Marketing of Agricultural Products RIC H A R D L. K 0 H L S, P II , D , DEPARTMENT OF ACRICULTURAL ECONO:!lIICS PURDUE UNIVERSITY A8GR \L r J CCntral LI'b ' I aI'\, HYdcrab:lCl ' G947 1/lIII/! 11!I/lIIIIIiillllllllJ 'The Macmillan Company, New York COPYRIGHT, 195'5', BY THE MACMILLAN COMPANY PUBLISHED SIMULTANEOUSLY IN CANADA All rights reserved-no part of this book may be reproduced in any form without permission in writing from the publisher, except by a reviewer who wishes to quote brief passages in connection with a review written for inclusion in magazine or newspaper. PRINTED IN THE UNITED STATES OF AMERICA FIRST PRINTING MY GRANDPARENTS- TO WHOM lOWE MY INTEREST IN AGRICULTURE PREFACE In this time of ever-increasing emphasis on the marketing phase of our economy, no explanation is needed for the addition of another book to the field of study of agricultural marketing. This book is written primarily for those who are just beginning their study of the marketing of farm products. It is also designed for the use of both students who have had little or no previous contact with economics and those who have had elementary eco nomics. The chapters on elementary price theory may easily be omitted for the latter group. The viewpoint taken is that of the farm producer and those most interested in the farmers' problems and well-being. It does not lay claim to being a complete text adequately covering all phases of marketing. The commodity chapters must of necessity treat inadequately some things which many instructors feel important. For after all, entire texts are de voted to the study of individual commodities. Those who have a primary interest in food processing, wholesaling, and retailing should seek elsewhere for detailed treatment. These areas are presented here in a summary form. However, the chapters on government, food processing, and food whole saling and retailing are included because agricultural students must be brought into contact with the entire picture. The belief is far too prevalent among farm groups that marketing is completed when the farmer sells his products and what occurs after this point is of no concern to them. The approach of the book is a mixed one-partly functional, partly institutional, and partly by commodities. Part I, "The Framework of the lvlarketing Problem," attempts to sketch in a broad way the nature of producers and consumers which the marketing structure must serve. Part II, "Some Functional Problems," discusses the development and problems in securing adequate performance of some of the marketing functions. Part lIT, "Commodity and Institutional Problems," particularizes these m8.rketing problems from the standpoint of the several agricultural com modi tic; and business and government structures. Marketing often has a reputation of being a stuffy, dry area of study. This is not because of the subject matter, but rather because of our shortcomings in its presentation. vii Vlll PREFACE It is the author's conviction that marketing cannot be successfully taught in a completely abstract framework. Students do most of their learning in the framework of the familiar-hogs, milk, the retail food store, and so on. lt is hoped that the mixed approach of the text wiII make the subject area more palatable and in doing so wiII enhance the learning process. A conscious cffort has been made to document the text rather heavily. No claim is made for complete bibliographies and references. Rather it is hoped that those presented wiII encourage further study, or at least call attention to the immense volume of marketing literature which is now flowing forth. On the other hand, many specific details have been omitted, since any marketing teacher worth his salt wiII supplement any text heavily with iIIustrations and data which have particular application to his students. The author presents this text with great humility and recognizes, at least in part, many of its shortcomings. The challenge to set down on a relatively few pages a word picture of this highly diverse and complex field is a great one. The author has sought and received much help and counsel J. from his colleagues at Purdue University. Dr. '\T. \Viley of the Depart ment of Economics was of immeasurable assistance in developing the chap ters on price theory and imperfect competition. Dr. C. B. Cox, who directly contributed the material on cotton and tobacco, also aided greatly in J. preparing the chapter on agricultural cooperation. Professor C. Bottum J. advised on the presentation of price policy. Professors \\T. Hicks, P. L. Farris, and C. E. French also gave of their time and advice in many areas. To the administrative staff of the University the author also owes a debt of gratitude for their understanding attitude, for only with such under standing can most staff members at a land grant institution find the neces sary time to complete such a project. And to his wife, Irene, who read the manuscript and challenged him to present the material in as simple and understandable language as he could, the author acknowledges a very special debt. Of course, the author accepts all the responsibility for what finally has been presented. R. 1. KOHLS Purdue University CONTENTS PAR T I: THE F R A :tvl E \V 0 R K 0 F THE MARKETING PROBLEM 1. The l'vlarl~eting Problem 3 \Vhat is Marketing? ~Iarketing is Complex and Costly; J\farketing is Productive; Growth of Marketing; Marketing Defined; Marketing Effi ciency. Historical Bench ~Iarks in Agricultural Marketing. The Farmer and Marketing. The Approach of This Book. 2. Analyzing Marketing Problems Major Marketing Processes. Approaches to :t-,Iarketing Problems: The Func tional Approach; Use of the Functional Approach, The Institutional Ap proach; Middlemen of the :t-,!arketing Processes, Organization of the Marketing Machinery, ;I,!arkcting Channels, Use of the Institutional Approach; The Commodity Approach. Marketing Principles. 3. Consumers of Agricultural Products Incomes and Food Expenditures. Population and Income: Distribution of People and Incomes; Population Growth; Growth of Urban Population; Income Distribution; Income Levels and Food Consumption. Regional Differences in Food Consumption. Other Factors Affecting Consumption Patterns: Religious Differences; Race and Nationality Differences; Effect of Special Days_ Changcs in Consumption Through Time. Foreign 11arket for Agricultural Products. 4. Agricultural Production 49 The Production Plant: The Production Unit. Characteristics of the Prod uct: A Raw ;l,Iaterial; Bulky and Perishable Products. Characteristics of Production: Total Output; Annual Variability in Production; Seasonal Variability in Production; Quality Variation; Areas of Production; Adjust ment of Production to Changing Conditions. 5. The Cost of II.'Iarheting 66 TIle Famler's Share: Changes in the Farmer's Share TIuough a Period of Time; Differences in the Farmer's Share Among Commodities. Composi tion of the ~!arketing :t-,!argin: Labor Costs in il.1arketing; Profits in :1\1arket ing; A Basic Reason for a Large ;\Iarkcting ;\!argin. Reduction of Market ing Costs: Inflexibility of ;\[arkcting :t-,!argins; TIle Farmer's Share as a iI.!casure of l\Iarketing Effieicncy; Opportunitics for Reducing Costs. IX x CONTENTS PART II: SOr-.'IE FUNCTIONAL PROBLEMS 6. The Exchange Function-Price Discovery Prices in a Competitive Economy: The !I.'leaning of Demand; The !l.lcaning of Supply; The Equilibrium Price. Changes in Demand and Supply. Elasticity of Demand and Supply. Summary. 7. Competition in Food Marl,eting 100 Perfect Competition: Assumptions of Perfect Competition; The Indi· vidual Fiml; The Market Area and the Law of One Price; Relationship of Prices to Costs. Departure from Perfect Competition: Monopoly and Oligopoly; Imperfect Competition and Product Differentiation. Competitive Conditions in Agricultural l\farketing: Examples of Imperfection in Com petition. Usefulness of the Competitive Model. 8. Agricultural Prices Agricultural and Nonagricultural Prices. Individual Commodity Prices: Nature of Supply and Demand; Cyclical Price Fluctuaticns; Seasonal Price Fluctuations. 9. Government Price and Marketing Programs Background For Aid. Agitations of the 19::o's. The Depression Develop ments: Development of Parity; Support Programs; Surplus Disposal Pro grams; Marketing Orders and Agreements; Price Controls. Effect of Pro grams on i\farketing; Efficiency of the Pricing Mechanism; Efficiency of the Marketing Machinery. ..,../ 10. Standardization and Grading Importance of Standardization: 'Weights, Measures, and Containers; Quality; Early History of Standards; Advantages of Standardization. Determina tion of Standards; Objective of Ideal Standards; Criteria for Good Stand ards. Problems of Agricultural Standardization: Lad: of Relationship Between Price and Quality; Determining Consumer Preference; I\leasuring Grade Factors; Determining the Limits of Grade; Quality Deterioration; Health Regulations and Quality Standards. Farm Selling on a Graded Basis. Place of Govemmel.~ in Standardization. The Consumer and Grad ing. The \Vholesale Trade and Grading. 11. Collection and Use of Market Information The Role of Marketing Information. Securing Adequate l\farket Informa tion: Area to Be Covered; Price Information; Information Dissemination. Collection and Dissemination Agencies: Private Agencies; Public Agencies. Information Needs and Problems: Extension of Coverage; Keeping Abreast of Changing Conditions; l\fethodology of Collection; Dissemination of Information. CONTENTS xi Transportation 12. \Vho Does the Job? Trucking to Initial Markets; Trucking to Terminal Markets; Rail Transportation; \Vater Transportation; Air Transportation. Freight Rates: The Freight Rate Structure; :t\Iaking of Rail Freight Rates; Freight Charges and Agricultural Prices. Reduction of Transportation Costs: Rates and Methods of Transportation; Other Approaches to Cost Reduction; The Transportation Bill Will Remain High. 13. Storage Storage Operations: Seasonal Production and Storage; \Vhere Commodities are Stored; Public \Varehouse Supervision. Costs of Storage. "'ho Should Store? Reducing Storage Costs. Storage and Seasonal Price Variations. 14. Risk and the Futures Exchanges 202 Types of Market Risk: Product Destruction; Product Deterioration in Value. The Futures Market: Exchanges and Their Organization; The Futures Contract; Relationship Between Cash and Futures Prices; Hedging; The Place of the Speculator; Commodities Adaptable for Futures Trading. The Futures Ma~ket Controversy: Argument For and Against Futures Trading; Effects on Prices; Effects on Marketing Costs; Government Supervision of Exchanges. PART III: COMMODITY AND INSTITUTIONAL PROBLEMS 15. Livestock Marketing The Product-Its Production and Usc: Production; The Products of the Livestock Industry. Marketing of Livestock: Assembly of Live Animals; Local Cooperative Associations, Country Dealers, Auctions, Concentration Yards, Terminal Public Markets, Packing Plants, Retail Meat Dealers, Farmers; Slaughter of Live Animals; \Vholesaling and Retailing of Meat. Changes in the Assembly Structure: TIle Growth of the Terminal Market; The Growth of Direct Marketing; Reasons for the Development of Direct Marketing; Arguments Against Direct Marketing; \Vhere is the Best Place to l\Iarket Livestock? Problems Crcated by Decentralization. Problems of Standardization and Grading: Difference Between Live and Carcass Value; Selling of Livcstock on Basis of Carcass \Veight and Grade; The Develop· ment of l\Iore Adequate Standards. 16. Dairy Marheting Milk Production and Use: Utilization; The Production of l\Iilk. Countrv Assemcly of Milk and Cream. Fluid l\Iilk: Nature of the Product and It~ Ma:;,et; Pricing and l\Iarket Regulation; Fluid :t\Iilk Distribution. l\Iilk Used for :t\Ianufactured Products: :t\Iarketing Structures; Product Develop. ment; Pricing Problems. xii CONTENTS 17. Poultry and Egg Marlwting Egg Marketing: The Product and Its Production; 1-.1arketing Channels; Problems of Quality. Poultry Marketing: The Commercial Broiler Indus· try; The Turkey Industry. Problems of Integration and Pricing. 18. Grain Marketing The Products-Their Production and Use: Product Utilization; Variable Production. The Marketing Channels: Country Elevators; Cash Grain Commission Merchants; Terminal Ele\'ators; Processors and Millers. Grain Grading. The Storage of Grain. Country Grain Buying. 19. Cotton Marketing 286 TIle Product and Its Use: United States Production; Cotton Standards; Consumption of All Fibers; Utilization of Cotton. Location of r..mling. Iviarketing Channels: Channels Used; Local Markets; Central Markets. Marketing Margins: :rviargins Included in Farm Prices; Cotton Merchan· disers' J\Iargins; Ivianufacturing Margins; \Yholesale and Retail Margins; Consumer's Cotton Dollar by Cost Items. J\Iarketing Cottonseed. Foreign Production and United States Exports. Cotton I\Iarketing Problems: Pro· ducer Knowledge of Grades; Producers Do Not Force Price Competition; Producers Sell in Small Lots; Excess Gin Capacity. Tobacco Marketing 20. The Product and Its Use: United States Production; Classification of To· baccos; Domestic Consumption. Farm Marketing Methods; On·Farm Sales; Hogshead Selling; Loose Leaf Auctions; Cooperative Associations. Marketing Channels. Tobacco Manufacturing. Marketing Margins of Cigarettes: Manufacturer's and Leaf Dealer's Margins; Distributor's Mar· gin; Federal and State Excise Taxes. Acreage and Price Control. Intcr· national Trade: United States Exports. Major Marketing Problems. 21. The Place and Problems of Agricultural Cooperatives \Vhat is a Cooperative? Distinctive Characteristics of American Co· operatives; Kinds of Cooperative Business; l\Iarketing Cooperatives, Pur· chasing Cooperatives, Processing Cooperatives; Type of Cooperative Organ· ization; Independent Local Associations, Federated Associations, Central· ized Cooperative Associations, l'vIixed Associations. History and Present Status of American Coope:1tion: Early Development; The Active Period, 1910-1925; The Consolidatlun Period, 1925-1940; The Period of Economic Growth, 1940-?; Cooperation by Regions and Commodities. \Yhat l\Iakes For a Successful Cooperative Association? Criteria for Long·Run Success; Establishment of a Successful Cooperative. Problems of l'vlodem Coopera· tion; Size and Growth; Financing; Management; Membership Relations; Relations with the General Public. Government and Agricultural Marketing 22. Areas of Regulation: Regulations to l'viaintain and Police Competition or Prevent Monopoly; Regulations to Control or Offset ::--'lonopoly Conditions;