Agribusiness market analysis

CBU 5205Agribusiness Marketing

Topic 2Market Analysis

Odunze Daisy

Supply and demand

Price is determined by how much of a product people are willing and able to sell (supply)and how much other people are willing and able to buy(demand).

The potential profit from a product is determined by two critical factors: supply and demand.

Supply and demand have a great deal to do with market size and product prices, both of which should be of interest to an agribusiness manager

Supply and demand Supply is the quantity of a given product that is

available at a specific time and price. Demand is the quantity of a product that is needed

at a specific time and price The supply and demand of a product is

determined by several factors but price is the primary determinant.

Supply and demand

Consumer driven market Consumers are ultimately the determinant of

agribusiness marketing success. Commodities or services may be available but if

the consumer chooses not to buy and does not submit to persuasion, there will be no sale.

In a market economy, every scarce commodity commands a price, and that price is market determined by the product’s demand and supply curves.

Supply and demand

Consumer driven market In a democratic system, producers have the right

to produce and market goods and services for personal profit. Similarly, consumers have the basic right to refuse to buy goods and services.

The better producers can get to know the consumer, the better chance they have of offering superior and successful products.

Understanding Consumer Demand

For the consumers, the lower the price, the more consumers are likely to buy and consume.

For the producers, the lower the prices paid for inputs and the higher the price paid for the final product, the larger the firm’s profits.

The price of final products is of interest to consumers just as much as the price of inputs or materials needed to make products is of great interest to producers.


Profit equation Profit = total revenue – total cost

Π = TR –TC Profit is the difference between price paid (total

revenue) and cost of product (total cost). The objective of the firm is to make the difference

between TR and TC as large as possible by raising TR, lowering TC, or doing both.


Total revenue (TR) = price per unit (Py) X quantity sold (Y)

TR = Py X Y It is important for firm managers to remember the

main goal of the firm is to increase long-term profits, not just increase the quantity of products sold.

If the selling price is too low or costs are too high, increased sales could result in a large loss.


A good part of the success in trying to increase profits comes from knowing the relationships between total revenue and levels of price and quantity.

High levels of the total revenue can be reached by selling just one unit if the price is high enough and someone is willing to pay for it.


Total Revenue Price ($) Quantity

1,000,000 1 1,000,000

1,000,000 2 500,000

1,000,000 5 200,000

1,000,000 10 100,000

1,000,000 100 10,000

1,000,000 1,000 1,000

1,000,000 10,000 100

1,000,000 100,000 10

1,000,000 1,000,000 1

Table 2.1: total revenue vs price


This same total revenue goal can be reached by selling a large number of the products at a more reasonable price.

There are several in-between prices and quantities that can give the same total revenue.

Price and quantity always move in opposite directions, the level of total revenue does not remain the same. This is shown in the next table


Price $ Quantity = Total revenue($)

5.00 10 50

4.50 20 90

4.00 30 120

3.50 40 140

3.00 50 150

2.75 55 151.25

2.50 60 150

2.00 70 140

1.50 80 120

1.00 90 90

Table 2.2: demand schedule


(Plot a graph) Putting prices and quantity on a graph shows a

line sloping or going downward and to the right on the page. This means the higher the price, the lower the quantity sold.

It shows the law of demand. This law states that consumers buy less of a good

as the price rises and more as the price goes down.


The consumer directs what is produced by what he or she purchases.

consumers always seek the highest level of total happiness from the collection of goods they consume.

When choosing each additional good to consume, they always pick the one that gives them the greatest addition to the overall total level of happiness.


The amount of satisfaction received from consuming each additional unit of a product decreases as more is consumed.

Decreasing satisfaction for individual products makes consumers demand a wide selection or variety of products to increase their total satisfaction.


If a change in the ‘’ own price’’ of an item brings a change in the number of units sold, then there has been a change in quantity demanded.

However, if price remain the same and the quantity sold changes, this means a shift in demand.


The factors that cause this movement of the demand schedule include the following: Price of substitute goods Price of complements Income Population Taste and preference Seasonality.

Understanding Agribusiness Supply

Production Process Production is the use of inputs to create an

output that has economic value. The production process is how an

agribusiness combines the various inputs to create an output.


When agribusinesses decide to produce an output they must make four major production decisions: What to produce? What products and services

can this business profitably offer? How to produce? What is the best combination of

inputs to use in producing the output? How much to produce? What is the correct

amount of output to produce that will increase the firm’s long term profits?

When to produce? What is the correct time to produce the output or to offer the service?

Understanding Agribusiness Supply The Efficiency of Agricultural Markets Marketing efficiency is measured by comparing

output and input values. Output values are based on consumer valuation of a good, and input values (costs) are determined by the values of alternative production capabilities.

Therefore, markets are efficient when the ratio of the values of output to the value of input throughout the marketing system is maximized.


The Efficiency of Agricultural Markets Pricing efficiency is concerned with the accuracy,

precision, and speed with which prices reflect consumers’ demands and are passed back through the market channels to producers. Pricing efficiency is thus affected by rigidity of marketing costs and the nature and degree of competition in the industry.


The Efficiency of Agricultural Markets A process is technically efficient when the

maximum or highest output per unit is obtained at all levels of input use.

Technological changes can be evaluated to determine whether they will reduce marketing costs per unit of output.

This must be done first. Once this efficiency is reached the manager can turn his or her attention to reaching economic efficiency.


The Efficiency of Agricultural Markets A process is economically efficient when the

level of output reaches the highest profit. The primary reason for firms to increase their marketing, technical and pricing efficiency is the expected income improvement; for society, the basic goal of economic efficiency requires marketing, technical and pricing efficiencies.


Determination of Economic Efficiency It is important to know that maximum profit does

not happen at the point where input efficiency is highest or where the highest output occurs. Maximum profit is measured by the cost of inputs compared with the revenue earned by selling outputs.


RevenueOutput(s) @ $10/unit

Number of labourers Labour cost@ $ 200 Profit(s)

0 0 1 0 0

30 300 1 200 100

100 1000 2 400 600

168 1680 3 600 1080

220 2200 4 800 1400

240 2400 5 1000 1400

252 2520 6 1200 1320

245 2450 7 1400 1050

Understanding agribusiness supplyPrice Quantity supplied

$5.00 1000

$4.50 900

$4.00 800

$3.50 700

$3.00 600

$2.50 500

$2.00 400

$1.50 300

$1.00 200

$ 0.50 100

Law of supply Table 2.3 shows the relationship between selling price and quantity supplied. (plot in a graph)


Price is not the only factor that will affect supply. The non price determinants of supply are: Changes in the price of other goods. Expectations of future selling price Number of sellers in the market Changes in production costs

Characteristics of Agricultural Supply

Little control over how much is produced once the process is under way.

Uncontrollable factors control supply For commodities such as grains, unless imported,

the supply is fixed between harvests regardless of price.

Once the crop is planted, quantity supplied will not change much in response to price changes. But small changes in supply will cause very large changes in price.

Characteristics of Agricultural Demand Unlike supply, domestic demand for agricultural

commodities is usually stable from year to year. There may be seasonal changes for a product from year to year, but overall demand remains the same.

This is because consumer demands for food are largely a function of habit.

Characteristics of Agricultural Demand A closer look at food demand leads to several

interesting facts. First, the demand for specific food products tends

to be price sensitive. This means a change in price will cause the quantity sold to change. The availability of substitutes causes this response.

Second, the demand is less sensitive to price the closer one gets to the farm level because there are few substitutes for farm-produced commodities.

Role of price

Consumers by showing a willingness to pay a certain price for an item, show that they are getting at least as much satisfaction from the consumption of a good as they could get from the consumption of another good available at the same price.

If the price is lowered, more consumers will feel this way, and the quantity demanded will go up.

Producers operate in much the same way.

Role of price

Limited amount of money to invest to produce items demanded by consumers.

By paying a certain price for an input, producers show that it is worth at least that much to them in the production process.

Willingness to pay for the input really depends on how much they think the consumers are willing to pay for their products.

Role of price

In this way, the producers’ demand for inputs, or materials, depends on the consumers’ demand for the firm’s products.

The demand for tractors, feed, dairy cows, processing plants, e.t.c. comes in part from the consumer demand for retail food items.

For example, the demand by farmers for fertilizer, in part, comes indirectly from the consumer’s demand for chicken.

Price Determination and Price Discovery

Changes in price cause the quantity demanded or the quantity supplied to change along the supply or demand schedule.

Change in other factors with the price held constant cause the demand and supply curves to shift.

At the same price, more or less quantity would be demanded or supplied depending on the change.


Price is determined by the interaction of supply and demand. When a supply curve for a product is shown in the same graph as the demand curve for that same product, price is determined where the two curves cross.

This is called price determination


P S

D Q Price Determination


An important point to note is that where the curves cross supply and demand is in balance, the quantity supplied by the marketers of the product just equals the quantity demanded by the consumers of the product. There is neither a surplus of product in the market, nor is there a shortage.


In the real world, a supply-and-demand curve does not exist, they are estimated.

Any attempt to determine price by these methods will not truly reflect what is going on in the marketplace.

That brings us to price discovery. Sellers and buyers haggle over price. Not an exact

process. All about negotiation.


Neither party has complete information about supply, demand, or the factors which affect either one.

Whether the agreed-on price is above or below the general price level for similar transactions in other parts of the country depends on the following: Amount, quality and timeliness of the information

available to both parties. Bargaining ability of each participant.


One can see that information plays an important role in being successful in the price discovery process.

The price discovery process usually works very well, meaning there are few transactions at prices very much above or below the current market price.

Some people are better at bargaining over price than other people.

Price Determination and Price Discovery It is important that marketers know and

understand the difference between price determination and discovery.

Both are important because price sets both the size of the market and the amount of profit possible.

Price determination helps researchers understand the long-term effects of changes in the marketplace, and price discovery helps agribusiness managers set prices for day-to day operations.

Law of one price

The law of one price state that when markets are operating normally, there should be only one common price for each product in a market, after adjusting for the cost of storage, transportation, and processing.

If prices differ by more than the cost of storage, transportation, and processing, then price is “out of line’’.

Law of one price

When this happens, there is an economic incentive to shift from an area of low prices to another area where prices are being paid. The process of capturing extra profits in settings where prices are “out of line is called arbitrage

Anytime prices are higher than justified by the costs of storage, transportation, and processing, someone will try to capture the extra profits.

By so doing, they will keep the markets in balance.

Law of one price

Time: For the current and future markets to be in balance, the cost of storage should be just equal to the difference between the current price and the future price.

Distance: For two distance separated markets to be in balance, the cost of transportation should be just equal to the difference in price between the two locations.

Law of one price

Form: For markets separated by different product forms to be in balance, the cost of changing form should be just equal to the difference between the price paid for raw commodity and the price received for the processed product.

In this way, the law of one price keeps markets in balance that are separated by time, distance, and form. There is a natural tendency for markets to move toward the balance defined by the law of one price

Agricultural Price Patterns

The prices of many agricultural commodities show patterns over time. These patterns relate to the biological nature of food production and slight variations in consumption.

Those patterns that happen yearly are called seasonal price patterns.

Patterns that repeat longer than a year are called price cycles.


Seasonal price patterns are caused by the seasonality of production and consumer demand. For grains, fruits and vegetables there is usually only a single crop year, while demand is constant throughout the year.

This difference in supply and demand produces the pattern of prices throughout the year.


Price patterns


A graph of monthly prices would show price is lowest at harvest time, followed by a slow rise each month afterward. The price is highest just before the next harvest.

The increase in price each month after harvest is the market’s method of rewarding someone who stores part of the annual crop to meet year round demand.


Price cycles go beyond one year. They also have their origin in the biological nature of production, as do seasonal patterns. In these cases the biology does not permit a rapid adjustment in supply adjustment patterns.

A full cycle of rise and fall for pigs may take 3.5 to 4 years, while for cattle it may take as long as 11 to 12 years.


Knowing where you are in the price cycle is critical to planning./ producers do not wish to expand output at the peak of the price cycle knowing they might face a pattern of falling prices for years. But they might consider expanding if they were at the bottom or on an upward swing of the price cycle.