have ample labor resources and capital is becoming more mobile in the global economy. Because the items produced in EPZs are exported, the combination of labor and capital in EPZs allows developing countries to absorb FDI and become more connected to the global economy with minimal impact on their home economies. WTO rules prohibit export subsidies, necessitating the phase-out of EPZ tax advantages. Some EPZs are seizing the opportunity to transform into industrial and technology parks and integrate into their local economies. 100% Export Oriented Units (EOU): This scheme was implemented in 1980 with the goal of increasing exports by producing more production capacity. Its main goal was to promote and expand the manufacture and export of value-added products. A variety of incentives have been granted to these units in order to make them more cost-effective, to facilitate their free access to foreign technology, and to encourage them to enter overseas markets on a big scale. Capital goods, raw materials, components, packing materials, consumables, spares, and numerous other defined categories of equipment, including material handling equipment, are all eligible for duty-free import. These units must

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execute a bond to comply with the EO, abide by the notification and Exim Policy restrictions, and pay the duty levied on items that are not used in the fabrication of commodities for export on demand. The EOUs should attain the VA level defined in the letter of permission (LOP) or positive net foreign exchange earnings specified in Exim Policy 2002–2007, whichever is appropriate. Export Houses: A trading house is a company that facilitates trade between two countries, such as a foreign country and one’s own. It provides a service that removes trade barriers for small businesses with limited resources or import or export capabilities to enter foreign markets. A trading house facilitates the exchange of goods across national borders. It fulfills its function by purchasing various products, such as those from Japan, and then marketing and selling them to a retailer in the United States. A trading house may charge slightly higher costs for products as an agent for overseas vendors looking for purchasers in the local market than if the retailer purchased the commodities directly from Japan. The goal of utilizing a mark-up strategy to price items is to compensate for costs and make a profit. Dealing with a few trading houses rather than a large number of wholesalers benefits the store because it streamlines the process of acquiring internationally manufactured goods. Other advantages of using trading houses for exporters include access to information and expertise about the overseas markets they want to join. Vendor financing is also available through trade credits and direct loans. Trading companies also provide intermediary services in order to give the most efficient operational and logistics services. They may take care of the paperwork required in importing or exporting goods, provide storage, provide transportation advice, obtain foreign exchange, or arrange insurance for local stores. Clients can also use trading houses to connect with new customers and special agencies, obtain financial financing, and conduct market research. Trading houses also create trading flows by finding markets and utilizing specialized products. A trading house is built on the principle of supply and demand. Large companies can hire their own trading houses, but only on a contract basis. Most trading houses’ main strength is that they act as principals for certain products and marketplaces, assuming, and lowering

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the risks associated with international markets. Trade Fair: Trade shows, conferences, business events, economic forums, and exhibits can all be categorized as sophisticated platforms for conducting business on a national and worldwide level. It is more than just a marketing tool because you have access to the entire market. They provide as a centralized source of market data, meeting your needs. They are a great way to get feedback from clients and establish market potential, conduct research, and evaluate competition, build commercial structures by finding new agents and distributors, and start joint ventures and project partnerships. Both Indian and foreign participants benefit from exhibitions since they provide a unique networking opportunity. They assist with promotion, marketing, and publicity.

6.3. STRUCTURE AND TRENDS IN AGRICULTURAL TRADE Agriculture’s proportion of world exports fell from 21% in 1973 to 15% in 1980, owing primarily to the high growth in the value of fuel exports. Agricultural exports, excluding fisheries and forestry goods, fluctuated greatly between 1973 and 1980, growing at an annual rate of around 13% on average, reaching $220 billion in 1980. Intra-OECD commerce accounts for two-thirds and three-quarters of worldwide agricultural exports and imports, respectively. OECD countries account for three-quarters of both exports and imports in the food sector. Intra-OECD commerce accounted for two-thirds and four–fifths of agricultural raw material exports and imports, respectively. Three major changes influenced international trade trends in the 1970s. First, the United Kingdom’s (UK) entry into the European Community altered trade flows in dairy products and other agricultural commodities away from traditional suppliers. Second, developing countries have become relatively important suppliers of certain commodities that serve as cereal substitutes in animal feed, such as soybeans and cassava, affecting production costs and demand in both the meat and cereal sectors in some industrial countries; in addition, middle-income developing countries have become important markets for certain agricultural products. Third, Eastern state trading countries have become increasingly important participants in agricultural commerce; their import demands might fluctuate significantly year-to-year, leading to worldwide market swings. A distinguishing aspect of temperate zone agriculture is that only a small percentage of global output

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is traded abroad. Dairy products account for around 3% of the total, whereas bovine meat accounts for 6%, wheat for 25%, coarse grains for 15%, and fats and oils for 34% (O’Brien, 2016). Small changes in global supply and demand, as well as trade policy positions, can have a significant impact on worldwide markets. During the 1970s, significant adjustments in the share of temperate zone agricultural exports held by the major agricultural exporting countries occurred. Canada’s proportion of global wheat, coarse grain, and meat exports fell by 30–50%. New Zealand’s proportion of global meat and dairy exports fell by 20%–60%. Australia’s percentage of wheat, coarse grains, meat, and dairy goods exports remained unchanged, but its share of sugar exports fell by 20%. The United States boosted its share of wheat and coarse grain exports by 20–25% while losing 10% of its global soybean export share.

6.4. AGRICULTURAL POLICY OBJECTIVES AND INSTRUMENTS Agricultural policy in industrial countries have always been aimed at achieving a wide range of goals that are not always compatible. These include guaranteed minimum income for farmers, increased productivity and efficiency in farm production and marketing, increased food security through increased self-sufficiency and secure import sources, affordable farm products for consumers, environmental protection, and balanced regional development. Retention of the work force in rural areas is also a common policy goal, especially in light of recent high unemployment rates. Simultaneously, the agricultural sector is required to contribute to the achievement of overall economic goals such as growth, price stability, and a viable balance of payments position. Traditional agricultural exporters, such as Australia and New Zealand, have tended to rely on improving their agricultural export performance to achieve other goals, whereas traditional net importers, such as the European Community and Japan, have focused on improving the income levels of their agricultural sectors through import substitution. Apart from domestic policies with significant trade implications, trade policy policies have been used to augment and assist domestic policies. As a result, agricultural trade policy departs significantly from free trade principles. •

Domestic Policies: In most developed countries, the primary goal is to increase income. The idea that agricultural income should rise in lockstep with other sectors of the economy and

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that any income disparity between agriculture and other sectors should be minimized by deliberate government intervention is widely accepted. This, combined with production goals, has often resulted in the formation of support programs involving the fixing of prices at levels aimed to provide farmers with larger returns than would be possible if they relied solely on market forces. As a result, high-cost domestic manufacture is promoted. Income support entails government budget expenses that must be passed on to non-agricultural sectors via greater taxation unless the goal of assuring adequate supplies to consumers at acceptable costs is abandoned. Traditional agricultural exporters have occasionally used price policies to help domestic producers. Certain governments have tended to reduce the cost of income assistance by limiting it to predetermined maximum production amounts. Others have employed shortfall payments instead of outright price supports to alter trade flows without distorting relative prices directly. Attempts have been undertaken in several nations to increase farmer returns through supply limits or production quotas. While strong supply controls may have prevented overproduction in some cases, they can also result in the freezing of production structures, making structural modification difficult. External Policies: The use of trade policies that insulate the domestic agricultural sector from foreign competition has been a natural concomitant of the development of domestic policies targeted at providing income support, strengthening the trade consequences of domestic policies. In defining access to the home market, trade policies frequently provide domestic producers preferential treatment while discriminating against international suppliers. Quantitative import limitations are fairly common. When domestic production for a certain commodity is much less than the country’s demand, governments often employ a more permissive import policy, and limitations are enforced when domestic supply improve. In addition to the long-term economic effects of such policies, they increase trade uncertainty, deterring exporting countries from making adjustments. In many cases, the pursuit of internal support policies has resulted in surplus production, necessitating trade actions to limit imports or promote the export of surpluses through incentives, including subsidies, resulting in trade frictions with traditional, more

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efficient producers in third markets. Importers have had long-term access to supplies due to sporadic export restrictions imposed by major producing countries in order to ensure domestic supply or maximize returns. Import levies and quantitative limits, as well as internal revenue duties and import calendars, are used to limit imports. Imports may be restricted as a result of health and sanitary laws. Import taxes are commonly used in conjunction with other import restrictions, such as minimum price schemes and state-run trade activities. Variable import tariffs try to bring import prices up to par with domestic prices. Despite the liberalization of various quantitative limits over the last three decades, global or bilateral import quotas remain common. Export aids, which can take a variety of forms, including direct subsidies, preferential credit facilities, and refunds or restitutions, are examples of measures that boost exports. Their primary goal is to let domestic producers to get the same price for their exports as they do for domestic sales, where prices are controlled by the government. This also allows surplus production created by domestic assistance programs to be accommodated. Export aids can successfully shift the burden of adjustment to the overseas market, avoiding a short-run price deterioration on the local market due to excessive production. As a result, conventional exporters may be forced to provide export subsidies in order to maintain market dominance. Export assistance can also take the form of price pooling between domestic and export sales, resulting in lower export prices countered by higher domestic prices maintained through import controls. Long-term bilateral trade agreements are becoming more common in the global grain trade because they appear to provide security of access to markets and supplies when international markets are volatile; however, such agreements can have trade-distorting effects, particularly during times of scarcity. With the USSR, China, and Mexico, the US has long-term agreements covering wheat and coarse grains. China has long-term agreements with both Canada and Australia. The European Union (EU) has recently expressed interest in entering into long-term bilateral agreements to gain guaranteed access to foreign markets. In 1981, bilateral grain agreements accounted for roughly 30% of all wheat trading.

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6.4.1. Agricultural Policies in European Community Several of the six founding countries had their own complicated and mainly protectionist agricultural policies prior to the foundation of the European Community. In this environment, the only way to create a mutually acceptable Common Agricultural Policy (CAP) in 1962 was to ensure substantial selfreliance in food and agricultural raw materials through common prices and no direct production regulations. The CAP strives to boost production, ensure a decent standard of living for farmers, stabilize markets, and ensure that consumers receive supply at reasonable costs. These goals are achieved through a common price strategy for important agricultural products and uniform counter-terrorism measures. These are maintained via a shared Community-wide finance strategy, competitive rules, common rule structure and administration, and the elimination of intra-Community impediments to agricultural product trade. While the CAP’s specific processes differ from product to product, the pricing structure for agricultural commodities has the essential ingredients. These entail the identification of interconnected variables. • Target, basic, or guide prices; • Intervention or support prices; and • Threshold, sluicegate, or reference prices applicable to imports. Annually, target prices are set at a level that producers of cereals, wheat, rice, dairy products, sugar, olive oil, and oilseeds in the Community want to achieve. The basic price (for pig meat, fruits, and vegetables) and the guiding price (for cattle and calves) are both based on the same principles. Intervention or support prices, which are set annually as well, are usually 5–10% below target prices. The intervention agencies guarantee to buy equities from manufacturers at certain prices. Threshold, reference, and sluicegate prices are the lowest levels at which imports are permitted. Internal target and intervention prices are inextricably linked to threshold and reference prices. For wheat, the threshold price is equal to the target price in the area with the most deficiency, less freight from a specific point on the border to that area. The variable levy is the CAP’s primary protection mechanism. This is an import tax implemented to align the price of a commodity on the world market with the Community’s higher internal price. The difference between an established import price and the Community’s threshold or reference price is used to compute the tax for most CAP products. The established import price is based on current global

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market pricing. As a result, taxes might be adjusted monthly, weekly, or even daily to protect the Community market against import competition. Import duties apply to some agricultural products that are not covered by the CAP’s full price support and import levy mechanisms, and for which the Community’s self-sufficiency levels are low. Shifts in the structure of agricultural imports into the EU are seen in. Domestic prices have risen as a result of the CAP’s introduction, encouraging larger and more efficient farmers to create surpluses. Sugar, grains, dairy goods, and animal products have all generated surpluses. As a result, the Community has determined that subsidizing the export of these surpluses in the form of export refunds is necessary. The size of the agricultural surpluses, as well as the level of world prices and the Community’s domestic agricultural prices, are used to determine the export refunds. Despite attempts to fund export subsidies through the implementation of a co-responsibility fee on the manufacture of particular items, the burden has been borne largely by the Community budget. Subsidies for the production of various commodities, such as processed fruits and vegetables, cottonseed, flax, and hemp, seed, and dried feed, hops, silkworms, and olive oil, are all included in the CAP. The subsidy is based on the amount of product produced or a set payment per hectare. The European Agricultural Guarantee and Guidance Fund (EAGGF), a chapter of the Community’s general budget, is in charge of financing shared measures. The Guarantee Section is responsible for financing price support initiatives, while the Guidance Section is responsible for structural reforms (i.e., modernization of farms). The Guarantee Section is responsible for the majority of agriculture spending, with dairy and grain products accounting for the most. In order to avoid abrupt adjustment of common agricultural prices in each member country’s currency when the currencies of member nations fluctuate against one other, the CAP uses border taxes and subsidies on intra-Community agricultural trade. These monetary compensating amounts (MCAs) are border taxes and subsidies. MCAs rule out the potential of arbitrage activities that profit from pricing discrepancies caused by exchange rate fluctuations. Concerns over rising agriculture program budgetary expenses led the European Communities Commission to recommend several amendments to the Council of Ministers in October 1981: •

When output surpasses desired levels, an increase in producer participation (co-responsibility) in the cost of surplus disposal was advocated. In the case of cereals, a production target for 1988 would be set, with intermediate annual targets set each year;

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any exceeding of allowable ceilings would result in intervention prices being reduced the next year. Intervention buying of beef would be limited or suspended during specific times of the year. • It was suggested that Community cereal prices be gradually linked with those paid to US growers. In addition to reducing output surpluses, this approach would make cereal substitute imports less appealing and lower the cost of CAP protection for many items. • It was suggested that the community create a common export policy. Long-term sales contracts, the establishment of private export sales agencies to encourage exports, and the availability of long-term finance to enable exports would all be part of the new policy. In January 1982, the Commission suggested a 9% price increase for the majority of CAP-covered agricultural items for the 1982/1983 year, with increases ranging from 6% to 12% for the rest. A 7% price rise for grains has been proposed. The Council approved hikes in common prices of 10.7% on average in May 1982, (Hart & Spero 2013). The Commission’s recommendation to broaden the scope of co-responsibility was postponed until 1983/1984, pending approval by the Ministers of Agriculture.

6.4.2. Agricultural Policies in United States Providing income and price support to farmers, ensuring adequate supplies of food and fiber at reasonable costs, providing food aid to low-income households, and promoting agricultural exports are all goals of US agriculture policy. The US government has relied on a number of commodity-specific programs to fulfill these goals. Over the years, significant policy adjustments have occurred, particularly in the grain sector, where programs have been developed to handle either the disposal issues caused by grain surpluses or the need to replenish depleted grain inventories in shortage times. The goal of US policy is to reconcile and coordinate farmers’ income goals with maintaining competitiveness on domestic and international markets, as well as to change production capacity in ways that minimize surplus carryover stocks to manageable levels. Price supports, which set commodity floor prices, or outright income supports, which are administered through shortfall income payout schemes, are the most common commodity-specific programs. Nonrecourse loans and government purchases of commodities are used to establish price support programs. Farmers are granted loans

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for their crops at set price support levels under the nonrecourse grain loan program, with the crops serving as loan collateral. Farmers can repay their loans and redeem their crops, or they can choose not to repay the loans and hand over title to their crops to the US government. The US Commodity Credit Corporation (CCC), a financial arm of the US Department of Agriculture, implements the dairy price support program through purchases. In grains, set-aside, and acreage limitation schemes have been employed to supplement price support programs on occasion. The implementation of the deficit payment program is based on target pricing. A deficit payment is paid to eligible producers if market prices fall below previously established targets. Market prospects, funding availability, and producers’ capacity and willingness to accept production constraints are all factors that are considered. Domestic support programs for wheat and other grains, dairy products, peanuts, soybeans, sugar, cotton, wool, and mohair are included in the 1981 Agriculture and Food Act. Agricultural import tariffs have been cut as a result of various trade treaties. Cotton, dairy products, peanuts, and sugar are all subject to import limitations. Meat is subject to several regulations under the 1979 Meat Import Law. Many import quotas were increased as part of the MTN.

6.4.3. Agricultural Policies in Japan The goal of Japan’s agricultural policy is to achieve self-sufficiency and provide appropriate income to farmers. The great emphasis on food self-sufficiency reflects a deep sense of vulnerability, which has led to broad acceptance of the costs of high self-sufficiency due to historical, geographical, and demographic circumstances. Agriculture has benefited from special consideration due to a desire to preserve sociocultural practices related with the land. Rice policy is at the heart of the development of other product support programs. Rice contributes for around 35% of farm output, with prices two or three times higher than world prices. Because other crops and livestock must compete with rice for inputs, most other goods’ production costs have increased, necessitating the protection of other agricultural sectors. As a result of this condition, rice, vegetables, dairy products, meat, and fruits are all self-sufficient. Nonetheless, due to a steep loss in the self-sufficiency ratio for grains, the food self-sufficiency ratio has fallen to around 50% in terms of calorie intake; this trend reflected severe limits on accessible arable land and rapid rise in demand. The Agricultural Basic Law of 1961 establishes the goals of agricultural policy and provides the foundation for import protection. The policy of income

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support and price stabilization is based on administered prices that reflect the farm cost of production plus income compensation, allowing a full-time farmer with sufficient resources to earn an income comparable to that of an industrial worker. In practice, however, the typical small farm does not provide profitable full-time employment options, prompting farmers to work part-time in non-farm activities. Support prices offer total earnings to farmers that, on average, exceed the average income of industrial workers, owing to this off-farm income. Import substitution has also benefited from production subsidies. Furthermore, a state or semi-state trading system has been employed to secure acceptable returns to producers of products that compete with imports. The agricultural sector is primarily protected by three mechanisms: •

Budgetary direct payments—subsidies that do not impact the price of the commodity; • Restrictions on quantities supplied to consumers via statemanaged import quotas, resulting in higher prices paid by consumers and transferred to producers; and • Import tariffs that boost domestic prices and improve domestic producers’ competitiveness. Although import tariffs and levies are significant, especially in the cattle sector, the first two instruments provide the majority of protection. All three approaches are employed for various commodities. Quantitative import limitations have been gradually lowered in scope, down to 22 products at this time. Meat, some milk and milk products, dairy products, citrus fruits, wheat, barley, and rice are currently mostly covered by import quotas. Other industrial countries have considered Japan’s food distribution system as an informal import barrier in addition to these legal mechanisms of control. The majority of food is transferred to consumers via long networks of middlemen that are tightly linked to traditional local sources of supply. Procedures for awarding import licenses for items subject to quantitative limits have also been noted as hurting overseas providers.

6.4.4. Agricultural Policies in Other Countries The agriculture sector in Canada is highly export-oriented; exports account for half of the sector’s revenue. Government policies are primarily focused on providing infrastructure support to facilitate production and export. However, the Agricultural Stabilization Board administers a domestic assistance program for a variety of agricultural products. Supply management

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is used in this program to ensure that farmers receive enough and consistent returns. Butter, cheese, chickens, turkeys, and eggs are all commodities that are subject to supply management. The Stabilization Board sustains certain commodities’ prices at not less than 90% of the previous five-year average market or base price, with relevant cash cost increases taken into account. Subsidies have been used in supply management on occasion; the most common product to be subsidized is cheese. Quotas and surtaxes are enforced on a commodity-by-commodity basis when imports of stabilized or support products interfere with this program. Informal agreements govern the distribution of import quotas among countries. In addition to products subject to stabilization, the Meat Import Act of February 1982 places restrictions on meat imports. Given the interconnected nature of the North American market, these measures are similar to those used in the United States and are geared at defending the Canadian market from trade deflection caused by US rules. Canada also uses discretionary licensing to limit imports of some other agricultural products; in the past, such steps have resulted in virtually no imports of the products in question. Australia is a large agricultural producer as well as a major exporter of wheat, wool, sugar, meat, and dairy goods. Agricultural policy has been implemented through a variety of schemes with varying levels of help to agricultural production. Discriminatory pricing arrangements, import restrictions, adjustment assistance programs, such as concessional credits and tax concessions, and other programs, such as government contributions to stabilization funds and a local content scheme, are the most common forms of government assistance to the agricultural sector. Discriminatory pricing systems can push commodity prices higher than world prices or keep domestic prices low. Certain dairy goods, sugar, wheat, rice, dried vine fruits, other fruits, and eggs are currently subject to price discrimination. In 1979–1980, these pricing arrangements resulted in transfers of wheat, sugar, dried vine fruits, and manufacturing grade milk from producers to consumers, while producers of eggs, apples, and pears, rice, and fluid milk profited. Domestic production is sometimes restricted in order to limit the output increases that follow from better returns. Imports are usually excluded or their prices raised through tariffs or other forms of limitations in instances where domestic prices are maintained above world prices. Import restrictions range from outright bans (such as on sugar) to fewer formal limitations (such as on canned ham and cheddar cheese) and levies (e.g., orange juice).

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6.5. AGRICULTURE COMMODITY TRADE TRENDS Agricultural policies have shielded domestic agricultural sectors from international competition to varying degrees. The entire degree of agricultural protection in industrial countries is projected to be over three times that of manufacturing, with both the level and product coverage of agricultural trade barriers increasing. A comparison of nominal protection coefficients, or the ratio of domestic wholesale to world prices, for selected agricultural products in the three major industrial areas of the European Community, Japan, and the United States, demonstrates the degree of agricultural protection, despite the fact that it is subject to many variables. In both the European Community and Japan, the largest importing countries for most commodities, the nominal protection coefficients are substantially over unity, indicating positive protection. The ratios in the United States have consistently remained around or below unity (except for sheep meat). Essential consumables, such as grains, particularly rice, have greater coefficients than items like sugar and meat, whose production in industrial countries competes with traditional sources of supply in poor countries. Lower protection levels in comparison to the Community and Japan demonstrate the United States’ comparative advantage in the production and export of a wide range of agricultural products, particularly grains.

6.5.1. Dairy Products Trade Trends Only around 3% of global milk output is exported in the form of dairy products, such as milk powder, butter, cheese, and a few other items. The quantities for cheese and butter are 4% and 12%, respectively. The OECD countries dominate production and exports, while developing countries are becoming net importers. Dairy products are generally traded on a residual basis, which means that even minor changes in output can cause significant price and volume fluctuations. Price dispersion is considerably greater in this sector than in other agricultural commodities due to policies. Price disparities, combined with export subsidy schemes, have skewed world trade significantly from the scenario that would prevail if resources were allocated more efficiently. The level of export subsidies of the world’s largest dairy exporter, the European Community, has a significant impact on global dairy prices. The evolution of commerce in butter and cheese, the two principal dairy products, has some significant variances. While butter output increased only slightly between 1972 and 1981, global exports increased significantly, owing mostly to rising imports from poorer countries. Despite the fact that

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the European Community remained a large importer, its proportion of global imports declined from 36% in 1975 to 12% in 1981. The Soviet Union’s proportion in world imports increased from 2% in 1975 to 30% in 1981. The European Community, Australia, and New Zealand were the sole sources of exports. In 1981, the Community overtook the United States as the greatest exporter, accounting for 67% of all exports, up from 39% in 1976. Australia and New Zealand’s share of the market declined from 61% in 1976 to 33% in 1981. Cheese output, on the other hand, has increased at a more consistent yearly average rate of 4%. The Community’s share of global production increased from 29% in 1972–1974 to 33% in 1981. While Australia and New Zealand’s exports remained stagnant, the Community’s exports grew at an annual average rate of 20% from 1976 to 1981. Increased purchases by emerging countries accounted for the majority of the Community’s export growth. As a result, its proportion of global exports increased from 54% in 1976 to 73% in 1981. In 1976, the Community was the largest OECD importer of cheese, accounting for 26% of the total, but only 15% in 1981.

6.5.1.1. International Dairy Framework for Trade The International Dairy Arrangement, agreed during the MTN, has been in force since January 1, 1980. It aims at: •

The expansion and liberalization of world trade in dairy products under stable market conditions; and • Furthering the economic and social development of developing countries. The Arrangement includes a comprehensive information and cooperation framework to help achieve these goals. Specific clauses in three supporting protocols set minimum export prices for some milk powders, milk fat (including butter), and certain cheeses. At the moment, 16 nations are members of the Arrangement, which is run by the International Dairy Products Council, which was founded under the GATT. The Council monitors the evolution of the dairy trade using data provided by signatories on previous performance, current status, and outlook for production, consumption, prices, stockpiles, and trade. If a major market disequilibrium or threat of disequilibrium is detected, the Council may propose viable solutions for the participants to consider. In 1981, Canada withdrew from the Arrangement. Private dairy farmers and exporters have backed governments’ promises and undertakings under the Arrangement. The specified minimum export prices have remained much lower than market pricing. The minimum export prices

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effectively function as floor pricing, putting a limit on export subsidization. The difference between these prices and world prices, on the other hand, has grown since the Arrangement began. Only two violations of minimum price undertakings have occurred in the last two years. The Arrangement has been considered as a mechanism of ensuring orderly markets and preventing a market collapse in the face of rising global dairy product surpluses. The MTN’s Tokyo Round produced in a handful of relatively minor access concessions for conventional exporters. One of these was a mutual importlimitation agreement between the European Community and Canada, which set the Community’s exports to the Canadian market at 60% of Canada’s global import quota of 20,400 tons. In exchange, the Community agreed to allow the import of 270,000 tons of Canadian cheddar cheese, principally into the UK, under the condition that exports to the Community would be at higher prices than those in Canada. This quota is significantly lower than the previous level of Canadian sales to the Community before to the UK’s entrance.

6.5.1.2. European Community on Dairy Products The CAP for butter and cheese is strongly linked to the policy for milk and the market for milk products. There is a significant concern with milk oversupply at current prices. Only 25% of milk produced in the EU is intended for liquid consumption, with the rest going to dairies for processing. Small farms, which have few other options for income generation, account for more than 30% of production. The CAP price system for dairy products establishes a target price for milk, which is backed up by intervention prices for butter, skimmed milk powder, and several cheeses; liquid milk and some other cheeses are exempt from intervention. A threshold price for imports is used to support the domestic target price. Refunds are available for all exports. Since 1977, efforts have been taken to curb milk production growth by imposing a co-responsibility charge on production, which is calculated as a percentage of the milk target price. The domestic milk target price is set annually as a minimum producer price consistent with the concept of income support. This price, which is significantly higher than the world average, was raised by nearly 13% between 1976/1977 and 1980/1981, and by 9% and 10.5% in 1981/1982 and 1982/1983, respectively. Intervention prices for dairy goods have been 6% below the target price. Dairies pay producers’ prices that reflect market conditions and are far below the target price because there is no intervention price for milk. Threshold prices for 12 pilot products provide protection against low-cost imports; threshold prices

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for other products are derived from these values. Imports are subject to a variable charge, with the exception of those for which the Community has reached special arrangements. The charge is equal to the difference between the threshold price and the free-at-border price for each commodity, and it is set by the European Communities Commission on the first and 16th days of each month. The Community has reached particular agreements with various nations that govern imports subject to certain requirements; these primarily apply to certain cheeses. In addition, the Community has an agreement with New Zealand under which butter is imported in predetermined quantities and subject to a special fee. From 125,000 tons in 1978 to 92,000 tons in 1982, their volumes have decreased. Export reimbursements cover the gap between internal pricing and the prices of internationally traded products for dairy products from the Community, which account for 15% of total deliveries. To account for specific market conditions, refunds may be differentiated according to the destination country. The Community has established special export agreements for various cheeses with a number of countries, including Australia, Austria, Canada, Spain, Switzerland, and the United States, in order to boost dairy product exports. In 1977, a co-responsibility levy of 1.5% of the target price was imposed on all milk producers (with an exemption for the first 60 tons of butter equivalent for each farmer). The co-responsibility fee was designed to deter a rapid expansion in Community production and the creation of substantial exportable surpluses that would put a strain on the Community’s budget. After being reduced to 0.5% of the target price in the 1978/1979 and 1979/1980 milk years, the co-responsibility fee was raised to 2.0% in 1980/1981, with some exceptions for less favored regions. For the 1981/1982 milk year, the levy was increased to 2.5% and remained at that level for 1982/1983. Increases in the co-responsibility fee have contributed to a recent reduction in yearly milk delivery growth to roughly 1.5%. Since the structure of production has evolved toward larger, more efficient farms, production growth is unlikely to slow significantly. This rise could still result in surplus output, given the nearly flat internal domestic demand. The direct cost of preserving the dairy product business has increased dramatically as a result of rising domestic production and the resulting requirement to subsidize exports through refunds. Expenditure for the dairy product industry (including intervention costs and export refunds) increased from roughly 24% of the EAGGF guarantee budget to nearly 46% in 1978, but then fell in succeeding years. It accounted for around 32%

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of the EAGGF budget in 1981, or ECU 3.7 billion. Export refunds have accounted for more than half of all expenditures in recent years.

6.5.1.3. United States on Dairy Products For many years, the United States has had a dairy price assistance program. The CCC implements the price support program by offering to buy butter, cheese, and nonfat dry milk at prices tied to the milk support price. Minimum support prices for dairy products were defined as a percentage of the parity price equivalent until 1981, and for several years, they averaged about 83% of the parity price equivalent. During the 1970s, CCC spending on dairy products fluctuated a lot. From $24 million in fiscal year 1979 to $1.0 billion in fiscal year 1980, and then to $1.9 billion in fiscal year 1981, such expenditures increased dramatically. In fiscal year 1982, they are expected to approach $2 billion. On September 30, 1981, CCC dairy product stocks were valued at $2.4 billion, or almost two to three times the previous four years’ levels. Concerns about escalating costs have resulted in certain changes to the dairy support program. In nominal terms, the support price for fiscal year 1982 will stay unchanged from 1981. The 1981 Farm Act allows for nominal increases of around 3.5% each year for the next three fiscal years, or about one-third of the average increases from 1978 to 1980. CCC export sales, the food aid program, and a free distribution program for low-income families are all used to dispose of dairy surpluses. The New Zealand Dairy Board purchased 100,000 tons of butter from the United States government in 1981, roughly half of its annual output, at a price higher than the minimum export price established under the International Dairy Arrangement to assist the United States in selling its butter surpluses. Up to July 1982, the butter will be distributed in stages, with the New Zealand Dairy Board disposing of it in a timely manner to minimize market disturbance. Import quotas authorized under Section 22 of the Agricultural Adjustment Act limit dairy imports to the United States. Import quotas exist for a variety of milk products, 12 types of cheese, and chocolate imports. Annual import quotas on buttermilk, skimmed, and whole milk, dried cream, and butter are established at levels that are less than half of what they were 30–50 years ago. Current import quotas in almost half of the cheese categories reflect MTN enlargements and exceed actual import levels by a factor of one or two in the sample period considered to determine the quota (generally the early 1950s or the middle 1960s). Import quotas apply to around 85% of cheese imports. Except for limitations on evaporated or dried milk, about 80–90% of dairy product import quotas have been satisfied

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in recent years. Despite the MTN-negotiated easing of quotas, U.S. dairy import quotas are rather rigid in comparison to domestic production levels. The butter import quota was 0.06% of US butter production in 1981, and the cheese import quotas were 0.3–14.0% of US production. The United States International Trade Commission (USITC) launched an investigation in August 1981 to see if casein and lactalbumin should be added to the list of dairy products subject to import restrictions. The USITC decided in January 1982 that imports of casein and lactalbumin did not seriously interfere with the US Department of Agriculture’s domestic dairy support program, and therefore import limitations were not necessary.

6.5.1.4. Japan on Dairy Products Japan’s dairy production has been quickly rising thanks to government subsidies and protection. Producers get direct subsidies (deficiency payments) that, when combined with the prices obtained for dairy products, keep prices for manufacturing grade milk products at levels that are connected to the estimated production costs. Quantitative limits on the importation of dairy products other than natural cheese help to keep domestic dairy market prices several times higher than world prices. Since the early 1970s, increased dairy output has been combined with moderate development in demand, resulting in dairy product surpluses in Japan, necessitating increased protection. In 1981, in response to rising domestic dairy product surpluses, Japan held talks with New Zealand, which resulted in a voluntary 10% reduction in New Zealand’s compound butter exports to Japan over the next three years.

6.5.1.5. Canada on Dairy Products The dairy product business in Canada is heavily regulated and safeguarded against import competition, accounting for roughly 13% of total milk output and 13% of total farm income earnings. It is based on a strict milk supply management system with production quotas set for each milk producer. Milk produced for liquid consumption and milk produced for the manufacturing sector are distinguished. If output exceeds defined quotas, the excess must be sold at world market rates; if this does not cut output, the base quota for the following year is reduced to alter the predetermined output route. Basic producer prices, which are adjusted by a formula based on increases in consumer prices, input costs, and a judgment element to define the “target return” on industrial milk, are supplemented by mandated output quotas. The government effectively utilizes a combination of direct

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subsidies to milk producers and support prices for butter and skim milk powder that are fixed above world prices to reach this return level. The difference between the producer price and the world market price is partly covered by a producer co-responsibility charge, but mostly by the budget. The dairy business consumes 30% of the government agricultural budget. Dairy imports are prohibited in Canada to ensure the smooth operation of the domestic assistance program. Except for butter, all dairy products are subject to import tariffs and quantitative limits. Since 1977, cheese import quotas have been fixed at around 20,000 tons, around 12% of domestic output; 60% of the cheese quotas are allotted to the European Community.

6.5.2. Fats and Oils Trade Trends About 5% of global agricultural product commerce is made up of fats and oils. Even while OECD countries remain the largest producers and exporters of fats and oils, developing countries have steadily reclaimed market share. Developing countries’ reliance on imports has increased at the same time, while industrial countries, particularly the European Community, have been able to lessen their need on imports by increasing local output. Prices fell in 1980 after progressively rising through the second half of the 1970s in response to supply changes that caused manufacturing to slow. As a result, trade volumes in 1981 likely decreased. Fats and oils are exposed to relatively modest levels of protection in general. Concerns over the secure availability of imports have recently pushed certain OECD countries to focus more on boosting domestic production. Because of Spain’s importance as a producer of olive oil and the prospect of substitution against other oils, Spain’s admission to the Community could result in a significant shift in the Community’s trade policy in this area.

6.5.2.1. International Framework for Trade Under the International Olive Oil Agreement, only olive oil is subject to internationally agreed-upon rules. This agreement went into effect on January 1, 1981, and is overseen by the International Olive Oil Council, an intergovernmental organization. The Agreement’s economic provisions aim to reduce supply variations in order to avoid excessive price swings and to establish conditions “that allow production, consumption, and international trade to flourish harmoniously.” The Council coordinates the policy of producing countries; however, buffer stocks are not included. Furthermore, under the auspices of the Food and Agriculture Organization,

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an Intergovernmental Group on Oilseeds, Oils, and Fats has been deliberating (FAO). Under the MTN, some trade liberalization in fats and oils was agreed. However, determining the economic significance of these concessions is challenging.

6.5.2.2. European Community Fats and Oil Framework Oils and oilseeds are only protected because of the commercial interrelationships between animal fats, butter, and edible oils, with the exception of olive oil, which the European Community is 70–80% selfsufficient in. The Community’s common regulations apply to rapeseed, sunflower seed, and soybeans. Oils, on the other hand, are subject to a distinct regulatory environment than other agricultural goods. Oil imports are subject to a 10% import charge. Variable levies on olive oil imports are equal to the difference between the threshold price and the c.i.f. import price. Intervention helps producers maintain a derived market target price by paying a deficiency payment to the Community’s producers. Deficiency payments for olive oil amounted to nearly 30% of the world price in 1981/1982. Because Spanish production, at around 200,000 tons, is roughly equivalent to the total world trade in olive oil, shortfall payments could rise dramatically after Spain’s membership to the Community unless the target price is decreased. Target wholesale and intervention prices for oilseeds are set and phased seasonally. Within the Community, intervention prices vary from country to country. Producers, wholesalers, and oilseed crushers get a shortfall payment equal to the difference between the Community’s higher target price and the lowest c.i.f. import price. This aims to ensure the supply of oilseeds by giving a sufficient return to producers. The rate of shortfall payments was roughly 45% of the world price in 1981/1982. Fats and oils exports are now limited, primarily to the United States and North Africa, and they get an export refund equal to the shortfall payment. Overall budgetary expenditures for this sector protection increased from 4% of EAGGF guarantee expenses in 1978 to 8.2% in 1981.

6.5.2.3. United States Fats and Oil Framework Despite the fact that the United States is an efficient soybean producer, accounting for more than 95% of global exports until recently, it maintains a loan and buy program to support soybean prices. Support prices have frequently been established below market pricing in recent years. The 1981 Farm Act set the soybean loan rate (support price) at 75% of the price

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of soybeans received by farmers over the previous five marketing years. Production quotas, which were cut in 1981, govern the United States’ peanut support program. It is backed by a high import tax and a limited import quota that has not changed since 1953. Following a substantial decline in domestic peanut supply due to adverse weather conditions in late 1980 and early 1981, additional import permits of 175 times the typical annual quota was permitted, and they were filled.

6.5.2.4. Japan Fats and Oil Framework Imports of fats and oils into Japan are largely unrestricted; however, imports of oilseeds are given priority over oils to support the domestic crushing sector. As a result, oilseeds are duty-free imported, while seed oil is subject to a levy. The Japanese government places a high value on reliable import sources, which it has attempted to achieve through an informal allocation of the domestic market to a number of foreign suppliers. To protect domestic farmers in the case of soybeans, where Japan is around 5% self-sufficient, a deficit payment mechanism similar to that used for cereals is utilized.

6.5.3. Grains Trade Trends Over the last four decades, global grain commerce (including wheat and coarse grains like barley, maize, and millet) has doubled. This remarkable expansion indicates considerable shifts in output toward temperate-zone industrialized countries, owing to major technological advancements and greater productivity per acre. Simultaneously, slower domestic production rates in developing and Eastern state trade countries demanded more imports. Wheat and coarse grain exports are dominated by OECD countries, particularly the United States, Australia, and Canada. The evolution of international trade in the 1970s reflects these themes. Wheat exports increased to an estimated 22% of world production in 1981, after falling from 19% in 1975 to 15% in 1976. The OECD countries’ proportion of wheat exports remained over 80%, peaking at 94% in 1981. In 1972–1974, developing countries consumed 59% of global imports, rising to 64% in 1981. The share of total imports from state trading countries has remained below 25%. In the case of coarse grains, OECD countries account for 70% of exports and 30% of imports. However, import substitution in coarse grains has been far more pronounced than in wheat, particularly in the European Community. The Community’s share of coarse grain imports decreased from 24% in 1972–1974 to 11% in 1981. On the other hand, both Eastern trade countries

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and developing countries have increased their import share. Price volatility has grown in the grain market during the last decade, owing to changes in output, crop failures in many emerging and state-traded countries, and fewer stocks retained by exporting countries. Net grain importers’ policy stance on grain production and trade is influenced by food self-sufficiency concerns. Food self-sufficiency has been a major worry for developing countries, but wealthy countries such as Japan have expressed similar concerns.

6.5.3.1. International Framework for Trade The International Wheat Agreement, which has been in effect since 1971, was most recently renewed on July 1, 1981, for a two-year period. A Wheat Trade Convention and a Food Aid Convention are included in the agreement. Although the Wheat Trade Convention does not contain any real economic measures, it does call for frequent meetings on global supply and demand. The Food Aid Convention requires members to provide minimum annual donations of wheat and other grains, or the financial equivalent, to underdeveloped countries. The revised Food Aid Convention aims to meet the World Food Conference’s goal of providing at least 10 million tons of food aid to developing nations each year. This corresponds to around 5% of global grain commerce (including wheat). The International Wheat Council has been negotiating a new International Wheat Agreement for some years. When Canada and the United States refused to support a proposal to establish a network of individually held, globally coordinated world food stocks and a scale of price levels at which worldwide consultations on stock accumulation or release would take place, efforts toward a new Agreement were abandoned in 1981.

6.5.3.2. European Community Framework for Grain Trade Over the previous 10 years, the European Community’s imports of wheat and other grains have decreased dramatically while exports have increased, owing largely to increased local output. In 1979/1980, the self-sufficiency ratio for wheat was 112%, compared to 94% in 1968/1969. The ratio has risen from 86% in 1968/1969 to 98% in 1979/1980 and an estimated 105% in 1980/1981 for all grains. Supporting the cereal industry cost climbed from less than 14% of EAGGF guarantee expenditures in 1978 to 17% in 1981, equating to ECU 2 billion. Voluntary export constraint agreements with Thailand and Indonesia have also protected Community producers by stabilizing imports of cassava, a cereal alternative, from these countries.

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Furthermore, the European Communities Commission has asked permission to negotiate under the GATT the substitution of import quotas for bound tariffs on corn gluten feeds, another grain substitute. By means of departure from the Community’s pricing restrictions on the common organization of the market, the reference price for common wheat of bread-making quality has normally been established for several years. The Council of Ministers, however, reverted to the official regulations for 1981/1982, establishing an actual reference price that serves as a basis for calculating the target price—and hence the threshold price—as well as a derived price at which intervention in minimum-quality bread wheat must occur. In 1981/1982, the calculated price was 5.5% more than the corresponding reference price in 1980/1981. The domestic wholesale price of wheat in 1980 was 45% higher than the corresponding world price, while the difference in maize was more than 100%. In 1980/1981, import taxes on common wheat averaged 20–23% of the c.i.f. price, while they were 14–62% and 48–68% of the c.i.f. price for barley and maize, respectively. Export restitution has becoming more widely used to boost exports as production has increased and exportable surpluses have emerged. This support has accounted for almost 72% of overall EAGGF guarantee expenditures in the cereal industry over the last four years. In 1980/1981, 7.2 million tons of common wheat (15% of total production) and 3.4 million tons of barley received restitution (8% of total production). The Community’s policy of subsidizing grain exports has recently prompted the United States to file GATT objections over wheat flour and pasta, while Australia has apparently found it difficult to compete with the Community’s wheat exports in particular Middle Eastern markets.

6.5.3.3. United States Framework for Grain Trade The nonrecourse loan and buy program detailed previously is used to implement the US price support program. The CCC increased its grain holdings dramatically during periods of surplus production, such as in the 1950s and 1960s. The CCC also buys wheat and feed grains to boost prices by implementing US food aid programs. A second type of scheme was in place for a few years, in which farmers were paid for diverting land away from wheat and other grain production. In 1981, diversion payments were abolished. Another program, started in 1973, helps farmers earn more money by setting grain target prices. A shortfall payment is paid if market prices for wheat, corn, sorghum, and barley fall below the targets set during the first five months of the marketing year. Producers must comply to

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acreage constraints or set-aside directives in order to be eligible for both the price and income assistance programs. These directives are given if market conditions warrant them. The annual value of grain collateral acquired by the US government as a consequence of nonrecourse loan programs was $85 million on average during the 1977–1981 fiscal years, ranging from $2 million in 1981 to $240 million in 1979. During the 1977–1979 fiscal years, purchases (including those for the food aid program) averaged around $200 million, although equal amounts were disposed of during the same period. However, purchases totaled $1.2 billion in fiscal year 1980, while disposals were only $0.2 billion. Purchases fell to over $80 million in fiscal year 1981, while sales more than doubled. Because of substantial global price rises, annual government diversion payments fell to $500 million in 1973, down from about $900 million in 1970–1972. In 1977 and 1978, deficient support programs resulted in huge government payouts, particularly in 1977, when they totaled $1 billion. In the early 1970s, there were also huge price support payments to maize producers, totaling over $1 billion, as well as smaller payments to sorghum and barley producers. Deficiency payments to these producers have been significantly smaller in recent years. The late 1970s saw record-breaking grain harvests in the United States, prompting the creation of a farmer-owned food grain reserve in 1977. The reserve’s goal was to allow farmers to keep their grain supplies off the market until their value increased. This program was open to wheat, maize, sorghum, barley, and oats. Farmers that held their grain for three years or until the market price reached predetermined release levels received a price support loan on the grain as well as annual storage payments. Farmers who sold their grain before the prices reached these levels were penalized by having to pay storage charges plus interest on top of the original loan. In 1981, the grain reserve program was extended.

6.5.3.4. Japan Framework for Grain Trade To strengthen its self-sufficiency and for sociocultural reasons, Japan runs a grain price support program. Its import policy is also influenced by the requirement for grain supply security and stability. The economic effects of this approach can be seen in the rice sector, where domestic prices are typically many times higher than those on the international market. The agriculture budget’s main expense item is government losses on rice trading. Given rice’s dominance in Japanese agriculture, policies affecting rice have an impact on views toward other grains. Imports of maize, sorghum, and other grains are allowed freely since feed grains constitute the foundation of

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the economy’s pig, poultry, and cattle industries. However, despite the low level of self-sufficiency, imports of domestically produced wheat and barley are subject to worldwide limitations. Wheat imports have been over 6 million tons in previous years, while barley imports have been around 2 million tons. These quotas are calculated as a residual, taking local production and market demands into account. Import requirements are split down into halfyearly quotas, which are then broken down into port-of-arrival quotas, with quantities to each port allotted to particular millers and other processors based on previous purchases. Government sales prices for imported wheat are set primarily to keep domestic prices stable, rather than to safeguard domestic growers. Quantitative restrictions on wheat and barley imports are intended to boost indigenous production. The Food Agency of the Ministry of Agriculture, Forestry, and Fisheries has repeatedly set producer prices that are significantly higher than import prices. The Food Agency buys almost all of the wheat and barley produced and resells it at far lower prices than the producers. The consolidated budget is used to cover the trading deficit. Over the last decade, the cost of safeguarding local producers has increased dramatically due to an increasing divergence between producer pricing and the Food Agency’s sale price, particularly due to a significant increase in domestic wheat and barley production.

6.5.3.5. Other Countries Framework for Grain Trade Wheat and barley are key exports from Canada. Almost 80% of exports go to state trading countries and are routed through the Canadian Wheat Board to long-term contracts with purchasing agencies in these countries. The remaining 20% of exports are handled through the market by global trading companies. All grain sales to China and the Soviet Union proceed through the Canadian Wheat Board, which is governed by long-term agreements that stipulate minimum amounts that Canada must sell and minimum amounts that importers must purchase during the course of the deal. Algeria, Brazil, Jamaica, Japan, Mexico, and Poland have all signed long-term agreements in recent years. The actual sales contracts are negotiated for six-month periods, and each contract stipulates the pricing that can be sold. These prices are generally in accordance with market prices in the United States. A deficiency payments system underpins the domestic grain stabilization scheme. The Canadian Grain Commission pays around 80% of the projected price to Canadian growers at delivery. After the sales are done, the remaining earnings are handed to the farmers. When realized prices fall short of original payments, the Canadian Wheat Board incurs

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losses, and the Federal Government makes additional expenditures to cover the losses. In recent years, however, no such losses have occurred. One of Australia’s most efficient sectors is wheat production. Wheat production and marketing have seen significant government intervention, including the operation of a price stabilization fund, price setting mechanisms, statutory monopoly control of domestic and export marketing, other government support programs, and import prohibitions. The Australian Wheat Board is the sole marketer of wheat in Australia as well as wheat and flour exported from Australia. Government intervention in the Australian wheat industry has resulted in negative effective protection since the early 1970s. Wheat for human consumption is marketed in Australia at an administered price set annually using a formula that takes into account changes in domestic expenses and export prices while also providing a margin above long-term f.o.b. export prices. Between seasons, price changes in wheat designated for human consumption are limited to 20%. The Australian Wheat Board sets prices for wheat sold for industrial and livestock feed based on commercial considerations. A number of wheat importers, notably Abu Dhabi, China, Egypt, and Iraq, have inked long-term deals with the Australian Wheat Board.

6.5.4. Meat Trade Trends Long-term trends in meat production and trade have mostly followed the same pattern as other products, particularly grains, albeit the rate of rise has been slower. OECD exports have expanded at the fastest rate in recent years, whereas emerging countries and state trading countries have lost market share. Imports have expanded more quicker in state trading and emerging countries than in OECD countries, reflecting the nature of production. In terms of production, there was a shift in the long-term pattern during the 1970s. World bovine meat production was only 13% greater in 1981 than in 1972–1974, while developing countries’ proportion of production had increased somewhat. Nonetheless, the OECD countries’ supremacy was maintained. Meat production, particularly beef, is cyclical due to the cattle breeding cycle, and beef confronts fierce competition from highly substitutable goods like chicken and other meats. Throughout the 1970s, the bovine meat trade as a percentage of total production stayed at 6%. The OECD countries’ proportion of exports increased from 71% in 1972–1974 to 82% in 1981, while developing countries’ part declined from 29% to 18%. Despite the loss of the UK market following the UK’s entry to the European Community, Australia’s exports more than doubled during the 1970s,

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accounting for over half of all OECD exports. New Zealand’s bovine meat exports increased by approximately a quarter, while the Community’s exports, which had been progressively dropping until 1973, jumped dramatically in 1979, reaching over three times their 1970 level. The percentage of total imports from developing nations increased from 6% in 1972–1974 to 17% in 1981. While the United States’ imports increased continuously during the decade, the Community’s imports dropped dramatically from 35% of OECD imports in 1972 to 12% in 1979. During this time, intra-community trading in bovine flesh more than doubled. Throughout the 1970s, Japan’s imports increased dramatically, despite a low starting point. During the 1970s, New Zealand and Australia retained their dominant market shares of 70% and 30%, respectively, but the volume of their exports remained stagnant due to a fall in exports to the European Community.

6.5.4.1. International Framework for Trade From January 1, 1980, participants in the MTN adopted the Arrangement Regarding Bovine Meat for a three-year period. The Arrangement aims to promote the expansion, liberalization, and stabilization of the international meat and livestock markets, among other things, by facilitating the gradual removal of restrictions on world trade in bovine meat and live animals, as well as improving the international framework for world trade. To that purpose, the Arrangement establishes a platform for cooperative information gathering. The Arrangement has a total of 20 signatures. The International Meat Council, established by this Arrangement under GATT auspices, assesses the global market situation and outlook and makes recommendations to interested governments in situations of potential or actual serious market disequilibrium. The evaluation is based on data provided by signatories. The Arrangement does not have any economic stipulations, but it does provide a platform for discussion and informal agreements. The MTN resulted in 40–50% duty reductions in the meat market, as well as a shift to more tarifffree categories. Furthermore, some quota liberalization was negotiated, particularly in Canada, Japan, and the European Community.

6.5.4.2. European Community Meat Framework for Trade When the market price of beef falls below the intervention price for two weeks, the CAP intervenes to support the price. Around 90% of the guide or target price is used as the intervention price. When the market price stays

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above the intervention price for three weeks, the intervention ends. Imports subject to special arrangements and quotas negotiated in the MTN are exempt from the variable import charge; approximately four–fifths of the European Community’s imports are subject to these arrangements. Imports from Yugoslavia and African, Caribbean, and Pacific (ACP) countries are subject to lower rates of variable taxes under the Lomé Convention. In 1982, the quota for Yugoslavia was raised to account for Greece’s membership in the Community. All beef and veal imports are subject to a 16% tariff for live animals and a 20% charge for frozen or refrigerated meat. Imports of offal and breeding animals are duty-free. Export refunds are used to facilitate the export of surplus production in order to clear the domestic market. The normal return rate was around 60% of the international price in April 1982. Refunds differ significantly depending on the export destination. In recent years, the budgetary cost of the Community’s support policy in this sector has risen, owing to rises in export refunds. Total support for bovine meat climbed from 7.2% of EAGGF guarantee section expenditure in 1979 to 13% in 1981, while export refunds increased from 36% to 53% of expenditures on this sector. In October 1980, the Community adopted a sheep meat regime in which 12 nations agreed to voluntary export restraints in exchange for the Community’s concession of more advantageous import treatment in the form of a reduction in the variable import charge. The agreements will be reviewed every year. Some traditional sheep meat exporters are concerned that, as a result of the new system, the Community’s self-sufficiency in sheep meat will increase to the point where imports will be phased out.

6.5.4.3. United States Meat Framework for Trade While there is no domestic assistance program for meat production in the United States, meat imports are prohibited. Import restrictions on fresh, chilled, or frozen beef, veal, sheep meat, and goat meat are to be applied when imports during the year are expected to reach 110% of an adjusted trigger level for each product, according to US legislation issued in 1964 and revised in 1979. The basic import level is 546,600 tons, which is the average of actual imports from 1968 to 1977. To reach a trigger level for the application of import quotas, this level is changed by a production adjustment factor and a countercyclical adjustment component. In line with the long-term trend in domestic beef production, the production adjustment factor tends to raise the permitted import level. During the liquidation phase of the US cattle cycle, when supplies are projected to be plentiful, the countercyclical component

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lowers the trigger level. Domestic beef production fell in 1980, and the countercyclical factor increased the permissible import level by nearly 30%. However, meat exporters whose cattle cycle coincides with the U.S. cycle may suffer disproportionately from the countercyclical adjustment factor, as access to the U.S. market is limited when they are also in the liquidation phase of the cycle. The countercyclical adjustment factor has not been used to activate import quotas since the 1979 amendment. When it appeared likely at the start of the year that imports would surpass 110% of the trigger threshold, the US avoided imposing meat import bans by establishing bilateral restraint agreements with exporting countries. Until 1980, bilateral limitations were imposed in 9 of the 16 years, with restrictions affecting around 5–7% of domestic production between 1973 and 1979.

6.5.4.4. Japan Meat Framework for Trade Japan produces over 70% of its beef and veal consumption. The national beef trade policy is written in such a way that the domestic livestock sector is guaranteed a specific level of financial assistance. The Ministry of Agriculture, Forestry, and Fisheries, in consultation with the National Beef Marketing Board, creates a global import quota that is split down by type of beef based on available domestic supply and intended returns to Japanese producers. Every six months, the allotment is adjusted. Importing beef is monopolized by the National Beef Marketing Board. Imports are auctioned off to domestic distributors for a fixed minimum price. The revenues are put into a separate fund to help the domestic livestock business. The Japanese strategy efficiently manages both the quantity imported and domestic pricing by following this technique. The United States provides hotel-style meat, while Australia provides the rest. Japan liberalized its import limit under the MTN, increasing it from 92,000 tons in 1977 to 135,000 tons in 1982/1983. Given the large price differences between domestic and international pricing, there is significant excess demand for beef in Japan (at world market prices) (Obara, 2010). The minimum auction price was raised in 1981, causing demand to fall; as a result, the import quota for the second half of the 1981/1982 fiscal year was cut by 6.4% compared to the previous fiscal year. Several exporters have also complained that the severe health and sanitary regulations and inspection procedures for imported beef have effectively limited foreign supplies at times.

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6.5.4.5. Canada Meat Framework for Trade The Canadian cattle industry is a tenth of the size of the US industry, yet the two markets are intimately interconnected. Until recently, beef imports were governed by ad hoc quota determinations, albeit imports remained relatively constant and within the established limitations. To avoid trade diversion, which has previously forced safeguard steps in Canada, it has been deemed necessary to coordinate Canada’s beef import policy with that of the United States. In February 1982, Canada passed a new Meat Import Act that is very similar to the 1979 legislation in the United States. If the formula’s trigger levels are reached, Canada will negotiate bilateral export restraint agreements with its meat suppliers under the Act. If exporters do not agree to limit exports “voluntarily,” the Act allows import limits to be imposed at lower levels than in the past. Fresh, chilled, and frozen beef and veal are all covered by the Meat Import Act. The amount of limitation is based on the average level of imports from 1971 to 1975, adjusted for changes in domestic beef or veal disappearance (consumption) and cyclical fluctuations in domestic supplies. In addition, discretionary changes may be made to account for health measures or trade restrictions that are unconnected to the Act but affect commerce in cattle, beef, or veal between Canada and other countries, or other circumstances deemed relevant by the Government. The argument for cyclical fluctuations in domestic supply tends to limit authorized imports in the slaughtering phase of the cow cycle, but the formula argument for domestic disappearance tends to increase the allowed amount of imports as consumption rises. The Meat Import Act further stipulates that, regardless of the import levels estimated using the formula and other adjustment factors, if beef consumption declines, meat import levels must at least grow proportionately to the predicted population increase.

6.5.5. Sugar Trade Trends Sugar output and sales have been continuously increasing since the mid1950s. Despite the fact that the OECD countries’ share of global output and exports has been growing, emerging countries continue to dominate. Beet sugar, which is predominantly cultivated in wealthy countries, has benefited from technological advancements. As temperate zone developed countries boosted their sugar production, their share of overall imports declined from 62% in 1972–1974 to 38% in 1980, while developing countries’ part climbed from 21% to 41%. The developed countries’ exports increased from 26% of

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world exports in 1972–1974 to 34% in 1980. The drop in import shares was particularly noticeable in the European Community (including intraCommunity trade), where it plummeted from 15% to around 9%. Between 1976 and 1980, the Community’s proportion of world sugar exports (excluding intra-Community trade) increased from 12% to 18%. Sharp global price variations have also had a substantial impact on sugar trade.

6.5.5.1. International Framework for Trade Since 1958, a series of international accords have governed free market sugar trading; the most recent agreement went into force provisionally in January 1978 and permanently in January 1980. The current International Sugar Agreement (ISA) establishes export quotas and special stockpiles that are held by countries but managed internationally in order to maintain a price range of 13–23 cents per pound. In order to achieve this goal, participating exporting countries may be obliged to limit their exports, with the maximum conceivable limitation being 15% of the ISA’s basic export tonnage. These economic provisions took effect in early 1978. Due to depressed prices on the international market in the first year of the ISA’s operation, exporting countries were urged to limit their shipments to the ISA’s minimum levels; these minimum levels were maintained throughout 1979. Although the imposition of export restrictions helped to support sugar prices remained low due to the comparatively large basic export tonnages and the lack of participation in the European Community’s ISA. Export limits were stopped in January 1980 due to a sharp rise in sugar prices, but were reinstated in May 1981 and then decreased to their lowest level in September 1981. Exporting members were also required to acquire 1 million tons by June 30, 1982, and 1.5 million tons by the end of 1983. The European Community announced preparations to withhold excess supply from the international market in late 1981, and held exploratory talks about joining the Agreement. The ISA was extended for another two years in November 1981. Sugar trade is also influenced by the Lomé Convention, which requires the European Community to import 1.2 million tons of sugar (refined sugar equivalent) from associated developing countries at guaranteed prices every year, as well as trade among state trading countries, such as Cuba’s sugar sales to the Soviet Union.

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6.5.5.2. European Community Sugar Framework for Trade Sugar markets in the European Community are subject to more direct involvement and stronger controls than other agricultural markets. Quotas, support buying, and fines for overproduction are all part of the sugar regime. The Council of Ministers sets a yearly target price, with the intervention price set at about 5% below the target price and the threshold price for imports set at around 15% above the target price. Only a small amount of sugar is supported by full intervention. Target prices and the related intervention prices, on the other hand, have generally been set at levels substantially above those in the global market. The difference between the target and the optimal export price is used to calculate export refunds. The Council defined the Community’s sugar policy for a five-year period in July 1981, ensuring the continuation of the quota system and establishing the principle that producers should be fully responsible for the costs of disposing of any sugar produced in excess of Community consumption, with the exception of about 1.2 million tons imported from ACP countries, which will be financed through the EAGGF. As a result, producers are charged a co-responsibility levy to help support export refunds. Sugar production in the Community is governed by a quota system that distributes quotas to over 100 sugar factories. Each processor is given two quotas: an A quota that receives a full guarantee at the intervention price, and a B quota whose intervention price is 30% lower than the A quota’s declared level. The total domestic demand is calculated by adding the A quotas together. The B quota is calculated as a percentage of the A quota, and it was cut from 27.5% in 1980/1981 to 23.5% in 1981/1982. Currently, the A and B quotas total over 11.8 million tons, with the B quota accounting for around 2 million tons. C sugar, or sugar produced in excess of these quotas, must be exported at the risk of the producer; there is no intervention or export reimbursements for C sugar. Producers then distribute quotas to beet producers and set the purchase price for A, B, and C quotas based on the target price, the predicted coresponsibility levy established by the European Communities Commission, and the expected export price for C sugar. For numerous years, local production has outstripped domestic demand, and the Community has had to rely on export refunds to get rid of its sugar surpluses. Until July 1981, export refunds were partially funded by a charge of up to 30% of the intervention price on B quota production, with the remainder coming from the EAGGF’s general resources. Since then, the sugar industry is projected to be self-sufficient. As a result, the Commission estimates the co-responsibility charges required to reimburse all export

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refunds. A co-responsibility fee of up to 2% of the intervention price is applied to all A and B sugar for this purpose. If the earnings of this levy are insufficient to cover the cost of refunds, a supplemental levy of up to 7.5% can be imposed retrospectively to the B quota, bringing the B quota’s contributions up to 37.5% of the intervention price, assuming the previous levy of 30%. High world prices at the start of the 1980/1981 crop year prompted Community farmers to increase the area under beet cultivation by 11% while selling forward their expected C sugar crop at current high prices. Yields increased by approximately 20% due to favorable weather. As a result, the Community’s sugar surplus reached around 4 million tons by the end of 1981, but dropping world sugar prices forced the Community to withdraw roughly 2 million tons from the world market in 1981/1982. In 1982/1983, these stocks would be included in the A quota. EAGGF expenditures on the sugar sector are expected to rise from 6% of overall expenditures in 1981 to 9% in 1982. Other sugar suppliers do not believe that these adjustments in the Community’s sugar regime properly negate the impacts of subsidization or that further growth in sugar output will be discouraged. As a result, 10 developing nations, including Australia, have filed a new complaint with the GATT, seeking retribution for the Community’s sugar policies. Their main argument is that, while the new funding arrangements change the source of funds, they do not cut or limit the overall sums or subsidization rate available for sugar exports in the Community. Sugar imports are subject to variable import duties based on threshold prices, with the exception of several developing nations under the Lomé Convention and the German Democratic Republic. As a result, such supply has been effectively blocked.

6.5.5.3. United States Sugar Framework for Trade The United States government removed the import quota system that had been in place for decades at the end of 1974, taking advantage of exceptionally high sugar prices. The only restriction was a 0.6250 US cents per pound import duty on raw sugar (equal to around 3% of the average 1975 world price of 20.29 US cents) and 0.6625 US cents per pound import tariff on refined sugar. To meet the needs of existing regulations, a global sugar import quota of 6.9 million short tons of raw sugar was set, greatly above the levels of sugar imports. After steep drops in sugar prices in 1976 and 1977, the 1975 action was reversed in 1977, and a new sugar price support program was implemented. Import fees were imposed on sugar imports in November 1977, and import duties were raised by one cent per pound. The

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import charge system was modified from a fixed to a flexible structure, akin to a variable import levy, by the end of 1978. The flexible import fee is the difference between the domestic support price (adjusted for freight, insurance, and other domestic expenditures) and the total of the average spot (global) price plus the relevant import tariff. The import tax cannot exceed 50% of the spot (global) price, according to Section 22 of the Agricultural Adjustment Act. The Act allows for the establishment of import quotas as an alternative to import fees, however the quota levels must not exceed 50% of the quantity imported during a representative period. Import costs for raw sugar were repealed in October 1979, and refined sugar import fees were cut to 0.52 cents per pound, with no price support program in place for calendar years 1979 and 1980. In early 1980, import duties were also decreased. After world sugar prices dropped in December 1981, a domestic support scheme for the 1982–1985 sugar beet and sugarcane crops was revived. A domestic support price of 16.75 US cents per pound for raw sugar was established for 1982, and it is expected to be achieved through the use of nonrecourse loans. (A CCC purchase program was in operation for the first nine months of 1982, but no purchases were made until the 1983 fiscal year.) A market stabilization price was issued with the domestic support price, which is the total of the domestic support price and attributable expenses for domestic freight and other costs associated with the marketing of sugar in the United States to ultimate consumers. Import taxes and tariffs were to be used to boost the price of imported sugar to the level of the market stabilization price, reducing the danger of the CCC obtaining sugar throughout the program’s existence. In December 1981, a market stabilization price of 19.08 cents per pound of raw sugar was established for the 1981/1982 purchasing program, and import fees and tariffs were reinstated correspondingly. Because world sugar prices continued to plummet, fees were hiked twice in the first four months of 1982 to keep the price of imported sugar from going below the market stabilization price. The import fee required to maintain the market stabilization price would have exceeded the permissible maximum of 50% of the world price by the end of April 1982. As a result, in May 1982, a country quota system was reinstated. In the absence of quotas, it is projected that CCC purchases of $400 million would have been required to achieve the established market stabilization price for 1982. The market stabilization price was also increased to 19.88 cents per pound. A global import quota of 200,000 metric tons was established through June 30, 1982; subsequent quotas will be set on a quarterly basis, and the quota policy will be rigidly enforced. Australia, Brazil, the Dominican Republic, and the Philippines

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received more than half of the overall quota allotment, based on past trade patterns.

6.5.5.4. Japan Sugar Framework for Trade The domestic sugar industry in Japan is tiny, delivering just approximately 20% of domestic demand. Because the cost of producing sugar in Japan is higher than the rest of the world, the cane and beet sugar sectors have needed government assistance. Despite the fact that raising production capacity is physically impossible, the government objective is to boost sugarcane and beet output by giving incentive payments beyond the guaranteed minimum producer prices set each year. When determining the minimal producer price, actual production costs are taken into account. A sugar price stability regulation was enacted in 1965 to protect the domestic sector and avoid excessive swings in refined sugar prices, in order to make domestically produced sugar competitive with imported sugar. This law created the Sugar Stabilization Agency, a public business that trades in locally produced and imported sugar and imposes tariffs on imported sugar to preserve a competitive balance between domestic and imported output. The agency conducts paper transactions with sugar millers, purchasing raw cane sugar at a price determined by the minimum price guaranteed to growers and the cost of production, and then selling it back to millers at the raw sugar equivalent of the current domestic refined sugar price. The Agency’s purchase price is usually twice as high as the selling price. The millers must then sell it to refiners at the Agency’s current sellback price. The Agency is also subsidizing domestic white beet sugar at this time to offset the raw material and processing costs. Imports are also subject to a variable charge or rebate system, which is determined by the interaction of four prices: • the maximum stabilization price; • the minimum stabilization price; • the target price or standard price for domestic sugar; and • the average import prices. The maximum and minimum prices are set using an index of imported sugar prices, but they are also influenced by other factors. The goal price should represent domestic production costs, but it must fall between the maximum and minimum pricing. However, in actuality, it is substantially below the cost of production and includes a subsidy from the Sugar Stabilization Agency in the form of the Agency’s purchasing price. Depending on whether import prices are below the minimum price or over

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the maximum price, the Agency imposes charges or rebates on imported sugar (sugar imported by trade houses, which then sell it to the Stabilization Agency). When import prices surpass the maximum price, proceeds from the import charge are directed to a price stabilization fund, which pays refiners refunds. Another fee is imposed in order to keep domestic producers’ pricing at predetermined levels. The average price paid by the Sugar Stabilization Agency for cane sugar in the 1970s was around 80–90% over the average c.i.f. import price, reflecting price support and related programs. The Sugar Stabilization Agency was given extra powers in February 1978 to limit supply on the market in order to prevent a price drop that would undermine the industry’s orderly structural change. Import restrictions on both raw and refined sugar are among these abilities.

6.5.6. Wine Trade Trends and Frameworks In terms of production norms, planting controls, and enological processes, the European Community’s common organization of the market in wine covers table wines and quality wines. Only table wines are subject to the pricing and intervention system, which is concerned with setting guide prices and, if necessary, activating the intervention system in the market by removing quantities for distillation and using private storage. The increasingly diverging trends in consumption and supply have resulted in wine surpluses. Wine consumption has decreased by 0.75% year, while output has climbed by 1% annually. Although the amount of land under cultivation has decreased by 10% since 1976, production has not decreased due to increased productivity. A few nations, such as Norway and Sweden, receive reimbursements on table wine exports from the EU. A “countervailing tax” is applied if wine imports into the Community are priced below the so-called reference price. The application of countervailing charges, on the other hand, has become the exception, since most wine-producing nonmember nations have agreed to adhere to reference prices in exchange for a guarantee from the Community, which exempts them from paying the countervailing fee. The Community decreased the “countervailing price” levied on imports of wine in bottles to zero in 1984 for the few countries that still had it. The Community’s medium- and long-term guidelines for the wine sector are aimed at minimizing the area under production. Short-term approaches include limiting the amount of table wine that can be delivered for voluntary distillation (at 65% of the guiding price) and enforcing the compulsory distillation rule (50% of the guide price for the first 10 million hectoliters and 40% for the quantities exceeding that level). Exports to the United States

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have expanded dramatically in recent years. The USITC recently dismissed a subsidy complaint filed by US wine growers against the Community. For two years, the United States Trade and Tariff Act of 1984 allows grape growers to be included in the definition of the wine industry for antidumping and countervailing duty petitions. The Community has filed a complaint with the GATT alleging that this component of US law is in violation of GATT norms. The U.S. Act also requires the U.S. Trade Representative to identify trade barriers to U.S. wine exports and to consult with trading partners on their removal; the President is empowered to retaliate against measures or practices applied by other countries and considered by him to constitute “unfair” barriers to U.S. wine exports. The Community has expressed worry about the US legislation’s underlying concept of sectoral reciprocity.

6.5.7. Consequences of Agricultural Protection The economic impacts of agricultural protection are widely established, but empirical quantification is challenging due to well-entrenched distortions induced by agricultural policy, which make quantitative estimation of gains and losses sensitive to the assumptions made. This section briefly summarizes some of the substantial literature on crop protection expenses. The numerous instruments used to promote agriculture can be evaluated in terms of their overall domestic and international consequences. In the domestic market, protectionist policies result in higher domestic pricing than would otherwise be the case. Consistently high domestic price supports can lead to agricultural output overproduction and underconsumption, as well as resource allocation imbalances between agriculture and other sectors of the economy. Protection shields domestic agriculture from international competition, but it also generates disincentives for structural reform and adjustment by allowing inefficient enterprises or producers to stay in business. Within the protected sector, relatively efficient producers receive high rents and are frequently able to boost profits by introducing innovations in production technique or realizing economies of scale. The possibility for overproduction at established prices would vary in proportion to the dispersion of productivity levels around the average, because domestic price supports may be set at levels that benefit relatively inefficient producers. Agricultural protection also affects demand for agricultural commodities produced abroad, resulting in lower output, export earnings, and employment in lower-cost producers’ agriculture and agro-based businesses, which include both developed and developing countries. Restriction on the volume of production entering international trade may have a depressive effect on

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world agricultural product prices and exacerbate agricultural trade instability. More recently, the combined effects of protectionist measures on production and consumption have resulted in huge exportable surpluses in the nations implementing these policies, needing financing through export subsidies. Such surpluses are not only costly to the country in question, but they also generate major problems in third markets for traditional providers of the products in question, distorting trade flows and global resource allocation.

6.5.7.1. Price Distortion Effects Internal terms of trade across different economic sectors in a country change over time as demand and supply factors change. For strictly economic reasons, the terms of trade for any given sector of the economy may improve or deteriorate, and this could be the result of an economy’s effective allocation of resources. However, in the agriculture sector, government domestic support measures safeguard trade terms, and developments can be attributed in part to these policies. A comparison of wholesale pricing in agriculture and manufacturing, is a measure of the internal terms of trade. Agricultural terms of trade improved steadily in the European Community and Japan from 1974 to 1981, however they decreased in the latter half of the decade. In contrast, since 1974, the terms of trade for agriculture in the United States have been steadily deteriorating. Agricultural policies have also helped several agricultural goods become more self-sufficient. The European Community has achieved a net export position in several products (wheat, sugar, and dairy products). In Japan, self-sufficiency ratios have stayed very stable or even decreased slightly.

6.5.7.2. Budgetary Cost of Domestic Support Programs Direct budgetary expenditures are the most evident internal effects of farm protection. Gross EAGGF guarantee expenditures grew at a slower pace in the Community in 1980–1981, following averaging over 28% in 1974– 1979. Guarantee expenditures as a percentage of total budget expenditures increased from 67% in 1974 to 73% in 1979, but then declined to 63% in 1981. They have showed a typically rising trend in terms of the Community’s combined gross national product (GNP) (excluding Greece), rising from 0.31% of GNP in 1974 to 0.52% of GNP in 1981(Cox et al., 1997). EAGGF guarantee expenditures have been stable at around 2.8% of the Community’s food expenditures in recent years. The CCC’s net expenditures (costs of price support and related programs + PL 480 food aid expenditures) increased

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from around $2 billion in fiscal year 1976 to over $5 billion in fiscal year 1981 in the United States. They increased from 0.5% in 1976 to 1.4% in 1978, but then fell to 0.8% in 1981. They increased from 0.1% in 1976 to 0.3% in 1978, but then fell to around 0.2% in 1981. In Japan, there is little information on the fiscal expenses of agricultural protection for various commodities. Budgetary appropriations for agriculture, on the other hand, have continuously exceeded the contribution of agriculture to Japan’s gross domestic product (GDP); in 1980–1981, appropriations were roughly 8% of the budget, while agriculture’s contribution to GDP was 4%. Revenue lost as a result of preferential tax treatment given to the agricultural sector is removed from the budgetary cost figures stated above; in certain situations, such agricultural tax exemptions have been substantial.

6.5.7.3. International Impact Several studies have been conducted to assess the international impact of crop protection. According to one analysis of the European Community’s trade policy, agricultural protection in the Community transformed the structure of its agricultural commerce to the detriment of foreign exporters between 1962 and 1979 (Yeats, 1981). The drop in market share of efficient OECD producers and developing nations, which resulted in significant foreign exchange losses, was nearly totally offset by an increase in intra-Community trade. The negative impacts of agricultural protection on emerging countries have been the subject of several empirical studies. Valdés and Zietz (1980) examined the effects of trade liberalization in 17 OECD nations on exports of selected agricultural items from 56 developing countries. It was discovered that lowering trade barriers by half would enhance global commerce by $8.5 billion per year, with 36% going to developing nations, 20% going to OECD exporters, and the rest going to the rest of the world. In 1975–1977, the yearly increase in developing country agricultural exports was estimated to be 11% of total developing country agricultural exports. The study predicted significant increases in imports in the Federal Republic of Germany, Italy, Japan, New Zealand, and the UK, as well as significant increases in exports in Australia, Canada, New Zealand, and the United States, while exports in France and Italy would be significantly reduced. When it comes to domestic job creation, the benefits of agricultural trade liberalization may be significant for developing countries. According to the International Labor Organization, developing countries consume up to 30 times as much labor per unit of agricultural output as industrialized countries, hence agricultural trade liberalization might greatly enhance employment in poor countries.

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Another study looked at the consequences of agricultural pricing distortions on output, consumption, trade, and rural employment in nine nations (Bale and Lutz, 1981). It was discovered that in developed countries where agricultural commodity pricing policies result in positive rates of protection, agricultural production is higher than it would be without intervention; for example, sugar production in France and the Federal Republic of Germany is estimated to be 50–60% higher, and rice production in Japan is more than double. In developing nations, where agricultural commodities are frequently protected at negative rates by price intervention measures, output is much lower than it would be in the absence of distortions—for example, wheat production in Egypt and Argentina is estimated to be 40–60% lower. The biases boost consumption in developing nations while discouraging it in wealthy countries; for example, wheat consumption in France and the Federal Republic of Germany is projected to be 6% lower than sugar consumption in the UK. In terms of trade consequences, the study discovered that pricing strategies reduce imports from industrial countries with nominal protection coefficients more than one and exports from developing countries with nominal protection coefficients less than one. Studies on the effects of protection in individual commodity sectors have also been conducted. The impact of a 25% consistent reduction in protection rates was studied in FAO research for the Intergovernmental Group on Cattle on the quantitative effects of market protection on international commerce in the beef sector. According to the study, global beef trade would have been 22% larger than it was in 1977–1979, and the average price in international trade would have been 7% higher. According to the report, this liberalization would allow low-cost developing countries to increase beef exports by more than 50%. According to a study of the dairy market, moving to multilateral free trade would not necessitate significant policy changes for the United States, the European Community, and Canada, whose domestic dairy prices were found to be near to the level of world prices that would prevail under free trade. Another study calculated the effects of the Community’s varying import duties on world prices in 197,657, using a variety of elasticities. The Community’s system of variable levies was expected to decrease world prices by at least 2–3% for wheat, barley, and maize using upper-limit price elasticities. The model indicated that the variable levies lowered world prices by 7–11% due to weaker world demand and supply elasticities.

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6.5.7.4. Market Instability The economic literature has extensively addressed the instability of specific commodity exports and exports from specific countries (Manger, 1979). In general, these studies indicated greater export instability in developing nations than in developed countries, as well as mixed results in terms of the stability of primary product export revenues versus manufactured goods export earnings. Staff estimates for the period 1972–1981 are as follows: •

Agricultural export volume and unit value were more volatile than total export volume and unit value; • The price volatility of agricultural exports was greater than the price volatility of these exports’ volumes; • Agricultural commodity output was more volatile than global commodity output in general. While agricultural policies are not the only, or even the primary, cause of market instability (weather-related production changes are also essential), they can be a substantial role. Because international agricultural markets are typically tiny in comparison to output and dominated by a few major importers or exporters, shifting surplus or deficit tonnage can generate significant worldwide market instability. Efforts to maintain domestic pricing stability can also contribute to foreign market instability. When global prices rise, variable import levies, for example, fall automatically. In this instance, import demand would be larger than under a constant nominal tariff, contributing to a further rise in world prices during an inflationary period. Similarly, when world prices are falling, the variable levies increase, limiting any growth in import demand. As a result, import demand becomes inelastic to fluctuations in global pricing. Stock management and surplus disposal can also contribute to market volatility, especially as these strategies are typically insufficient to supply new supplies during times of severe shortages.

6.5.8. Developing Countries Agricultural Trade Policy Reform Considerations (FAO) As a result of continuing trade discussions as well as policy advice from donors and international organizations, many developing nations are under pressure to lower their trade barriers to agricultural product entrance. Much of this pressure stems from the belief that agricultural trade liberalization should be pursued by all nations, regardless of their degree of development

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or the trade policies of their trading partners. More open trade policies, according to proponents, expose countries’ economic sectors to more competitive pressures, resulting in efficiency benefits as resources freed up from sectors that contract in the face of increased competition is redeployed to sectors where they would earn a higher return. This notion is backed up by a number of global trade simulation modeling methodologies, many of which have produced strong empirical evidence showing countries benefit from lower trade barriers. However, appeals for flexibility in trade policy change are becoming more common, allowing developing nations to preserve some level of protection for some agricultural exports. This apparent contradiction between “evidence” that fuller agricultural trade liberalization is the best strategy for developing countries, and calls for flexibility in the implementation of trade policy reforms, could be dismissed as a result of trade negotiators’ mercantilist stance, or as simply reflecting a debate about trade-offs between efficiency and nonefficiency objectives. While such dismissals may be justified in the case of today’s industrialized countries, developing countries with more competitive agricultural export sectors, or even poorer developing countries where agriculture is not a significant component of national economic activity, there are compelling efficiency arguments for questioning whether further agricultural trade liberalization should be a key component of trade policy reform. Some examples of trade policy reform contradictions are discussed in subsections.

6.5.8.1. Neglect of Agricultural Development Experience Recent arguments in favor of increased liberalization have tended to be based on analytical studies that either fail to acknowledge or are unable to incorporate ideas from the agricultural development literature, which is a fundamental challenge in the present trade policy discussion. For instance, agricultural producers in many developing countries encounter extensive market failures, which can greatly impair their ability to earn investible surpluses from agricultural production and use these surpluses to enable diversification into higher-value businesses. In cases of successful agriculture-led growth, the process of agricultural commercialization and related diversification into higher value-added activities has been observed to necessitate significant government intervention at an early stage of development to alleviate the pervasive nature of market failures as reflected in weak input and output markets, lack of seasonal financing, and limited availability of risk management instruments, combined with weak producer risk. While previous episodes of agricultural expansion show that government

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action is likely to be crucial, the question of whether a less-than-liberal trade policy should be part of such intervention remains unanswered.

6.5.8.2. Too Great a Focus on Export Expansion International debates on applied trade policy have tended to focus on promoting opportunities for increased exports to international markets, while downplaying the potential role of trade policy in improving the competitiveness of import-competing products, which are critical at the early stages of development. However, data suggests that expanding agricultural exports alone has not always been a realistic option for reducing poverty in many developing nations. A problem with the current debate is that any questioning of the need of export-led growth is often associated with the promotion of protectionist food self-sufficiency or food sovereignty initiatives, which have negative connotations, which are understandable in many cases. However, framing trade strategy selection in these terms is unnecessarily simplistic. Arguments about self-sufficiency vs. self-reliance for achieving national food security goals frequently dominate the agricultural trade policy debate. However, the notion that increasing agricultural product productivity can play a key role in promoting agriculture-led growth, particularly in areas where the agriculture sector is dominant in terms of total employment and income, is rarely acknowledged. It is critical that the debate distinguishes between calls for protectionist policies that are consistent with self-sufficiency goals and calls for some level of trade protection in activities where there is room for increasing productivity levels, which are currently uncompetitive in international markets but could become competitive over time, and which could be undermined in the interim by more competitive imports. Arguments for more protectionist agricultural trade policy regimes are commonly made in more advanced developing countries, which often have relatively commercialized agricultural sectors, on the basis of national food security concerns (as defined by the level of food self-sufficiency), the need to maintain agricultural producers’ incomes, and/or the provision of public goods. In poorer developing countries, where agricultural sectors are less developed but potentially more important in terms of contributing to the development and economic growth that underpins household food security, the arguments for intervention are more solidly based on the existence of widespread market failures and the difficulties in inducing technological improvements to allow productivity increases.

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6.5.8.3. Enhancing the Role of Agriculture A vibrant agricultural sector can contribute significantly to overall development, although the relative importance and type of these contributions vary per country. Increased agricultural productivity is necessary first for capital investment in agriculture and subsequently for the constant flow of surplus capital and labor to other sectors of the economy, where agriculture accounts for a substantial part of GDP and an even bigger share of employment. Rather than adopting a liberal policy stance from the start, countries that have achieved periods of sustained agricultural productivity growth have tended to gradually remove the constraints to continued growth while intervening to secure the necessary favorable environment for the transformation of their agriculture sectors. Induced innovation has been found during periods of border protection, with productivity growth rates exceeding those that may have been attained in more liberal circumstances. Technology, resource consumption, institutions, and markets must all be changed to deal with consecutive bottlenecks or limits affecting specific commodity systems if growth is to be sustained. In order for the sector to fulfill its function, agricultural trade policy must be consistent with this sequential relaxation of production restrictions.

6.5.8.4. Pros and Cons of Border Protection The impact of potentially increased food costs on the poor is one of the arguments against using border protection as part of a package to boost agricultural productivity growth. However, such explanations fail to account for the fact that: •

The vast majority of the impoverished still live in rural areas, and their livelihoods are heavily reliant on agricultural activities, whether through sales or employment; • The price of food staples in rural areas has varying effects on different rural households; • Poor urban households are more concerned about their employment income than the cost of food. In terms of such elements, the diversity of country conditions is frequently overlooked. Chile’s agricultural success, which was founded on deregulation and export expansion tactics, is often held up as a model for others to emulate. However, this overlooks the fact that Chile is not typical of many developing nations, as agriculture accounts for less than

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20% of total employment, agricultural exports account for less than 20% of total merchandise exports, and agriculture accounts for less than 10% of GDP. There is evidence that consolidation into larger farms has displaced the livelihoods of small producing households in some cases of export-led expansion. The number of people absorbed into alternative jobs is likely to be lower than the number of those who are displaced. In a country like Chile, where agriculture employs a small percentage of the population, the impact on income distribution may be negative, but it is likely to be dismissed as “insignificant.” However, in nations with larger agricultural sectors, a negative consequence in terms of distribution of gains and losses could be much more obvious. Because of the wide range of trade situations, production status, and agricultural responsibilities in developing countries, a “one-size-fits-all” trade liberalization/export expansion plan may be ineffective in a variety of situations. Is a strategy that involves an import substitution policy for agricultural food items, nevertheless, sensible? Many impoverished countries have yet to reach the point where higher-value items have a viable local market. Add to that the fact that agricultural export markets will continue to be hampered by distortive OECD policies and imperfect global markets, that there is significant potential for growth in the absolute value of domestic staple food markets in very poor countries, and that the majority of the rural poor work in import-competing food staple sectors, particularly in developing countries. In the short to medium term, home, and regional food markets are likely to be more promising than foreign markets for many of these poorer farmers. The argument that government interventions will be distortive and result in inefficient resource usage is frequently made against the establishment of a less than completely liberal trade policy regime. Analytic data implies that reforming agriculture and trade policies would result in considerable net welfare benefits for nations that are now developed and/or medium income (and which generally supported their agricultural industries during important stages of growth). However, where governments intervene to correct chronic market failures that prohibit essential investments in activities where the country would otherwise have a competitive advantage, this argument is less well-founded.

6.5.8.5. A Need for Greater Flexibility How much flexibility do developing nations need in trade discussions to allow them to pursue such programs if there are justifications for a less than liberal trade policy approach, particularly when it comes to the production of import-competing food staples? It is critical to distinguish between

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different types of countries. Some trade negotiators think that maintaining policy flexibility for certain categories of nations is critical in allowing them to sustain their agricultural industries until they reach a point where: •

They are in a better position to compete with imports that are more competitive or subsidized; and • Agriculture’s vital, if transitory, role in these countries’ economic development has been adequately explored during the course of successful economic development. Some model-based studies confirm key arguments made against the availability of policy space, suggesting that even when nations are given the freedom to continue to safeguard only a tiny number of tariff lines, the gains from multilateral trade liberalization are all but wiped out. More recent model-based evaluations, on the other hand, imply that the worldwide “losses” sustained by poor countries using special product provisions are likely to be minor. Whether or not using special product provisions would limit potential global advantages, their use has been approved on the grounds that they will help particular countries achieve their development goals by maintaining some level of protection for certain agricultural products. Another argument made against providing such flexibility is that, in the case of staple food production in rural areas, producers may already be well “insulated” from import competition, with or without tariff protection, due to large gaps between import and export parity prices in producing areas due to high transportation costs. The removal of obstacles that contribute to such margins, such as improvements in rural infrastructure, is critical to generating bigger volumes in rural markets. However, infrastructure upgrades may allow more competitive imports to penetrate the market, putting local producers at a disadvantage. As transportation costs decrease, border control may become necessary to avoid import surges while domestic companies invest in local manufacturing to take advantage of lower transaction costs and risks. In the present WTO debates, it has been stated that the proposed accords will not hinder the ability of most countries seeking policy space to enact required measures. Indeed, as a result of: • •

The fact that many (but by no means all) countries have a gap between their bound and implemented tariffs; That most developing countries never use their de minimis levels of domestic assistance;

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•

Many argue that a probable decrease in policy space as a result of a WTO agreement is a non-issue because least developed nations (LDCs) are already free from reduction commitments. However, demonstrating that no policy space will be lost as a result of an agreement is not the same as claiming that the present policy space is sufficient to provide suitable, but currently underutilized, levels of support to the farm sector.

6.5.8.6. Agricultural Trends Shaping Future Trade Policies Many factors are likely to influence future agriculture trade and trade policies. In the last 30 to 35 years, particularly since the mid-1970s and the previous food crisis, a more international food system has emerged, and policy concerns have switched to non-agricultural growth and more open trade. Food security has been largely ignored by the WTO and arguments surrounding agricultural trade. Nonetheless, recent global food market events have refocused the attention of many policymakers on food security. Aside from that, there have been a number of events that are likely to have a significant impact on global food markets and commerce. Below is a list of some of them.

6.5.8.6.1. Uneven Growth in the Global Economy Almost all worldwide estimates indicate that growth in developing countries, particularly in Asia, will be faster in the next decades, whether fast or sluggish. Demand for the most income elastic food goods, such as cattle, fruits, and vegetables, will rise as a result. If the majority of growth in many of the faster-growing economies occurs outside of agriculture, import demand will rise faster than overall demand. Concerns regarding how to meet this rising domestic food demand will impact developing country agricultural trade policy, as well as their attitudes toward the WTO, in the coming years. Similarly, rapid growth in non-agricultural industries may result in the familiar (from now developed countries) political demands to ease the adjustment through rural subsidies. This will put on the government to provide protection or domestic assistance. If the WTO restricts countries’ ability to implement appropriate policies, a conflict between WTO commitments and domestic adjustment forces may occur. As a result, some policy flexibility in WTO commitments of nations at various levels of development may be required. The risk of a significant slowdown in global economic growth coupled by political tensions or trade interruptions is perhaps more concerning for the

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global trade system as a whole. Oil supplies, which are reliant on a small group of nations, many of which have potentially unpredictable regimes, are of special concern. In the past, big increases in the price of crude oil were associated with periods of inflation and slow growth. While oil prices have lately fallen following a dramatic climb, most analysts believe that once the global economy recovers, oil prices will rise again. Other types of disruptions, whether financial or real, are also possible, and the question is whether the global trade system as it has evolved since the Kennedy Round can withstand a significant downturn in the global economy, which could lead to self-preservation policies that effectively destroy the mechanisms that have been painstakingly established. Can the trading system as a whole, as well as agricultural trade laws, survive a catastrophic slump like the one in the 1930s?

6.5.8.6.2. Growth in Agricultural Output and Investment The current period of high food prices has brought to the attention of governments the importance of investing in the agricultural sector to preserve and expand its capacity to fulfill the demands of a growing population. As a result of shifting priorities for public investment and a lack of financial incentives for private investment, research spending has lagged in recent years. In the last four decades, international prices for main agricultural food goods have fallen, although the trend appears to have paused or stopped around 1980. Could this be the result of a global agricultural productivity slowdown? The yields of major agricultural food products have increased in wealthy and middle-income developing countries, but have remained stagnant in least developed countries (LDC). In comparison to rich and middle-income economies, LDC yields are substantially lower. Given that yield discrepancies reflect a greater use of contemporary inputs (better seeds, fertilizers, and pesticides), it appears that there is significant possibility for developing countries to achieve yield levels equivalent to developed ones, but this will require significant investment. Increases in public investment in the production of essential foodstuffs are needed because of the potential for productivity improvements and the chances for appropriate world prices for food commodities. A rise in interest in infrastructure upgrades, which are typically a barrier to the marketing of local foods in poor nations, could complement this. However, in a time of financial constraint, public investment in agriculture may be impeded. On the other hand, the private sector’s role in keeping supply in line with demand will be critical. It is unclear whether private contributions in the required

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levels will be available. There has recently been a resurgence of interest in international agricultural land investment. The purchase of agricultural land in Africa for food production by various Gulf states has gotten the greatest attention, but this is just one of several current or planned investment flows with varying reasons. Investment firms in Europe and North America are also looking into prospects driven by potentially high expected returns on investment, owing to rising food prices and, in particular, the possibility of producing biofuel feedstock. Food security and a fear that reliance on foreign markets for food supplies has become riskier as a result of recent high food prices and policy-induced supply shocks has sparked a surge of interest. Simultaneously, a number of governments are working hard to attract such investments in order to exploit “surplus” land. The receiving country’s benefits are a big concern. Capital inflows, knowledge transfer, job creation, multiplier effects from local sourcing of labor and other inputs, and possibly an increase in domestic food supply should all contribute to this. FDI, on the other hand, may lead to a reliance on imported inputs and thus limited domestic multiplier effects. Because the overall goal of these investments is to export the items produced, there are other business models to consider, such as contractual relationships, as has been the case with the development of East African horticulture production for export to European supermarkets. It is also crucial to think about the various trade ramifications of any overt or concealed subsidies that come with such deals.

6.5.8.6.3. Continued Reform Towards Decoupled Support in Developed Countries Since 1985, there has been a paradigm shift in agriculture economic management in both rich and emerging nations, with deregulation and the supply of incentives. In the 1980s, developed countries’ policies shifted away from market intervention and toward direct payments. This process increased in the EU during the 1990s, as farm policy evolved to encompass environmental and quality aspects of food production, culminating in the 2003 reforms, which effectively abolished any link between farmer support payments and commodity market conditions for arable agriculture. In the United States, progress has been less linear, with an effort to delink payments and production in 1996, but relapses in 2002 and 2008 when commoditybased price support schemes proven to have strong support in the farm lobby and Congress. Given the increasing pressures and political demands resulting from the recent food scare and the financial crisis, the question for the next few decades is whether the reform process will continue toward agricultural

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policies that focus on productivity development and risk management. This trend would be compatible with a more open trading system and the removal of many of the barriers that developing nations encounter in selling food to industrialized countries’ markets. However, if the Doha negotiations are postponed or abandoned, the pace of reforms may slow.

6.5.8.6.4. Continued Policy Reform in Developing Countries The more fundamental question is whether developing countries will follow the same path in terms of market and producer protection. Much of the incentive for government involvement in agricultural markets in industrialized countries emerged as a result of differing patterns of adjustment in the agricultural and non-agricultural sectors. The fact that present protection levels by sector appear to be tied to the stage of economic development suggests that the problem of appropriate trade policy at different levels of development has to be addressed further. The main finding in the recent pattern of protection by developing and developed countries in agricultural, processed food, and non-agricultural non-food products is that developing countries (except China and India) have lower protection than most developed countries, particularly non-US, and non-EU countries. In the case of processed foods, both developed and developing countries appear to have large but comparable levels of protection, whereas protection for non-agriculture non-food goods is often stronger in developing countries than in developed countries. LDCs appear to have rather moderate levels of protection for both agricultural and non-agricultural products. If the historical pattern of agricultural protection, as evidenced by cross-sectional evidence, suggests that agriculture is first unprotected or even taxed at early stages of development, then goes through a cycle of protection and support as the country approaches middle income, and finally is liberalized, then attempts in the WTO to bind current levels of protection and support may prevent some developing countries and LDCs from having the flexibility they need. It is unclear if the pace of agricultural protection in now-developing countries will need to follow the historically customary trend. If it does, and if the WTO’s new rules on agriculture prohibit it, pressures for other sorts of support that are WTO-compliant may arise. In the worst-case scenario, the WTO might be jeopardized. To avoid this, it may be necessary to provide developing countries with adequate policy flexibility for agricultural trade-related policies.

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6.5.8.6.5. Global Volatility of Prices and Food Security This topic was previously highlighted, and as a result, the world’s agricultural trade is likely to suffer more unpredictability and volatility. Despite the liberalization of commerce and the globalization of agriculture, global price volatility has remained relatively constant over the last four decades. Price volatility threatens the global market’s credibility as a place where countries can buy food on a regular basis and use trade to augment domestic output. The current WTO regulations are unbalanced: they kick in when prices are low, but they do little to restrain government action when prices increase. So, while export subsidies and tariffs are regulated, export taxes are not, and export embargoes are rarely discussed. The ability of the global trading system to respond in times of price volatility will almost certainly be severely challenged in the future, necessitating some innovative institutional structures.

6.5.8.6.6. Continued Concern for Environmental Impacts of Agriculture The impact of agriculture on the environment was almost entirely absent from discussions on agricultural policy in the 1960s. It is quickly becoming a key factor in determining domestic and international agricultural policies. Agriculture emits around 14% of all greenhouse gases (GHGs) in the atmosphere, but it can also help to reduce GHG emissions. By making farm support payments conditional on good environmental practices, the EU has taken the lead on this problem. Other countries, on the other hand, are recasting economic assistance as a form of remuneration for environmental stewardship and the provision of public recreational goods. Other environmental concerns (apart from biofuel subsidies) include agriculture and forestry’s contribution to carbon sequestration and the problems produced by livestock methane emissions. The trading system is set up to recognize commodities based on their product features, rather than the process attributes required to calculate a carbon footprint. On the other hand, once the concept of product life-cycle analysis is embedded in national legislation, product differentiation by manufacturing process becomes unavoidable. As a result, unless this divergence is rectified, expect more confrontations over the problem of the environmental impact of trade goods production and processing processes. Will this problem boost or diminish food trade? Product differentiation is often beneficial to commerce. Several environmentally friendly biotechnologies may require resources from other

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nations with suitable manufacturing conditions, making commerce an important feature of this new industry. However, increased trade, particularly of large goods, may raise concerns about transportation’s environmental impact. Environmental policies might include carbon fees, which would stimulate domestic manufacturing at the expense of imports. The conclusion is that trade and environmental regulations will become more complicated.

6.5.8.6.7. Continued Concentration and Value Chain Development in the Food System Recent study has revealed that most global trade, including food trade, is dominated by a few huge multinational corporations. While this has resulted in more variety and affordable food as well as more consumer choice, particularly in industrialized countries, a side effect is that corporate decisions can influence millions of farmers and consumers. Concerns have grown that economic power concentration could eventually restrict rather than empower farmers and consumers. As supply chains grow, much manufacturing trade occurs within the same company. The food trade follows the same pattern. While many nations, particularly the industrialized ones, have antimonopoly and antitrust laws, similar regulations do not exist in international trade. Many countries consider competition difficulties to be part of the so-called Singapore issues, which are not acceptable as part of the current Doha agenda. Lack of proper data, as well as a legal vacuum, are two major obstacles to progress in this sector. For example, whose national or international authority should be in charge of disciplining a global corporation that has a monopoly on a market? It remains to be seen whether and when competition policy will resurface.

6.5.8.6.8. Consumer-Driven Food Attributes and the Rise of Private Standards The emergence of global supply chains, with supermarkets and food processors as the driving force, may have been the most visible embodiment of food industry globalization. The consumer has actively participated in this evolution. The successful endeavor to package health and environmental responsibility with meals, as well as animal welfare and, in certain circumstances, labor conditions, has revolutionized the economics of food trade in industrialized countries. Consumers in developing countries have appreciated the availability of non-local foods as well as the increased reliability and quality control that comes with larger firms and management

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competence. Most of these tendencies have resulted in private standards that are different or additional to those that apply under the WTO’s sanitary and phytosanitary (SPS) Agreement, which attempted to limit governments’ ability to set import standards that were not justified by risk assessment and scientific evidence. The SPS Agreement has been beneficial in the field of animal and plant diseases, but it has not been effective in the field of private standards. The lack of jurisprudence on private standards, combined with their rapid growth, has resulted in a slew of problems in the worldwide food industry. Legal concerns relating to the multilateral agreement design of GATT, SPS, and TBT accords, as well as practical issues relating to the effects of private standards, particularly for developing nations, and proposed methods to remedy or mitigate these repercussions. The legal difficulties concern how the GATT, the SPS, and the TBT treat private standards. What is the connection between the SPS pact and private standards? Is the TBT agreement applicable to private standards, particularly the Code of Good Practice? The answers to these concerns are contingent on specific definitional issues in the SPS and TBT accords being resolved. Answering these questions is challenging due to a lack of precedent. This makes it difficult for national governments to evaluate whether private standards are a valid private-sector activity in which governments should not intervene, or whether the SPS/TBT accords require importing nations’ governments to be responsible for private standards. The blurring of the barrier between private and public standards is particularly problematic for the analysis. When does the connection between a government agency and a private standard-setting organization render the distinction between “voluntary” private standards and official standards meaningless? What happens if a government standardizing body produces a national safety standard based on a privately established standard, or if a member allows imported goods into the country if they are certified to a private standard that surpasses official requirements? These difficulties are not addressed in WTO jurisprudence, and the SPS and TBT agreements do not provide easy answers. The question of what legal consensus might be reached is also problematic. What would happen if private standards were brought before the WTO? What would be the consequences of attempting to broaden the scope of the SPS and TBT agreements to include private standards? Would these findings and ramifications jeopardize the international food-trade system’s viability? Are there any coregulatory approaches that can be employed under the WTO to help reach a consensus? Should a separate regulatory area be set out for private standards? What function should intergovernmental

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standard-setting organizations play? Is it desirable and practical to monitor private standards on a multilateral basis? These are complicated challenges with no simple solutions. How do small farmers cope with the expenses of compliance? This is the most important practical issue that arises from the use of private standards in the global food supply. Is there a way to make certification more practicable and economical for small-scale companies while still guaranteeing the same level of assurance? Is it possible to apply a practical interpretation of standards to reduce excessive demands and maximize chances for value addition (VA)? Is there a model that meets the needs of the retail supply chain while also being feasible and economical for small-scale producers? Countries will have to decide whether or not to try to change the SPS Agreement to allow government rules to respond to consumer complaints that have not been proven to be scientifically valid. In the absence of a remedy, the SPS Agreement will become more useless for the majority of food trade.

6.5.8.6.9. The Proliferation of Regional and Bilateral Agreements As more regional and bilateral trade agreements are signed, will the global food market begin to fragment? Or will these regional and bilateral trade agreements effectively merge to form a worldwide free trade zone? Many bilateral and regional trade agreements have already been signed by significant countries or trading blocs such as the EU, the United States of America (USA), and Japan, and others are in the works. If agriculture is incorporated at all, it is usually done so cautiously so as not to upset the status quo and with numerous exemptions. Such accords have an inherent asymmetry, as the larger country with the larger market has an advantage over the smaller one. Preferential access to the larger market is frequently purchased at the expense of the developed nation partner’s product entering the smaller country’s market more freely. However, one key impediment to taking use of such accords is adherence to the rules of origin (RoO), which can impose unnecessary cost and stress on many administratively weaker nations, resulting in the agreement’s potential benefits not being realized.

6.5.8.6.10. Growing Water Scarcity and Increased Food Emergencies Due to Climatic Shocks A half-billion people live in countries that are chronically water-scarce. By 2050, the population will have surpassed 4 billion. Agriculture, which uses the largest water resources, accounting for 69% of global fresh water

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use in 2000, will be severely impacted. Irrigation expansion has previously contributed to increased agricultural productivity and production, but this may not be the case in the future due to increasing water scarcity in many parts of the world (and especially according to the Intergovernmental Panel on Climate Change (IPCC) report on climate change in low-income developing countries). Irrigated land accounts for only 17% of the world’s arable land, but it generates more than a third of the world’s total food supply. Irrigation efficiency varies significantly by country, and various subsidies and a lack of adequate pricing mechanisms tend to distort incentives for water conservation. Agricultural water requirements can shift as dietary habits shift. While it takes about 2000 liters of water on average to create the amount of food consumed by one person in one day (about 500 times the amount of water used directly per person per day), this varies significantly depending on the type of food consumed. For example, one kilogram of rice grown in paddies takes approximately 1900 gallons of water. However, one kilogram of beef requires 15,000 liters of water. The premise is that changing incomes and habits, together with changing water availability, will lead to increased agricultural commerce from areas with ample water resources to others with limited water resources. Climate change has caused increasing water scarcity in numerous parts of the world, as well as increased variability in production and food shortages. Over the last two decades, the incidence of yearly food emergencies, particularly those caused by natural catastrophes, has increased dramatically. This means that food trade, and in particular the growing need for emergency aid, will be another issue that the global trading system must consider.

6.5.9. Private Standards and Agricultural Trade Private standards have emerged and proliferated during the last few decades. Private standards relate to any rules imposed by non-governmental entities, such as wholesale or retail businesses, national producer associations, civil society groups, or a combination of them, while there is no internationally recognized definition (Lund, & Manyika, 2016). They primarily cover food safety, environmental protection, animal welfare, fair trade, working conditions, and human rights protection, among other things. Agriculture, forestry, aquaculture, fashion, and fair trade are among the sectors where private standards are being developed, but other industries are following suit. While private standards may encourage improved production practices and performance in exporting countries, and may give complying producers a competitive advantage, their proliferation and increased influence has

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become a growing source of concern for suppliers, particularly those in developing exporting countries. In recent years, there have been several discussions and disputes over private trade rules. The main topics of discussion include their consequences for market access and development, their legal standing in the World Trade Organization (WTO), their ramifications for global governance, and how to maximize their benefits while limiting their hazards. Unfortunately, not much progress has been made thus far. Despite years of work by a working group led by China and New Zealand, the WTO Committee on SPS measures (SPS Committee) has yet to obtain an agreement on a working definition of SPS-related private standards (WTO, 2014). The fourth revision of the WTO agreement on the application of SPS measures (SPS Agreement), which was supposed to be finished by the end of 2014, has resulted in an impasse in WTO Member negotiations over private standards. The Code of Good Practice for the Preparation, Adoption, and Application of Standards (Code of Good Practice), which is open for acceptance by standardizing bodies, including non-governmental bodies, was brought to the attention of members of the Committee on technical barriers to trade (TBT Committee). Members have not notified the WTO of any of these nongovernmental bodies accepting the Code of Good Practice, nor have they shared any experiences or information on the “reasonable measures” they have taken “to ensure that… non-governmental standardizing bodies within their territories accept and comply with the Code of Good Practice” (Article 4 of the TBT Agreement).

6.5.9.1. Trends Among Private Standards Because of several factors, such as the expanding market dominance of transnational firms and major retailers, and the establishment of global value chains (GVCs) that span multiple countries, private standards have been increasingly prominent in recent decades. These are frequently coordinated by lead corporations that utilize standards to manage production processes and supply networks around the world, ensuring coherence among value chain partners. Civil society organizations that address environmental and social issues through private standards, also known as voluntary sustainability standards, are another reason driving the rise in importance of private standards (VSS). There are four key factors driving the need for private agricultural standards: •

The emergence of GVCs coordinated by large corporations either as system integrators or as key buyers (e.g., retailers and supermarket chains): The following assertion is made in

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•

•

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UNCTAD’s World Investment Report (2013: XXII). TNCs usually organize GVCs, with cross-border input and output commerce occurring inside their networks of affiliates, contractual partners, and arm’s-length suppliers. GVCs coordinated by TNCs account for around 80% of global trade. TNCs’ investment decisions impact the patterns of value-added trade in GVCs to a large extent. Countries with a stronger FDI presence in relation to the size of their economies are more likely to participate in GVCs and generate more domestic value added from trade. TNCs manage GVCs through a complex web of supplier connections and governance modes ranging from direct ownership of foreign affiliates to contractual agreements (in non-equity modes of international production, or NEMs), to arm’s length transactions. These governance modes, as well as the power structures that occur in GVCs, have a substantial impact on the distribution of economic gains from trade and the long-term development implications. A typology of governance structures of GVCs (Gereffi et al., 2005): Standards can be employed by lead firms to ensure that inputs, quality, working conditions, environmental impacts, and other requirements are consistent throughout GVCs (in order to provide “traceability,” meet “chain of custody” standards, and so on). Societal concerns addressing the need for more ecologically sustainable and better social production conditions and environmentally friendly products: Consumers, primarily in developed countries, but also large companies, nongovernmental organizations (NGOs), and standards consortia engaged in standard-setting and, in some cases, accreditation, and certification schemes that support the implementation and rapid market penetration of standards, are the main players in this area. Fairtrade International, Global-GAP, Rainforest Alliance, Better Cotton Initiative, Marine Stewardship Council, Forest Stewardship Council, UTZ Certified, and many others are examples of such organizations that are primarily involved in fair trade, agriculture, forestry, aquaculture, and cotton, but are expanding into other areas as well (oil and gas, aluminum value chain, building, tourism services, and so on). All of these groups have a distinct focus on specific items or aspects of production

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•

and trade (e.g., adequate wage and human rights issues). Private standards are frequently viewed from this perspective as a way to fill in the gaps left by legislation or other standards, as well as a way to raise the bar in order to attain better levels of economic, social, and environmental sustainability. Branding and marketing by companies to obtain additional benefits: In many cases private standards may be used to support green or bio-labeling schemes that lack a scientific and evidence basis (“greenwashing”): The proliferation of brands and labels without some sort of “clearing house” to ensure that they are founded on scientific evidence causes customer confusion, raises production costs, and affects exports from developing nations.

6.5.9.2. Impacts of Private Standards The introduction and spread of strict buyer-driven, process-oriented private norms may result in exclusive and exploitative supply chains, with negative consequences for trade, development, and global governance.

6.5.9.2.1. Trade-Related Problems Caused by Private Standards In the WTO, developing countries are increasingly concerned about private standards. According to the results of a study conducted by the WTO/TBT Secretariat in 2009 (WTO, 2009a), exporters view compliance with private standards to be a prerequisite for exporting to a wide number of developed country markets. Farmers and producers who are unable to comply with private standards, even if they fulfill Codex or other formal standardssetters’ norms, will lose market access and be compelled to seek alternate markets. According to the poll, some merchants want extremely stringent maximum residue limits (MRLs) for pesticides, calculated as a percentage of national MRLs, which are often more stringent than MRLs defined under Codex standards for the same items. Low MRLs result in the exclusion of certain producers from the market, despite the fact that they meet Codex other formal international criteria. A number of responses argue that such restrictive MRLs are not scientifically justified nor improve consumer food safety. Other problems include the high cost of compliance (an average annual certification price for a private standard can range from US $2,000 to US $8,000). This is in addition to the costs of complying with formal standards; annual certification requirements for firms, even if they have a good track record; nontransparent and inconsistent evaluations by some

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auditors; lack of a price premium despite the costs of certification; multiplicity of mutually incompatible private standards; disproportionate impact on smallholders; lack of transparency and non-involvement of exporters and other stakeholders The United Nations Forum on Sustainability Standards (UNFSS), a joint initiative of five UN agencies (the Food and Agricultural Organization (FAO), the International Trade Center (ITC), the United Nations Conference on Trade and Development (UNCTAD), the United Nations Environment Program (UNEP), and the United Nations Industrial Development Organization (UNIDO)), identified trade-related challenges similar to those identified by the WTO Secretariat in 2013 (UNFSS, 2013). Furthermore, the UNFSS points out that many commercial standards are not science-based, and that the proliferation of private standards may jeopardize sustainability goals and confuse producers and consumers. Conditions under which private standards can produce specific trade-related issues, which may be at the heart of the worries about private standards: •

a combination of a high degree of standard or scheme enforcement (supported by major market actors); • a lack of openness, transparency, and inclusivity in the development process (due to these market actors’ direct or indirect control of the development process); and • a medium to high level of standard market penetration (through the market power of these players). Other market participants may be forced out of a market if they try to evade such a standard. They also have a valid argument that the standard is imposed on them due to a combination of market power and a lack of transparency in its creation.

6.5.9.2.2. Private Standards and Development Many private standards are being produced without proper representation from developing countries, which is concerning. The absence of consideration of developing countries’ unique development, financial, and trade demands in the creation and application of private standards and accompanying certification schemes explains why private standards often create unneeded impediments to exports from developing countries.

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6.5.9.2.3. Private Standards and Challenges for the Multilateral Trading System The proliferation of private standards has the potential to undermine the value, credibility, and relevance of the multilateral trading system, international standards developed through the formal standardization system, and even government regulations, particularly from the perspective of developing countries. The question of whether private standards are covered by WTO regulations has sparked passionate debate. The WTO TBT and SPS accords generally deal with worldwide standards and conformity assessment schemes, as well as those adopted by states. The uncontrolled expansion of private standards is harming nations’ responsibility for the behavior of the bodies that have issued them, posing serious challenges to the legitimacy of the trade system. The WTO has members, and there is evidence that private standards are causing discrimination and trade barriers. There are compelling grounds for applying WTO rules to private standards, particularly the TBT and SPS agreements: First, the TBT and SPS agreements require governments to “take such reasonable measures as may be available to them” to ensure that “nongovernmental” entities or bodies “within their territories” adhere to certain principles outlined in the agreements, such as transparency, nondiscrimination, scientific justification, and the use of international standards as a basis, among other things (Articles 4 and 8 of the TBT Agreement, and Article 13 of the SPS Agreement). Second, Members “shall not take measures that have the effect of, directly or indirectly, requiring or encouraging” “non-governmental” entities or bodies “to act in a manner inconsistent with” the provisions of the agreements, according to Articles 4 and 8 of the TBT Agreement and Article 13 of the SPS Agreement. Third, the TBT and SPS agreements require Members to depend on nongovernmental organizations or agencies to conduct conformity assessments only if they comply with the applicable rules (Article 13 of the SPS Agreement and Article 8 of the TBT Agreement).

6.5.9.2.4. Private Standards and Public Governance Private standards are frequently produced to fill gaps in standards developed by official standardization systems or public agencies, such as government legislation and internationally recognized standards. However, the proliferation of private standards can lead to competition, duplication, and even disputes between private standards and those produced through the formal standardization system. Private standards, in particular, have

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the potential to undermine the functions of governments and international standards-setting groups, and in certain cases, even render their work obsolete. This leads to inefficiencies in accomplishing public policy goals, misunderstanding among producers and consumers, and doubts about the legitimacy of market-driven private activities. It is therefore critical that private standards-setters adhere to certain codes of good practice in standard development and application to ensure that standards developed through the formal standardization system always play a key role in protecting public goods and correcting market failures, and that there is greater complementarity and harmonization between private standards and standards developed through the formal standardization system.

6.5.9.3. Recommendations to Tackle Private Standard Challenges There are short-term and long-term recommendations available. Regardless of this distinction, it is recommended that both be implemented simultaneously. The following are some short-term suggestions: •

•

Develop an Integrated and Holistic Approach within the WTO: Private norms and their potential harmful consequences should be discussed together in the WTO’s TBT, SPS, and Trade and Environment Committees. The attempt to limit the discussion in the SPS Committee to the definition of what constitutes a private standard and postpone the problem in the TBT Committee should be revisited. A fair assessment of the problem reveals that some private standards address sustainability issues, which fall under the purview of the TBT and Trade and Environment Committees in addition to the SPS Committee. To overcome this artificial divide, private standards should be reviewed in joint meetings of the SPS and TBT Committees, as well as the Trade and Environment Committee, to gain a better understanding of the nature and scope of the issues at stake. To address the full complexity of private standards, an integrated and holistic strategy is required. Launch a Multi-Stakeholder Dialog: The WTO may consider beginning a multistakeholder debate in partnership with other organizations such as the UNFSS, the ITC, the International Organization for Standardization (ISO), the Codex Alimentarius Commission, the World Organization for Animal Health (OIE), and maybe others. Standards-setting bodies from the formal and

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private sectors, as well as major standards consumers, are key organizations and stakeholders. • Policy Recommendations to Meet the Challenges of Private Standards: Representatives from transnational corporations (TNCs) and relevant international organizations could be asked to assess and debate private standards concerns. This would include their interaction with formal standards in order to build a shared knowledge of the challenges and potential for fragmentation of the present system of standardization, as well as to encourage private behavior that is consistent with the TBT and SPS agreements. • Establish National Focal Points: In order to promote transparency, the establishment of private standards focal points in all relevant countries should be considered. Private standards may have focal points in all interested nations, as TBT and SPS laws require Members to establish inquiry sites. The interests of trade, quality, agriculture, agribusiness, industry, certification, and standardization entities could be represented by private or public organizations in the countries. Its role could be to address concerns relating to various trade barriers resulting from the growth of private standards. • Encourage Formal Standards Bodies to Strengthen Their Role: Formal standards organizations such as the ISO, the International Electrotechnical Commission (IEC) and its members, national standards bodies from over 160 countries, and regional partner organizations should consider taking appropriate measures to better serve those interests that would otherwise support the development and proliferation of private standards. Longer term recommendations to mitigate challenges due to private standard include: •

Establish a Standing (Voluntary) Peer Group: To review, monitor, and recommend actions in this area, a standing (voluntary) peer group of leading standards setters from the formal standards system as well as private standards setters, together with regulators, main standards users, TNC representatives, and relevant international organizations, could be formed. Its main goal could be to negotiate a Code of Conduct for Standards Development and Implementation, based on existing models (e.g., ISO/IEC Guide 59, the TBT Code of Good Practice, the six

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•

•

•

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principles for the development of international standards, guides, and recommendations resulting from the TBT Agreement’s Second Triennial Review, and the ISEAL Alliance’s StandardSetting Code) to ensure transparency and nondiscrimination. A “secretariat” or a “membership” paradigm for this peer group could be used. While a membership model, such as the ISO’s, may generate more support for the governance process among member organizations and States, and may make it easier to negotiate plurilateral or multilateral agreements, a secretariat model, such as the UNFSS’s, would have more decision-making autonomy and arrive at its goal faster. Clarify and Strengthen WTO Rules: The WTO should do a lot of work. The reality of private standards must be reflected in current agreements. To address the problems created by this reality, the goal is to clarify, improve, and develop guidelines for the implementation of Article 13 of the SPS Agreement, as well as Articles 4.1, 8.1, and 8.2 of the TBT Agreement. One goal may be to incorporate private standards in the TBT Agreement’s “Code of Good Practice” and the TBT Committee’s “Decision on Principles for the Development of International Standards, Guides, and Recommendations to the Preparation and Application of All Standards.” Clarify the Scope of Responsibility of Certain WTO Bodies: Clarifying the scope of authority of current WTO organizations, such as the TBT, SPS, and Trade and Environment Committees, to address particular trade issues relating to private standards is another crucial task. Without this clarification, the issues with private standards that many Members now confront will probably become commercial conflicts and be brought to the WTO’s Dispute Settlement Body. Establish a New Body: Because of the development of private standards and the need for global governance, it could be worthwhile to explore forming a new body with input from major parties. A new agency may be better suited to address the broader issues of the growth of private standards and their complexity. The goal is to create and encourage the implementation of fundamental concepts, regulations, and tools for the formation, enforcement, and resolution of such standards. This entity will also be in charge of representing their constituents in international trade forums, such as the WTO.

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INDEX

A

B

Accounts receivable 166, 171 Accumulating equity 169 Advertising 24, 40, 59, 62 Agricultural bargaining cooperatives 185 Agricultural commodities 24, 33, 37, 43, 48, 55 Agricultural Cooperative Council of Oregon (ACCO) 183 Agricultural Credit Bank (ACB) 166 Agricultural economy 85 Agricultural extension 76 Agricultural marketing 2, 7, 8, 9, 10, 12 agricultural mechanization 2 Agricultural product pricing 102 agricultural raw materials 2 agricultural resources 103 agricultural value chains (AVCs) 70 agriculture production clusters 77 Agriculture products 24 Agrochemicals 71 Air transportation 26, 28 Apples 24

bags 24, 46 balance of trade (BOT) 195 bioethanol 85 biofuels 84, 85, 86, 88 bottles 24 branding 24 Business and Employment Cooperative (BECs) 150 Business models 76

C cartons 24 cash 146, 154, 161, 163, 166, 167, 168, 171, 175, 186 Central Cottage Industries Corporation (CCIC) 199 cereals 24, 30 certificate of review (COR) 188 charity values 145 CIF (cost insurance freight) 201 commerce 103 Commodity Credit Corporation (CCC) 212 commodity exchange linkages 76

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Common Agricultural Policy (CAP) 209 Consumer demand 106, 109 consumer welfare 102 consumption 24, 25, 29, 30, 35, 37, 40, 41, 59, 66 container 24, 30, 31, 32, 59 contract farming systems 76 Cooperative marketing 163 cooperative movement 145, 146 cooperative stores 146 cost of goods sold (COGS) 85 Cost-oriented pricing 106 cotton 24, 42, 49, 50, 66 Crop production 84 crops 7, 8, 18 Cross-Price Elasticity 110

D demand dynamics 108 Demand-oriented pricing 106 demand theory 106 demographic variables 107 derived demand 110 Domestic trade 193

E Economic democracy 147 economic forces 104 economic theory 104, 107, 108 educational institutes 146 electronic networks 76 enhanced management information systems 76 Entrepôt Trade 194, 195 ethnicity 107 European Agricultural Guarantee and Guidance Fund (EAGGF) 210

exchange rates 103 Export Oriented Units (EOU) 203 Export Processing Zones (EPZs) 203 Export Trade 195 Export Trading Companies (ETCs) 188 External trade 194, 196, 197

F farm credit system (FCS) 166 farmer producer organizations (FPOs) 74 FBO (farmer-based organizations) 79 fertilizers 2, 19 financial institutions 146, 150 financing 6 FOB (free on board) 201 Food and Agriculture Organization (FAO) 87 food habits 2 Food Retail Chains (FRC) 75 food security 81, 83, 85, 92, 97 Food Security Army 76 foreign aid 103 foreign direct investment (FDI) 192 foreign trade 192, 193, 194, 197

G global aviation 26 globalization 25, 26 global policy environment 71 global positioning systems (GPSs) 115 Global trade 192 global value chains (GVCs) 258 global warming 84, 92, 98

Index

government budget deficits 103 greenhouse gases (GHGs) 253 gross domestic product (GDP) 241 gross national product (GNP) 240

H Handicrafts, and Handloom Export Corporation (HHEC) 199 herbicides 2 High yielding varieties 2 Home commerce 193 Home trade 193 Human interactions 70

I ICTs (information and communications technologies) 76 Import trade 195 income elasticity 110 industrial firms 146 information technology (IT) 87 insecticide 72 integrated market 5 Intergovernmental Panel on Climate Change (IPCC) 257 Internal commerce 193 internal trade 193 International commerce 192 International Co-operative Alliance (ICA) 144 International Electrotechnical Commission (IEC) 264 international market 2, 15 International Organization for Standardization (ISO) 263 International Sugar Agreement (ISA) 233 international trade 194, 195, 196, 197, 198, 199, 201, 203, 205,

273

221, 223, 239, 242, 254, 265 Inter-temporal arbitrage 109 Inventory 166

J jewelry 192 jute 24

K knowledge 70, 72, 73, 80, 89

L least developed countries (LDC) 250 legumes 70 letter of permission (LOP) 204 libertarian socialism 147 limited liability companies (LLCs) 153 livestock 7 logistics 26, 28

M macroeconomic variables 104 Market behavior 5 market conduct 5 Market demand 107 market information transmission 6 Marketing Agencies-in-Common (MACs) 188 marketing channel 163 marketing costs 24, 39, 67 marketing function 22, 40, 50, 63 market performance 5, 6 Market power concentration 4 market structure 4, 5, 6, 7 maximum residue limits (MRLs) 260

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mission statement 176 mobile banking 76 monetary compensating amounts (MCAs) 210 monetary policy 103 Monopolistic competition 119, 126 multinational laws 192

N NABARD (National Bank for Agriculture and Rural Development) 75 National Cooperative Business Association 147 National Council of Farmer Cooperatives (NCFC) 184 national law 146 New Generation Cooperatives (NGCs) 153 NGO (Non-Governmental Organization) 76

O OECD (Organization for Economic Co-Operation and Development) 92 oilseeds 24, 50, 66 oligopoly 4 oligopsony 4, 14 olive oil 209, 221, 222 Organization of Petroleum Exporting Countries (OPEC) 125

P Packaging 24, 25, 31 parcels 24 Patronage retention 168 population growth 103 Price Elasticity 110, 111

Price volatility 103 pricing theory 110, 119 pulses 24

R research and development (R&D) 127 Retail Trade 194 return on investment (ROI) 128 roots 70 rural advisory services (RAS) 79

S sanitary and phytosanitary (SPS) 255 SHGs (self-help groups) 78 spare parts 192 Speculative demand 109 static demand 140 stocks 192, 211, 219, 221, 224, 235 storage 6, 7, 9, 10, 11, 12, 13, 18 strategic business units (SBUs) 128 Strategic planning 176, 177, 183 supply chain management 26

T telecommunication networks 26 textiles 70 Total Elasticity 110 Transportation 6 tubers 70

U United States International Trade Commission (USITC) 220 urbanization 2 USSR’s (Union of Soviet Socialist Republics) 147

Index

275

V

W

value addition (VA) 2, 256 Value-based approaches 106 value chain 70, 71, 72, 73, 74, 76, 77, 78, 79, 80, 81, 82, 83, 86, 87, 88, 91, 92, 97, 98, 99 vegetables 25, 31, 43, 45, 49, 57, 60

Wholesale Trade 194 wine 192, 238 wool 24, 49 World Trade Organization (WTO) 85, 258