- - AGRICULTURE CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1450) Unit Title: - MARKETING ______________________________________________________________________________ (CLF1452) Unit Topic: KEY FACTORS IN Time Year(s) MARKETING 2 hours 3/4 ______________________________________________________________________________ Topic Objective: Upon completion of this lesson, the student will be able to: Learning Outcome #: (M-2) - Describe key factors involved in marketing. (M-3) - Describe types of markets. (M-4)..-..Describe the importance of grades and standards. References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Resources: Deere & Company. (1987). FARM AND RANCH BUSINESS MANAGEMENT (2nd ed.). Available from: John Deere Technical Services, Department F, John Deere Rd., Moline, IL 61265. Office of Federal Registrar. CODE OF FEDERAL REGULATIONS (CFR) Title 7 (Agriculture). Special Materials and Equipment: Handout: GRADES AND CLASSES OF MILK Evaluation: Completion of activity assignments, final marketing plan, and marketing plan presentation. TOPIC PRESENTATION: KEY FACTORS IN MARKETING A. Marketing is a key management activity. How and where products or services are to be sold have major implications for a business. 1. Investment and borrowing decisions are often based on expected returns. 2. Decisions about what to produce are affected by marketing considerations. 3. Decisions about the labor requirements of production are also affected by marketing considerations. B. Key Factors in Agribusiness Marketing 1. Quality -- Product quality has a major effect on the price received for a product. a. Grades and standards are measures of product quality. Grades and standards facilitate trade as buyers know what they will receive without physically handling or seeing the product. Sellers know the grade of their product and hence what price to expect. b. The price paid for an agricultural product can vary greatly depending on the grade of the product. c. Almost all agricultural commodities have grading standards for quality and often for size. Grades and standards for agricultural commodities are listed in the CODE OF FEDERAL REGULATIONS (CFR) Title 7 (Agriculture). d. Examples of grades include: 1) Meat grades established by the United States Department of Agriculture: USDA Choice, Select (formerly grade A), and no roll (the lowest grade). 2) Fruits and vegetables are generally subject to grade (quality) and size standards. Olives and kiwi fruit are good examples. 3) Processors are generally very concerned about product quality and pay for products based on standard grades. 4) Cereal grains, potatoes, carrots, poultry. and many other commodities are graded. e. Some products are sorted by size and quality at the point of production. 1) Tomato harvesting equipment can sort out green tomatoes while the crop is harvested. 2) Fresh fruit is generally hand sorted and packed by size and grade. f. Some products are sampled and graded prior to shipment, processing, or storage. 1) Grains are evaluated for cleanliness (lack of weed seed, plant parts, and dirt) and moisture content. 2) Prior to processing, tomatoes are sampled from each truckload and evaluated for acid and sugar content, color, percent moldy tomatoes, percent green tomatoes, and percent material other than tomato (MOT). Entire loads can be rejected if tomatoes do not meet the minimum standards of the processor. 3) Milk grades are determinmed in part by the quality of the milking facilities at the dairy where it originates. g. Meat is graded after slaughter and before processing. _____________________________________________________ ACTIVITY: 1. The study of grades and standards provides a good excuse for eating activies; beef, ice cream, fruits and vegetables can be judged on appearance, size, and taste. Dairy products such as ice cream and butter are often judged at county fairs. 2. Prepare samples of different quality grades of locally produced grains or other commodities for display at the county fair. 3. Talk with a supermarket produce manager about his/or her work and the importance of packaging, product shipping and handling, product display, and spoilage. 4. Take a field trip to a local grain elevator, packing, or processing facility. Discuss the role of grades and standards in the operation of the facility. 5. Read and discuss the attached handout on grades and classes of milk. What are the purposes of grades? How does grading benefit both consumers and producers? _____________________________________________________ 2. Timeliness is the ability to deliver product at the most profitable time. a. Processors often require precise times for product delivery. b. Perishable commodities may need to be delivered to consumers or processors within a limited period of time in order to avoid spoilage. c. Products may be salable only at certain times of the year; for example, poinsettias and Christmas trees are almost all sold during the period just before Christmas. 3. Price Cycles a. Due to the seasonal nature of much agricultural production, prices for the same product can vary considerably throughout the year. b. Product produced early or late in the season often receives a better price than product brought to market at the peak of production. 4. Supply or Production Lag a. The growing season and productive cyles of livestock limit the ability of agriculture producers to respond to changing prices. b. In the beef and chicken example, chicken producers were able to react to increased demand much more quickly than the beef producers. This is because chicken takes only a few months to produce whereas beef takes several years. c. For cereal crops, the production lag is one year. If wheat prices increase one year, the response of increased production occurs in the following year. 5. Pack -- The product must be packaged and handled so that spoilage is minumized and the product reaches the consumer in the best possible condition. 6. Marketing Niche -- Specialization in a specific, limited market sector. a. Producers develop marketing niches in order to take advantage of specific micro-climates, regional demand, and their own special knowledge or skills. b. Marketing specialized products can be more difficult than "following the herd"; it can also be more risky as well as more profitable. c. Examples of agricultural commodities that fill marketing niches are baby corn, artichokes, and Asian vegetables. _________________________________________________________ ACTIVITY: 1. Italian squash (zucchini) exhibit a marked price cyle, with prices tending to decline in the spring and increase again in the fall. The same is true of strawberries and melons. Track the price of specific items of fresh produce for several months and analyze any price fluctuations. 2. Find and discuss news stories related to such supply and demand issues as , shortages, surpluses, effects of pests, drought, and floods. _________________________________________________________ 7. Risk -- Prices may rise or fall during the growing season. In order to protect against risk, the producer should consider the following: a. Have a home (buyer) lined up before production begins. b. Forward contract for price and delivery terms with packers, shippers, and processors. c. Diversify production in order to offset risk. d. Use commodity markets and financial instruments (futures contracts) to offset risk. e. Make adequate provisions for product storage. For perishable commodities, provide proper conditions for storage. Know your product! f. Vertical integration is another means of minimizing risk. 1) Vertical integration involves taking on upstream and downstream marketing functions. 2) A grower-packer-shipper is a producer of fruit or vegetables who also handles packing and shipping of the produce. This is an example of vertical integration. D. Market Structures and Institutions 1. Agricultural products move from producers to consumers in a variety of ways. a. Direct marketing of products by farmers to consumers is the most direct method. Farmers' markets and roadside stands are examples of direct marketing. b. Most products are handled by one or more intermediaries or "middle men" before they reach the customer. Produce, for example, moves from the farm to a broker's warehouse and from there to other wholesalers and retailers. c. Meat passes through several intermediaries before reaching the consumer. d. Grain is held in elevators, shipped by railcar, milled into flour, bleached, enriched, and bagged before it is finally sold to the consumer. e. Each step of the marketing process adds value (and a higher price) to the product. _________________________________________________________ ACTIVITY: 1. Trace the route different farm commodities take to get to market. For example, trace all of the ingredients in a particular item of fast food and document all the steps from producer to restaurant. How did North Dakota wheat become a hamberger bun? Where did the beef come from and how was it processed? _________________________________________________________ SUPPLEMENTAL HANDOUT #1 - GRADES AND CLASSES OF MILK * Raw milk is the term used to designate milk in its natural state as it is removed from the udder of the dairy cow. Milk is transported from the dairy farm to the processing plant as raw milk. Milk Grades Reflect Conditions at the Farm Milk delivered to the plant will be considered either Grade A or Grade B, depending on the conditions under which the milk is produced at the farm. Physical facilities, such as the barn, milk house and well, must meet minimum standards in order for the milk to be considered Grade A. The standards for Grade B milk production are less demanding. Any dairy farm not meeting the minimum standards for Grade B milk production is prohibited from selling its product. Grades A and B milk are transported to different processing plants in separate tank trucks. Quality Tests for Milk Minimum quality standards are set by federal law. Individual states may set standards that are higher than minimum federal standards. Minimum federal standards for Grade A milk enable it to be marketed across state lines. When milk arrives at the dairy plant or bulk transfer station, it is subjected to several quality tests, including bacterial counts, somatic cell count, and drug residue tests. Because milk is a nearly perfect food, it is an excellent source of nutrition to several strains of bacteria. All raw milk contains bacteria cells. The number and strain of bacteria are an indication of quality. Somatic cells are white blood cells produced in the cow's udder in response to bacterial infections. A high somatic cell count probably indicates an infection, such as mastitis. An example of the minimum standards for Grades A and B milk is provided in the following table: GRADE A AND B RAW MILK QUALITY STANDARDS ______________________________________________________________________________ Quality Measure Grade A Grade B ______________________________________________________________________________ must not exceed Number Bacterial Cells per Milliliter 100,000 300,000 Somatic Cell Count 750,000 750,000 Drug Residue -0- -0- Storage Temperature 45 45 degrees degrees ______________________________________________________________________________ *Reproduced from marketing instructional materials distributed by the National Council for Vocational and Technical Education in Agriculture P.O. Box 15035, Alexandria, VA 22309-0035; the materials were founded and developed by the Wisconsin Milk Marketing Board, 8418 Excelsior Drive, Madison, WI 53717 Quality standards and tests also apply to processing plants. The next lesson discusses that topic. Milk Grades Federal law requires that all fluid milk, that is, beverage milk or the milk we drink, be processed from Grade A milk. Because milk meeting minimum Grade A standards can be marketed across state lines, it is often referred to as market grade milk. Grade B milk can be used only for manufacturing selected dairy products, such as cheese, butter, or dried milk. Therefore, Grade B milk is often referred to as manufacturing grade milk. Some manufactured dairy products, such as ice cream, must be made from Grade A milk. Manufactured dairy products are graded after they are made. The quality of the product in the package, and not the grade of milk used to make it, determines the product grade. Thus, Grade A butter could be made from Grade B milk as long as it meets the product standards established for Grade A butter. Likewise, Grade B butter could be made from Grade A milk. Because milk in its fluid form is highly perishable and subject to the development of undesirable flavors, it cannot be stored for extended periods of time. Excess fluid milk--that is, milk not used for drinking purposes--must be processed into manufactured dairy products that will keep in storage. Thus, many manufactured dairy products are processed from surplus Grade A milk. Milk Classes and the End Product All Grade A milk is eligible for fluid milk consumption. However, the supply far exceeds the demand and more Grade A milk is processed into other dairy products than is consumed in its fluid state. For pricing purposes, all Grade A milk is classified I, II or III, based upon the product made from it. Class I milk is used for beverage purposes only. Class II milk is used for manufacture of "soft" products, such as ice cream, yogurt and cottage cheese. Class III products, referred to in the industry as "hard" manufactured products include most cheeses, butter, and nonfat dry milk. Most Class III products can also be manufactured from Grade B milk. Milk Production Although milk is produced in all 50 states, its production is highly concentrated within a few states. The following five states produce 52.4 percent of the nation's milk supply: Wisconsin (17.5%); California (12.8%); New York (7.9%); Minnesota (7.2%); and Pennsylvania (7.0%). The following are some factors that help explain why the dairy industry has developed in these top five states: geography; the ability to produce high quality forage and grain; the best use of land resources; relatively large populations for a good market; warmer climate (as in California) that does not require warm buildings and a large amount of feed storage; and high-quality subsidized irrigation (California). A major regional shift in milk production has been occurring. During the 1970 to 1988 period, U.S. milk production increased 24.2 percent. The lake states (Wisconsin, Minnesota and Michigan) increased milk production by 25.5 percent, just slightly more that the U.S. average. The Corn Belt, northern plains, and delta regions lost in milk production (-22.4 percent). The northeast, Appalachian region and southeast combined to increase production more than the U.S. increase (+27.3 percent). The big growth in milk production during this period occurred in the southern plains (+50.77 percent), the western mountain region (+77.4 percent), and the Pacific region (+92.8 percent). The statistics indicate that milk production is shifting from the traditional dairy states in the lake region and the northeast to the south and west. The question is, will this trend continue? A look at the factors causing these regional shifts may help to answer the question. The key factors have been: Greater profit from dairying in areas of expansion. This has occurred because of lower costs of production, higher milk prices or a combination of the two. Some make the controversial claim that price inequities provided by federal milk marketing orders are also responsible for production shifts to the south and southwest. Growth in population creating a demand for fluid (beverage) milk. Milk production has followed population growth. Milk is perishable, bulky and costly to transport from one part of the country to another. Better farming alternatives. In those areas of decreasing milk production, other farming alternatives have been more attractive, such as cash grain farming. These factors will remain important for the decade ahead. In the lake states. Wisconsin will likely expand production. Dairy farming is the best use of land resources in Wisconsin. Wisconsin also has a strong reputation for high quality dairy products, particularly cheese, which gives the state a marketing advantage. Wisconsin's ability to raise high quality forages and grain without irrigation is also an advantage. Nevertheless, the race will be on over the next decade between Wisconsin and California for first place in milk production. 12/16/91 EEZ/sg #%&C