Agricultural Marketing

Agricultural marketing can be defined as the performance of all business activities included in the flow of products from the beginning of agricultural production until they are in the hands of consumers - “from the farm to the fork.” Agricultural marketing is more than just selling a commodity and receiving payment: it consists of a supply chain which combines capital items such as land and livestock, Labour, purchased inputs, equipment, Transportation, advertising, processing, and selling (wholesaling and retailing). This integrates the flow of goods and information in response to consumer demand, from the farm through to delivery to the consumer. Some view marketing as the most important activity that a business does; however, production and financial and human resource activities are also essential to a successful agricultural business.

Marketing functions are specialized activities performed in accomplishing the marketing process. There are three groups of marketing functions: exchange, physical, and facilitating. Exchange functions consist of buying and selling; physical functions include storage, transportation, and processing; facilitating functions are comprised of standardizing and grading, financing, risk taking, securing marketing information, and promotion and advertising. As these functions of marketing are integrated throughout the supply chain, a product's raw form is converted into a finished product at a location that is convenient for the consumer. It is also available at a time when consumers want it; the transformation of a product through these processes creates a level of satisfaction for the end user; and a transfer of ownership takes place, often several times, along the supply chain. Five agricultural supply chains as seen by Saskatchewan farmers marketing their products are highlighted below.

An open market pricing mechanism exists for many agricultural products including lentil, field pea, chickpea, Rye, Mustard, canary seed, herbs, spices, bison and elk. These commodities priced on the open market have no formal mechanism of price discovery: they are not sold on a centralized exchange, and there is no futures or options market. The open market is freely competitive, and price is determined through open competition. There are no restrictions as to where open market commodities are sold, and the marketplace is accessible to all. Commodities sold on the open market are subject to marketplace fluctuations: for example, the price received for most open market commodities declines as production increases. Contracts are sometimes used to provide protection from this uncertainty. Commodities sold under contract may have production volumes and prices predetermined prior to delivery or even prior to the growing season. Market information may be difficult to obtain, and prices may vary for similar products on the same day.

An open market pricing mechanism, together with a corresponding futures (and options) market, exists for some agricultural products including canola, feed Barley and feed wheat at the Winnipeg Commodity Exchange. A futures market also exists for Wheat in the United States on three exchanges: the Minneapolis Grain Exchange, the Kansas City Board of Trade, and the Chicago Board of Trade. Cattle and hogs are dealt with at the Chicago Mercantile Exchange. These United States futures markets may be used as a price discovery and risk management mechanism for commodities produced in Saskatchewan. However, there is an added degree of risk due to fluctuations in the dollar exchange rate between the two countries and to border disruptions that may restrict the flow of commodities from Canada to the United States, thus affecting the hedge. Price risk is inherent in the production of agricultural commodities: farmers and firms involved in marketing food products are exposed to large swings in price. A futures market is not only a method of price discovery, but also a risk management mechanism: it is a centralized facility where buyers and sellers meet to buy and sell futures contracts and options. Futures contracts are legally binding contracts with the obligation to deliver (sell) or accept delivery of (buy) a specific commodity at a specific place and point in time, with price as the only factor to negotiate. Futures contracts offer a marketing tool that producers and users of agricultural commodities can use to protect profit margins against unfavourable price changes. Through a process called hedging, a futures position is taken that is equal and opposite to the position held of the physical commodity. The futures position is offset prior to the settlement date at the time the physical commodity is either bought or sold: in this way, a futures market can be used as a temporary substitute for the purchase and sale of actual commodities. Some exchanges also provide an options market that offers the opportunity, but not the obligation, to obtain a futures contract by purchasing a put or call option.

Saskatchewan has a history of marketing commodities through single-desk selling agencies. These agencies take possession of the products they are marketing on behalf of farmers. For many years all hogs sold in Saskatchewan had to be marketed through a single-desk selling agency, SPI Marketing Group, which remained in effect until April 1, 1998. Since that time, producers have been free to market their hogs as they choose, either through a newly formed SPI Marketing Group Inc., or directly on the open market. Today, Saskatchewan hogs are, in effect, marketed in a dual marketing environment. Wheat and barley produced in Saskatchewan and sold for export or domestic human consumption must be marketed through a single-desk marketing board known as the Canadian Wheat Board (CWB), which markets wheat and barley for western Canadian farmers, all sales revenue being returned to farmers less marketing costs. The goal of single-desk selling is to allow farmers to sell as one entity, thus exerting a degree of market power within Canada and around the world - instead of as individual farmers competing against one another. In this way, farmers may be able to command a higher return for their grain. The CWB has a number of pricing mechanisms available to farmers. Price pooling ensures that all farmers who deliver the same grade and quality of wheat and barley anytime throughout the crop year (August 1 to July 31) receive the same price at the end of that year. Farmers receive an initial payment for part of the value of their wheat or barley upon delivery, and a final payment once the CWB has marketed all grain delivered within a crop year. The CWB also offers a number of producer payment options, allowing producers to take advantage of a number of risk-management pricing mechanisms; these include fixed price and basis contracts, early payment options, and guaranteed delivery contracts. The CWB is continually evolving as it responds to a changing marketplace and changing farmers' demands.

Supply management is a system of marketing whereby producers use quotas to control the domestic supply of a number of commodities including eggs, chickens, turkeys, and dairy products. Supply management was implemented to ensure stable domestic consumer supplies and a return to producers that covered their cost of production plus a reasonable return on investment. Through federal-provincial agreements, each province administers the production of supply-managed commodities within its borders through the use of a production quota. Provincial commodity marketing boards coordinate what individual producers are entitled to market provincially during a specific production period. A national marketing agency also regulates the volume of product marketed interprovincially and for export though the use of quota for some products. Imports are limited in these commodities by tariffs which were negotiated at the World Trade Organization (WTO).

A number of producers have responded to the uncertainty of open markets by marketing commodities through producer-led integrated marketing systems. Examples include producers of hogs, poultry and Bison. Producers are moving along the supply chain (closer to the end user) in an effort to capture a greater portion of the consumer food dollar. Primary producers vertically integrate, combining with shippers, packers and processors, using a variety of business arrangements such as Co-operatives, partnerships and direct buyouts. New- generation Co-operatives are a recent example where farmers establish a closed co-operative to market co-operatively and own shares according to their level of production. These co-operatives represent a new effort by farmers to respond to specialized niche markets and to the challenges of deregulated agricultural markets.

Robert G. Roy

Print Entry

Further Reading

Carter, C.A. 2003. Futures and Options Markets: An Introduction. Toronto: Prentice Hall; Kohls, R.L. and J.N. Uhl. 2002. Marketing of Agricultural Products. Toronto: Prentice Hall.