LECTURE MATERIAL FOR 11th ICAR NET COACHING –CUM-TRAINING PROGRAMME

Content List:

1. Agricultural Marketing - Concept and Definition

2. Marketing Functions:- Transportation, Storage, Warehousing and Packaging
3. Marketing Channels: Agricultural commodities
4. Marketing Efficiency
5. Marketing Cost: Price Spread, Market Margin
6. Market Structure, Conduct and Performance analysis

1. AGRICULTURAL MARKETING - CONCEPT AND DEFINITION

Marketing is as critical to better performance in agriculture as farming itself. Therefore, market

reform and marketing system improvement ought to be an integral part of policy and strategy for
agricultural development. Agricultural marketing was, for many decades, not fully accepted as an
essential element in agricultural development in the countries of Asia and Africa. Although
opinions differ as to the extent and precedence, there was general agreement sill 1970 that the question
of markets for agricultural commodities had been neglected. Agricultural marketing occupied a fairly
low place in agricultural development policies of developing countries.

The term agricultural marketing is composed of two words-agriculture and marketing.

Agriculture, in the broadest sense, means activities aimed at the use of natural resources for
human welfare, i.e. it includes all the primary activities of production. But generally, it is used to
mean growing and/or raising crops and livestock. Marketing means a series of activities involved
in moving the goods from the point of production to the point of consumption. It includes all
activities involved in the creation of time, place, form and possession utility.

Philip Kotler has defined marketing as a human activity directed at satisfying the needs and
wants through exchange process.

American Marketing Association (AMA) defined marketing as the performance of business

activities that directs the flow of goods and services from producers to use.

Agricultural marketing system in developing countries including India can be understood to compose
of two major sub-systems viz, product marketing and input (factor) marketing. The actors in the
product marketing sub-system include farmers, village/primary traders, wholesalers, processors,
importers exporters marketing cooperatives, regulated market committees and retailers. The
input sub-system includes input manufacturers, distributors, related associations, importers,
exporters and others who make available various farm production inputs to the farmers.

In nutshell: Agricultural marketing is the study of all the activities, agencies and policies involved in
the procurement of farm inputs by the farmers and the movement of agricultural products from the
farms to the consumers. The agricultural marketing system is a link between the farm and the
non-farm sectors. It includes the organisation of agricultural raw materials supply to processing
industries, the assessment of demand for farm inputs and raw materials, and the policy relating to the
marketing of farm products and inputs.
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NEW ROLE OF AGRICULTURAL MARKETING

The new role of agricultural marketing system is evident from the fact that Indian agriculture is
increasingly becoming more commercialized and market-orientation has gone up. This is a very
positive transformation of Indian agriculture, in which agricultural marketing system and policies have
contributed in the past but have to play an increasing role in times to come. The farmers are producing
for the market and marketed surpluses have gone up. There is a greater use of purchased inputs and
services by farmers. They are shifting towards high value crops and nutritionally rich products.
The main drivers of increasing commercialization of Indian agriculture are better market prices,
changing demand preferences of consumers towards high-value nutritive farm products, availability of
new agricultural technologies, increased investment in agriculture, expansion of export opportunities
and support from favorable policies and programmes. Indian Agriculture is also gaining increasing
corporate attention traditionally seen as unorganized and fragmented, Indian agri-business has now
become a hot sector. As the market for processed foods with better quality is expanding, it is being
considered as hot entrepreneurial activity. Agribusiness in areas like farm inputs, logistics,
warehousing, processing and marketing of dairy and food products is scaling-up and attracting
investment from a plethora of risk capital investors. Branded food products are particularly
attracting the investors. Western food chains are also flocking to India.

DIFFERENCES IN MARKETING OF AGRICULTURAL AND MANUFACTURED GOODS

The marketing of agricultural commodities is different from the marketing of manufactured

commodities because of the special characteristics of the agricultural sector (demand and supply)
which have a bearing on marketing. Because of these characteristics, the subject of agricultural
marketing has been treated as a separate discipline-and this fact makes the subject somewhat
complicated. The special characteristics which the agricultural sector possesses, and which are different
from those of the manufactured sector, are:

1. Perishability of the product:

Most farm products are perishable in nature; but the period of their perishability varies
from few hours to a few months. Their perishability makes it almost impossible for
producers to fix the reserve price for their farm grown products. The extent of perishability
of farm products can be reduced by processing function: but they cannot be made non-
perishable like manufactured products. The more perishable products require speedy
handling and often-special refrigeration, which raises the cost of marketing.
2. Seasonality of production
Farm products are produced in a particular season of the year. They can not be produced
throughout the year. It leads to intra-year seasonality in the prices. In the harvest season,
prices of farm products fall. But the supply of manufactured products can be adjusted or
made uniform throughout the year.
3. Bulkiness of products
The characteristics of bulkiness of most farm products make their transportation and
storage difficult and expensive. This fact also restricts the location of production to
somewhere near the place of consumption or processing. The price spread in bulky
products is higher because of the higher costs of transportation, handling and storage.
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4. Variation in quality of products
There is a large variation in the quality of agricultural products, which makes their grading
and standardization somewhat difficult. There is no such problem in manufactured goods
because they can be produced of uniform quality.
5. Irregular supply of agricultural products
6. Small size of holding and scattered production
Farm products are produced throughout the length and breadth of the country and most of
the producers are of small size. This makes the estimation of supply difficult and also
creates problem in marketing.
7. Processing
Most of the farm products need some kind of processing before consumption by the
ultimate consumers. The processing function, though adds value, increases the price
spread of agricultural commodities.

Market: The word market comes from the latin word marcatus which means
merchandise or trade or a place where business is conducted. In common parlance, a
market includes any place where persons assemble for the sale or purchase of commodities
intended for satisfying human wants. However, in economic sense, the term market carries a
broad meaning.

A market exists when buyers wishing to exchange the money for a good or service are in
contact with the sellers who are willing to exchange goods or services for money. Thus, a
market is defined in terms of existence of fundamental forces of supply and demand and is
not necessarily confined to a particular geographical location.

Components of a market:
For a market to exist, certain conditions must be satisfied. These conditions should be both
necessary and sufficient. They may also be termed as the components of a market.

1. The existence of a good or commodity for transaction (physical existence is, however,
not necessary).
2. The existence of buyer and sellers.
3. Business relation or intercourse between buyers and sellers and
4. Demarcation of area such as place, region, country or the whole world
Classification of markets
Markets may be classified based the different dimensions as follows;
1. On the basis of location or place of operation
a) Village market: A market which is located in a small village, where major
transaction takes place among the buyers and sellers of a village, is called village
market.
b) Primary market: These markets are located in towns near the centres of production of
agricultural commodities. In these markets, a major part of the produce brought for
sale by the producer-farmers themselves. Transactions in these markets usually take
place between farmers and primary traders.
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 c) Secondary wholesale market: These markets are located generally at district
headquarters or important trade centres or railway junctions. The major transactions in
commodities in these markets take place between primary/village traders and
wholesalers. The bulk of arrival in these markets is from other markets. The produce in
these markets in handled in large quantities. Therefore, there are specialized marketing
agencies (commission agents, brokers, etc) performing different marketing functions.
d) Terminal markets: A terminal market is one where the produce is either finally
disposed of to the consumers or processors or assembled for export. In these markets,
merchants are well organized and use modern methods of marketing. Commodity
exchange exists in these markets which provide facilities of forward trading in
specific commodities. Such markets are present either in metropolitan cities or at sea-
ports.

e) Modern terminal market: The Department of Agriculture and Cooperation, Ministry

of Agriculture, Govt. of India has taken initiative to promote modern terminal markets
for fruits, vegetables and other perishable commodities in important urban centres of
the country. These terminal markets are envisaged to operate on a ‘hub and spoke’
format where the terminal market (the hub) is linked to a number of collection centres
(the spokes) to allow easy access to farmers for marketing of their produce. These
markets are to be build, owned and operated by either a corporate, private or
cooperative entity. Government of India has launched a scheme under which subsidy is
available upto 25% for capital investment in agricultural marketing infrastructure for
terminal markets with a ceiling limit of Rs 50 lakhs for private agencies.

f) Seaboard markets: Markets which are located near the seaboard and are meant
mainly for the import and or export of goods are kwon as seaboard markets.
2. On the basis of area/coverage:

a) Local or village market: A market where buying and selling activities are confined
among the buyers and sellers belonging to the same village or nearby villages. This
market usually exists for the perishable commodities in small lots.

b) Regional market: A market in which buyers and sellers for a commodity are drawn
from a larger area than he local markets. Regional markets in India usually exist for
food grains.
c) National market: In national market, buyers and sellers are spread at the national
level. Earlier national markets existed for only durable goods like jute and tea. But,
with the expansion of roads, transport and communication facilities, the markets for
most of the agricultural commodities have taken the form of national market.

d) World or international market: A market in which the buyers and sellers are drawn
from more than one country or the whole world. These markets exist in the
commodities which have world-wide demand and/or supply, such as coffee,
machinery, gold, silver, etc. In recent years many countries are moving towards a
regime of liberal international trade in agricultural products like raw cotton, sugar, rice
and wheat.

3. On the basis of time span:

a) Short period market: The markets which are held only for a day or few hours are
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 called short-period markets. The products dealt with in these markets are of a highly
perishable nature such as fish, fresh vegetables and liquid milk. In this market, prices
are governed mainly by the extent of demand rather than by the supply of the
commodity.
b) Periodic market: The periodic markets are congregation of buyers and sellers at
specified places either in villages, semi-urban areas or some parts of urban areas on
specific days and times. These markets are held weekly, biweekly, fortnightly or
monthly according to the local traditions.
c) Long period market: These markets are held for a longer period than the short period
market. The commodities traded in these markets are less perishable and can be stored
for some time like food grains and oilseeds. The prices are governed both by the
supplyand demand forces
d) Secular market: These are the markets for permanent nature. The commodities traded
in these markets are durable in nature and can be stored for many years. Examples are
markets for machinery and manufactured goods.

4. On the basis of volume of transaction:

a) Wholesale market: A wholesale market is one in which commodities are bought and
sold in large lots or in bulk. These markets can be further classified as primary,
secondary and terminal wholesale markets.
b) Retail markets: A retail market is one in which commodities are bought are sold to
the consumers as per their requirement. Transaction in these markets takes place
between retailers and the consumers. The retailers purchase the goods from the
wholesale market and sell in small lots to the consumers.
5. On the basis of nature of transactions:

a) Spot or cash market: A market in which goods are exchanged with money
immediately after the sale is called the spot or cash market.
b) Forward market: A market in which the purchase and sale of a commodity takes
place at time t but the exchange of the commodity takes place on some specified date
in future i.e. time t+1. Sometimes even on the specified date in the future (t+1), there
may not be any exchange of the commodity. Instead, the difference in the purchase
and sale prices are paid or taken.

6. On the basis of number of commodities in which transaction takes place:

a) General market: A market in which all types of commodities, such as food grains,
oilseeds, fibre crops, gur, etc., are bought and sold is known as general market.
b) Specialized market: A market in which transactions take place only in one or two
commodities is known as specialized market. Eg. Food grains markets, vegetables
market, wool market and cotton market.

7. On the basis of degree of competition:

a) Perfect markets: a perfect market is one in which following conditions hold good
1) There are large number of buyers and sellers
2) All buyers and sellers have perfect knowledge of demand, supply and prices
3) Prices at any time are uniform over the geographical area, plus or minus the cost of
transportation from surplus to deficit areas
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 4) Prices are uniform over the periods of time, plus or minus the cost of storage from one
period to another
5) Prices of different forms of the product are uniform, plus or minus the cost of
converting the product from one form to another

b) Imperfect markets: The markets in which the conditions of perfect competition are
lacking are characterized as imperfect markets. Based on the degree of imperfection,
following situations may be identified;
1) Monopoly market: In monopoly market, there is only one seller of a commodity.
Indian farmers operate in monopoly marker when purchasing electricity for irrigation.
When there is only on buyer of a product, the market is termed as monopsony market.
The sugarcane farmers in the catchment areas of a sugar factory generally face a
monopsony market situation.
2) Duopoly market: A duopoly market is one which has only two sellers of a
commodity. The market situation in which there are only two buyers of a commodity
is known as duopsony market.
3) Oligopoly market: A market in which there are more than few but still a few sellers
of a commodity is known as oligopoly market. A market having a few (more than
two) buyers is known as Oligopsony market.
4) Monopolistic market competition: When a large number of sellers deal in
heterogeneous and differentiated form of a commodity, the situation is called
monopolistic competition. The difference is made conspicuous by different trade
marks on the product.
Monopsony, Duopsony, Oligopsony……………………………….

8. On the basis of nature of commodity:

a) Commodity market: A market which deals with the goods and raw materials, such as
wheat, barley, cotton, fertilizers, seeds, etc., are termed as commodity market
b) Capital market: The market in which bonds, shares and securities are bought and sold
are called capital market. Example: Money market, share market.
9. On the basis of stage of marketing:

a) Producing markets: Those markets which mainly assemble the commodity for
further distribution to other markets are terms as producing markets. Such markets are
located in producing areas.
b) Consuming markets: Markets which collect the produce for final disposal to the
consuming population are called consumer markets. Such markets are generally
located in areas where production in inadequate or in thickly populated urban centre.
The urban areas, including cities are consuming markets for agricultural commodities.

10. On the basis of extent of public intervention:

a) Regulated market: These are those markets in which business is done in accordance
with the rules and regulations framed by the statutory market organization
representing different sections involved in the marketing. The marketing costs in such
markets are standardized and, marketing practices are regulated.
b) Unregulated or informally regulated markets: In unregulated markets, business is
conducted without any set rules and regulations. Traders frame the rules for the
conduct of the business and run the market. These markets suffer from many ills,

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 ranging from unstandardized charges for marketing functions to imperfections in
determination of prices.
11. On the basis of type of population served:

a) Urban market: A market which serves mainly the population residing in urban area
is called an urban market.

b) Rural market: The word rural market usually refers to the demand originating from
the rural population.

12. On the basis of market functionaries and accrual of marketing margins:

On the basis of as to who are the market functionaries and to whom the market margin
accrue, market may be classified as, a) farmers market, b) cooperative market and c) general
market.

MARKET INTERMEDIARIES:

In the movement of agricultural commodities from producer to consumer, the role of market
middlemen/intermediaries has increased in the recent past because a substantial part of the
produce moves through them. Middlemen/intermediaries are those individuals or business
concerns which specialize in performing various marketing functions and render services
involved in the marketing of goods. They may be classified into five groups as follows;

1. Merchant middlemen:
Merchant middlemen are those individuals who take title of the goods they handle.
They buy and sell on their own and gain or lose depending upon the difference in the sale and
purchase prices. They may suffer loss with a fall in the price of the product. Merchant middle
are of four types:

a) Wholesalers: Wholesalers are those merchant middlemen who buy and sell agricultural
commodities in large quantities. They may buy directly from farmers or from other
wholesalers. They sell agricultural commodities either in the same market or in other
markets. They sell to retailers, other wholesalers or processors. They do not sell significant
quantities to ultimate consumers. They own godowns for the storage of the produce.

b) Retailers: Retailers buy goods from wholesalers and sell them to the consumers in small
quantities. Retailers are the closest to consumers in the marketing channel.

c) Itinerant traders and village merchant: Itinerant traders are those merchant who move
from village to village and directly purchase the produce from the cultivators. They
transport it to the primary or secondary market and sell it there. Village merchants may
have their small establishment in the villages. They purchase the produce of those farmers
who have either taken finance from them or those who are not able to go to the market.
Village merchants also supply essential consumption goods to the farmers. They act as the
financers of poor farmers. They often visit nearby markets and keep in touch with the
prevailing prices.
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d) Mashakakhores: This is a local term used for big retailers or small wholesalers
dealing in fruits and vegetables. Earlier, the mashkakhores used to deal only in one or
two fruits and vegetables, purchasing from the commission agents or wholesalers in
substantial quantitiesusually three to four quintals of produce. They usually sell to the bulk
consumers like hotelwalas, para-military units or small retailers/vendors in lots of about 5
kg to 10 kg each. However, in the recent years, mashkakhores have started retailing to all
types of customers without the condition of a minimum quantity. In other words, the
mashkakhoresare now working more like ordinary retailers.

2. Agent middlemen:

Agent middlemen act as representatives of their clients. They do not take title to the produce
and, therefore do not own it. They merely negotiate the purchase and/or sale. They sell
services to their clients (buyers or sellers) and not the goods or commodities. They receive
income in the form of commission or brokerage. Agent middlemen are of two types:

a) Commission Agents or Arhatias:

A commission agent is a person operating in the wholesale market who acts as the
representative of either a seller or a buyer. A commission agent normally takes over the
physical handling of the produce, arranges for its sale, collects the price from the buyer,
deducts his expenses and commission, and remits the balance to the seller. Commission
agents or arhatias in unregulated market are of two types i.e. Kaccha arhatias and Pacca
arhatias. Kaccha arhatias primarily act for sellers, including farmers. They sometimes
provide advance money to the farmers and the itinerant traders on the condition that the
produce will be disposed on through them only. On the other hand, Pacca arhatia acts on
behalf of the traders in the consuming market. The processors (eg. Rice millers, oil millers
and cotton or jute dealers) and big wholesalers in the consuming market employ Pacca
arhatias as their agents for purchase of specified quantity of goods within a given price range.
In a regulated market, only one category of commission agent exists under the name of ‘A’
class trader. The commission agent keeps an establishment- a shop, a godown and a rest
house for his clients. He renders all the facilities to the clients.

b) Brokers: Brokers render personal services to their clients in the market; but unlike
the commission agents, they do not have the physical control of the produce. The
main function a broker is to bring together buyer and sellers on the same platform for
negotiations. Their charge is called brokerage. They may claim brokerage from buyer,
seller or both depending upon the market situation and service rendered. Brokers usually
have no establishment in the market. They simply wander about in the market and render
their services to clients. They do not render any other service except to bring buyers and
sellers on the same platform. There is no risk to them.
3. Speculative middlemen:
Those middlemen who take title to the product with a view to making a profit on it are
called speculative middlemen. They are not regular buyer or seller of the produce. They
specialize in risk taking. They buy at low prices when arrivals are substantial and sell in the
off-season when prices are high. They make profit from short run as well as long run price
fluctuations.
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4. Processors:
Processors carry on their business either on their own or on custom basis. Some processors
employ agents to buy for them in the producing areas, store the produce and process it
throughout the year on continuous basis. They also engage in advertising activity to create
a demand for their processed products. They add form utility to agricultural commodities.
5. Facilitative middlemen:
Some middlemen do not buy or sell directly but assist in the marketing process.
These middlemen receive their income in the form of fees or service charge from
those who use their services. The important facilitative middlemen are:

a) Hamlas or labourers: They physically move the goods in marketplace. They do

unloading from and the loading on to the bullock carts and trucks. They assist in
weighing the bags. They perform cleaning, sieving, and refilling jobs and stitch the
bags. Hamlas are the hub of the marketing wheel. Without their active cooperation,
marketing system would not function smoothly.
b) Weighmen: They facilitate the correct weighement of the produce. They use a pan
balance when quantity is small. Generally, a scale beam balance is used. They get
payment of their services through the commission agent. The weighbridge and
electronic balance system also exist in big markets.
c) Graders: These middlemen sort out the product into different grades based on some
defined characteristics and arrange them for sale. They facilitate the process of price
settlement between buyer and seller.
d) Transporters: They assists in movement of the produce from one market to
another. The main market means are the railways and trucks. Bullock carts or
tractor-trolleys are also used in villages for the transportation of agricultural
commodities.
e) Communication agency: It helps in the communication of the information about the
prices prevailing, and quantity available in the market. Sometimes the transactions take
place on the telephone. The post and telegraph, telephones, mobiles, newspapers, the
radio and informal links are the main communication channels in agricultural
marketing.
f) Advertising agencies: It enables prospective buyers to know the quality of the product
and decide about the purchase of commodities. Newspaper, radio, television, print
media, etc. are the main media for advertisement.
g) Auctioners: They help in exchange function by putting the produce for auction and
bidding by the buyers.

DRIVERS OF GROWTH OF AGRICULTURAL MARKETING IN INDIA

1. Technological change in Agriculture:
Technological developments in agriculture, such as the evolution of high yielding
varieties of seeds, increased use of modern inputs and cultivation practices in the
agricultural sector, have resulted in substantial increase in farm production. The
marketed surplus of agricultural produce has therefore increase. This has resulted into
the growth on the marketing system.
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 2. Specialization:
The tendency towards increasing specialization by farmers and regions in certain
crops or livestock has resulted in an increase in their efficiency and the breakdown in
the self-sufficiency of the family unit. Specialization, thus, has resulted in increased
production, which is the base for the growth of marketing and, in turn, of the
economy. This has also resulted in improved use efficiency of natural resources like
land and water.
3. Urbanization:
Urban people are the main buyers of agricultural surpluses. The urban population of
India has increased significantly which necessitated a faster growth of agricultural
marketing activities. The rate of growth of urban population is much higher than rural
population (due to rural-urban migration) which has further increased the importance
of marketing system for farm products.
4. Transportation and communication
The increase in transportation and communication facilities has widened the market
for farm products. The length and breadth of the market to which a product is taken
from the production areas have increased. In the absence of these facilities, the
movement of produce from one area to another was limited, and the consumption of a
product was restricted only to the areas of production or; at the most, to nearby areas.

PROBLEMS IN AGRICULTURAL MARKETING IN INDIA

Indian system of agricultural marketing suffers from a number of defects. As a consequence,
the Indian farmer is deprived of a fair price for his produce. The main defects of the
agricultural marketing system are discussed here.
Improper Warehouses: There is an absence of proper ware housing facilities in the villages.
Therefore, the farmer is compelled to store his products in pits, mud-vessels, "Kutcha"
storehouses, etc. These unscientific methods of storing lead to considerable wastage.
Approximately 1.5% of the produce gets rotten and becomes unfit for human consumption.
Due to this reason supply in the village market increases substantially and the farmers are not
able to get a fair price for their produce. The setting up of Central Warehousing Corporation
and State Warehousing Corporation has improved the situation to some extent
Lack of Grading and Standardization: Different varieties of agricultural produce are not
graded properly. The practice usually prevalent is the one known as "dara" sales wherein
heap of all qualities of produce are sold in one common lot Thus the farmer producing better
qualities is not assured of a better price. Hence there is no incentive to use better seeds and
produce better varieties.
Inadequate Transport Facilities: Transport facilities are highly inadequate in India. Only a
small number of villages are joined by railways and pucca roads to mandies. Produce has to
be carried on slow moving transport vehicles like bullock carts. Obviously such means of
transport cannot be used to carry produce to far-off places and the farmer has to dump his
produce in nearby markets even if the price obtained in these markets is considerably low.

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 This is even truer with perishable commodities.
Presence of a Large Number of Middlemen: The chain of middlemen in the agricultural
marketing is so large that the share of farmers is reduced substantially. For instance, a study
of D.D. Sidhan revealed, that farmers obtain only about 53% of the price of rice, 31% being
the share of middle men (the remaining 16% being the marketing cost). In the case of
vegetables and fruits the share was even less, 39% in the former case and 34% in the latter.
The share of middle- men in the case of vegetables was 29.5% and in the case of fruits was
46.5%.

Malpractices in Unregulated Markets: Even now the number of unregulated markets in the
country is substantially large. Arhatiyas and brokers, taking advantage of the ignorance, and
illiteracy of the farmers, use unfair means to cheat them. The farmers are required to pay
arhat (pledging charge) to the arhatiyas, "tulaii" (weight charge) for weighing the produce,
"palledari" to unload the bullock-carts and for doing other miscellaneous types of allied
works, "garda" for impurities in the produce, and a number of other undefined and
unspecified charges. Another malpractice in the mandies relates to the use of wrong weights
and measures in the regulated markets. Wrong weights continue to be used in some
unregulated markets with the object of cheating the farmers.

Inadequate Market Information: It is often not possible for the farmers to obtain
information on exact market prices in different markets. So, they accept whatever price the
traders offer to them. With a view to tackle this problem the government is using the radio
and television media to broadcast market prices regularly. The newspapers also keep the
farmers posted with the latest changes in prices. However the price quotations are sometimes
not reliable and sometimes have a great time-lag. The trader generally offers less than the
price quoted by the government news media.

Inadequate Credit Facilities: Indian farmer, being poor, tries to sell off the produce
immediately after the crop is harvested though prices at that time are very low.

2. MARKETING FUNTIONS: TRANSPORTATION, STORAGE AND WAREHOUSING,

PACKAGING

TRANSPORTATION

Transportation or the movement of products between places is one of the most important
marketing functions at every stage, i.e., right from the threshing floor to the point of
consumption. Most of the goods are not consumed where they are produced. All agricultural
commodities have to be brought from the farm to the local market and from there to primary wholesale
markets, secondary wholesale markets, retail markets and ultimately to the consumers. The farm inputs
from the factories must be taken to the warehouses and from the warehouses to the wholesalers,
retailers and finally to the consumers (farmers). Transportation adds the place utility to goods.

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Transport is an indispensable marketing function. Its importance has increased with urbanization. For
the development of trade in any commodity or in any area transport is a sine qua non. Trade and
transport go side by side; the one reinforces and strengthens the other.

ADVANTAGES OF TRANSPORT FUNCTION

The main advantages of the transport function are:

(i) Widening of the Market: Transport helps in the development or widening of markets by bridging
the gap between the producers and consumers located in different areas. Without transport, the markets
would have mainly been local markets. The exchange of goods between different districts, regions or
countries would be impossible in the absence of this function. The example is the market for Himachal
or Kashmir apples. The producers are located mainly in the states of Himachal Pradesh and Jammu &
Kashmir, but apples are consumed throughout the country. Similarly, transportation of fresh vegetables
from Indian ports to Gulf countries has expanded the markets for vegetable growers of India.

(ii) Narrowing Price Difference Over Space: The transportation of goods from surplus areas to the
places of scarcity helps in checking price rise in the scarcity areas and price fall in surplus areas, thus
reduce the spatial differences in prices.

(iii) Creation of Employment: The transport function provides employment to a large number of
persons through the construction of roads, loading and unloading, plying of the means of transportation
and repair services.

(iv) Facilitation of Specialized Farming: Different areas of the country are suitable for different
crops, depending on their soil and agro-climatic conditions. Farmers can go in for specialization in the
commodity most suitable to their area, and exchange the goods required by them from other areas at a
cheaper price than their own production cost.

(v) Transformation of the Economy: Transportation helps in the transformation of the economy from
the subsistence stage to the developed commercial stage. Industrial growth is stimulated by being fed
with the raw material produced in rural areas. Manufactured goods from industries to village or rural
areas, too, can be moved.

(vi) Mobility of the Factors of Production: Transport helps in increasing the mobility of capital and
labour from one area to another. Entrepreneurs get opportunities for the investment of their capital in
newly-opened areas of the country, where the prospects of profit are very bright. Moreover,
transportation helps in the migration of people in search of better remunerative jobs.

MEANS OF TRANSPORTATION

The available means of transportation can be classified as shown in chart 4.1. The transportation of
agricultural commodities is mainly done by bullock or camel carts, tractor-trolleys and trucks,
depending upon the availability quantity and the stage of marketing. The most common means of
transportation used at different stages of marketing are:

Stage of Marketing Transportation is done by- Mean-

12
(1) From the threshing Farmers
Floor to the village Camel or bullock carts,
market nearest to the
road or railway point
thela, bicycle hand carts or
(ii) From the village Traders
market/railway Station
to primary /secondary by head loads Trucks,
wholesale market
buses or railway

(iii) From retail or Consumers

wholesale market to
consumers

TYPES OF WAREHOUSES

Warehouses may be classified on two bases:

1. On the Basis of Ownership

(a) Private Warehouses: These are owned by individuals, large business houses or wholesalers for the
storage of their own stocks. They also store the products of others and charge a fee for it.

(b) Public Warehouses: These are the warehouses which are owned by the government and are meant
for the storage of goods of any member of the public against a prescribed storage charge. The method
of operation and the charges for storage are regulated by the government.
(c) Bonded Warehouses: These warehouses are specially constructed at seaport or an airport and
accept imported goods for storage till the payment of customs duty by the importer of goods.
These warehouses are licensed by the government for this purpose. The owner of the warehouse
gives an undertaking to the government that customs duty will be collected from the person before he is
allowed to remove the goods from the warehouse. In other words, the goods stored in this warehouse
are bonded goods. They may be owned by the dock authorities or privately-owned; but they have to
work under the close supervision and control of the customs authorities. The following services are
rendered by bonded warehouses:

On the Basis of Type of Commodities Stored

(a) General Warehouses: These are ordinary warehouses used for storage of most of food grains,
fertilizers etc. In constructing such warehouses no commodity-specific requirement is kept in view.

(b) Special Commodity Warehouses: These are warehouses which are specially constructed for the
storage of specific commodities like cotton, tobacco, wool and petroleum products. They are
constructed on the basis of the specific requirements of the commodity.

13
(c) Refrigerated Warehouses: These are warehouses in which temperature is maintained as per
requirements and are meant for such perishable commodities as vegetables, fruits, fish, eggs and meat.
The temperature in these warehouses is maintained below 30° to 50°F or even less, so that the product
may not get spoiled by high atmospheric temperature.

COSTS AND RETURNS OF A WAREHOUSING ENTERPRISE

The costs incurred in storage and warehousing can be divided into two groups:

(i) Fixed costs: These costs are of permanent nature and remain the same irrespective of the quantity
stored in the warehouse. The main components of fixed costs are:

(a) Depreciation on building and machinery, if any;

(b) Insurance premium paid to the insurance company;
(c) Taxes, licence fees etc.;
(d) Repair and maintenance cost of the warehouse:
(e) Interest on the investment in construction of the warehouse;
(f) Salary of the permanent staff;
(g) Cost of records and book-keeping:
(h) Fixed part of the electricity charges (meter rent and minimum fixed

(ii) Variable Costs: These costs are of varying nature, i.e., they vary with the quantity stored in the
warehouse. The main components of variable costs charges are:
(a)Cost of protective material used, viz., insecticides, pesticides, rodenticides, gunny bags, polythene
cover, wooden slabs etc.;
(b) Cost of electric power,
(c) Wages of temporary labour

PACKAGING

Packaging is the first function performed in the marketing of agricultural commodities. It is

required for nearly all the farm products at every stage of the marketing process. The type of the
container used in the packing of commodities varies with the type of the commodity as well as with the
stage of marketing. For example, gunny bags are used for cereals, pulses and oilseeds when they are
taken from the farm to the market. For packing milk or milk products, plastic, polythene, aluminium,
tin or glass containers are used. Wooden boxes with straw / bamboo baskets and plastic trays or
containers are used for packing fruits and vegetables. Laboratories to carry out testing of packing
materials, training of the human resources, and other activities connected with packaging.

3. MARKETING CHANNELS:

Marketing channels are routes through which agricultural products move from producers to
consumers. The length of the channel varies from commodity to commodity, depending on the

14
quantity to be moved, the form of consumer demand and degree of regional specialization in
production.

DEFINITION

A marketing channel may be defined in different ways.

According to Moore et. al., the chain of intermediaries through whom the various food grains
pass from producers to consumers constitutes their marketing channels.

Kohls and Uhl have defined marketing channel as alternative routes of product flows from
producers to consumers.

At every stage of the marketing channel, one or other form of value (or utility) is added to the product.
Hence, these are also called value chains.

FACTORS AFFECTING LENGTH OF MARKETING CHANNELS:

Marketing channels for agricultural products vary from product to product, country to country, lot to
lot and time to time. For example, the marketing channels for fruits are different from those for food
grains. Packagers play a crucial role in the marketing of fruits. The level of the development of a
society or country determines the final form in which consumers demand the product. For example,
consumers in developed countries demand more processed foods in a packed form. Wheat has to be
supplied in the form of bread. Most eatables have to be cooked and packed properly before they reach
the consumers. Processors play a dominant role in such societies. In developing countries like India,
however, most food grains are purchased by consumers in the raw form and processing is done at the
consumer's level. Again, the lots originating at small farms follow different route or channels from the
one originating in large farms. For example, small farms usually sell their produce to village traders; it
may or may not enter the main market. But large farms usually sell their produce in the main market,
where it goes into the hands of wholesalers. The produce sold immediately after the harvest usually
follows longer channel than the one sold in later months.

With the expansion in transportation and communication network, changes in the structure of demand
and the development of markets, marketing channels for farm products in India have undergone a
considerable change, both in terms of length and quality.

MARKETING CHANNELS FOR CEREALS

Marketing channels for various cereals in India are more or less similar, except the channel for
paddy (or rice) where rice millers come into the picture. For pulse crops, dal mills appear
prominently in the channel.

15
MARKETING CHANNELS FOR FRUITS AND VEGETABLES

Marketing channels for fruits and vegetables vary from commodity to commodity and from producer to
producer. In rural areas and small towns, many producers perform the function of retail sellers. Large
producers directly sell their produce to the wholesalers or processing firms. Some of the common
marketing channels for vegetables and fruits are:

(i) Producer to consumer;

(ii) Producer to primary wholesalers to retailers or hawkers to consumer,

(iii) Producer to processors (for conversion into juices, preserves, etc.):

(iv) Producers to primary wholesalers to processors;

(v) Producers to primary wholesalers to secondary wholesalers to retailers or hawkers to consumers;

(vi) Producers to local assemblers to primary wholesalers to retailers or hawkers to consumers.

An important feature of marketing channels for fruits and vegetables is that these commodities just
move to some selected large cities/centres and subsequently are distributed to urban population and
other medium size urban market centres. The wholesale markets of these urban centres work as transit
points and thus play an important role in the entire marketing channel for fruits and vegetables. Large
wholesale markets for fruits and vegetables are concentrated in 10 major cities viz., Delhi, Kolkata,
Bangalore, Chennai, Mumbai, Jaipur, Nagpur, Vijayavada, Lucknow and Varanasi. These cities
account for 75 percent of vegetables marketed in major urban areas in India. Further, the transit

16
trade takes place through the cities with more than 20 lakh population which account for 68 percent of
the fruits and vegetables grown in the respective regions. There are 65 urban wholesale markets for
fruits and 81 for vegetables. Each market, on an average, serves a population of about 7 lakhs.

MARKETING CHANNELS FOR EGGS

The prevalent marketing channels for eggs are:

(i) Producer to consumer;

(ii) Producer to retailer to consumer;

(iii) Producer to wholesaler to retailer to consumer;

(iv) Producer to co-operative marketing society to wholesalers to retailers to consumers;

(v) Producers to egg powder factory.

Sometimes, the wholesaling and retailing functions are performed by a single firm in the
channel.

4. MARKETING EFFICIENCY

Marketing efficiency is essentially the degree of market performance. In this sense the concept is
broad and dynamic. It encompasses many theoretical manifestations and practical aspects. Broadly, one
may look at efficiency of a market structure through the following:

i) Whether it fulfils the objectives assigned to it or expectations from the system at minimum
possible cost or maximises the fulfilment of objectives with given level of resources (or costs); and

(ii) Whether it is responsive to impulses generated through environmental changes and whether
impulses are transmitted at all levels in the system. Expectations from or objectives assigned to the
system are of critical importance in assessing the efficiency because various participants have different
expectations from the system, which quite often conflict with each other. For example:

(iii) Traders and other functionaries expect steady and increasing incomes;

(iv) Government expects the system to safeguard the interest of all the three section and in a
proportion which is considered to be fair so that overall long run welfare of the society is
maximized.

DEFINITION OF MARKETING EFFICIENCY

The concept of marketing efficiency is so broad and dynamic that no single definition encompasses all
of its theoretical and practical implications. Some of the definitions are given below:

As per Kohls and Uhl: Marketing efficiency is the ratio of market output (satisfaction) to
marketing input (cost of resources). An increase in this ratio represents improved efficiency and a
decrease denotes reduced efficiency. A reduction in the cost for the same level of satisfaction or an
increase in the satisfaction at a given cost results in the improvement in efficiency.
17
Jasdanwalla: The term marketing efficiency may be broadly defined as the effectiveness or
competence with which a market structure performs its designated function.

Clark: Marketing efficiency has been defined as having the following three components:

(i) The effectiveness with which a marketing service is performed;

(ii) The cost at which the service is performed; and

(iii) The effect of this cost and the method of performing the service on production and consumption.

Of the three components, the last two are the most important because the satisfaction of the consumer
at the lowest possible cost must go hand in hand with the maintenance of a high volume of farm output.

EFFICIENT MARKETING

The movement of goods from producers to consumers at the lowest possible cost, consistent with the
provision of the services desired by the consumer, may be termed as efficient marketing. A change that
reduces the costs of accomplishing a particular function without reducing consumer satisfaction
indicates an improvement in the efficiency. But a change that reduces costs but also reduces consumer
satisfaction need not indicate increase in marketing efficiency. A higher level of consumer satisfaction
even at a higher marketing cost may mean increased marketing efficiency if the additional satisfaction
derived by the consumer outweighs the additional cost incurred I on the marketing process.

An efficient marketing system is an effective agent of change and an important means for raising the
income levels of the farmers and the levels of satisfaction of the consumers. It can be harnessed to
improve the quality of life of the masses.

APPROACHES TO THE ASSESSMENT OF MARKETING EFFICIENCY

Traditionally, efficiency of the marketing system has been looked at from the following two angles:

(1) Technical or Physical or Operational Efficiency

This aspect of the efficiency pertains to the cost of performing a function. Efficiency is said to have
increased when cost of performing a function for each unit of output is reduced. This can be brought
about either by reducing physical losses or through change in the technology of the function viz.,
storage, transportation, handling, and processing. A change in the technique may result either in the
reduction of per unit cost (storage cost for a month, transportation cost to a distance of 100 kms or the
cost of converting 100 kg of oranges to orange juice) or the increase in the output for a given level of
cost.

(ii) Pricing or Allocative Efficiency

Pricing efficiency means that the system is able to allocate farm products either overtime, across the
space or among the traders, processors and consumers (at a point of time) in such a way that no other
allocation would make producers and consumers better off. This is achieved via pricing of the product
at different stages, at different places, at different times and among different users and hence called

18
pricing efficiency. In simple terms, the pricing do not exceed efficiency is achieved when following
conditions hold:

(a) Price differences between spatially separated markets transportation cost;

(b) Intra-year price rise is not more than storage cost; and

(c) Price differences between forms of the product (pulse grain and split dal or wheat grain and wheat
flour) do not exceed processing cost.

The pricing efficiency refers to the structural characteristics of the marketing system, where the
sellers are able to get the true value of their produce and the consumers receive true worth of
their money.

Whenever functions of transportation, storage and processing are performed, cost is incurred, value is
added and the product is priced again.

The efficiency of marketing is concerned with the extent to which the prices (after these functions are
performed) deviate from what the cost of performing these functions warrant. The pricing aspect of
marketing efficiency is affected by the extent of competition, dissemination of market information and

The above two types of efficiencies are mutually reinforcing in the long run; one without the
other is not enough.

EMPIRICAL ASSESSMENT OF MARKETING EFFICIENCY

Some simple measures to assess the efficiency of the marketing system for agricultural commodities
are:

(1) Ratio of Output to Input Conceptually, efficiency of any activity or process is defined as the ratio
of output to input. If 'O' and '7' are respectively output and input of the marketing system and 'E' is the
index of marketing efficiency; then

E= X100

A higher value of E denotes higher level of efficiency and vice versa. When applied in the area of
marketing, output is the 'value added' by the marketing system and 'input is the real cost of marketing
(including some fair margins of intermediaries). The measurement of 'value added' is not easy. The
difference in the price at the farm level (price received by the farmer) and that at the retail level (price
paid by the consumers) may be used to measure the value added' but it has mainly because of market
imperfections. Assuming that degree of imperfection is pervasive, this measure has been used to
compare the marketing efficiency of two spatially separated markets, of two commodities or at two
points of time.

(i) Shepherd Approach.

19
Shepherd suggested that the ratio of the total value of goods marketed to the marketing cost may be
used as a measure of marketing efficiency. The higher the ratio, the higher efficiency and vice
versa. This method eliminates the problem of measurement of value added.

(ii) Acharya Approach

According to Acharya, an ideal measure of marketing efficiency. particularly for comparing the
efficiency of alternate markets/channels, should be such which takes into account all of the following:

(a) Total marketing costs (MC)

(b) Net marketing margins (MM)

(c) Prices received by the farmer (FP)

(d) Prices paid by the consumer (RP)

Further, the measure should reflect the following relationship between each of these variables and the
marketing efficiency (the assumption of "other things remaining the same" is implicit):

(i) Higher the (a), lower the efficiency

(ii) Higher the (b), lower the efficiency

(iii) Higher the (c), higher the efficiency

(iv) Higher the (d), lower the efficiency.

As there is an exact relationship among four variables, i.e., a+b+c=d, any three of these could be used
to arrive at a measure for comparing the marketing efficiency. The following modified measure is,
therefore, being suggested by Acharya

MME = FP / (MC+MM)

Where MME is the modified measure of marketing efficiency and MC and MM are marketing costs
and marketing margins respectively.

OVERVIEW OF MARKETING EFFICIENCY IN INDIAN AGRICULTURE

In a report on Agricultural Marketing in India as a part of the Millennium Study of Indian Farmers
prepared by Acharya (2003), based on the review of the past studies it was summarised that:

(i) The marketing efficiency in India was low in early part of nineties as reported by Royal
Commission on Agriculture (1928) and Central Banking Enquiry Committee (1931) because of the
existence of various malpractices in the trade of agricultural commodities. The situation improved
somewhat after the establishment of regulated markets in the country.

(ii) The degree of marketing/pricing efficiency is relatively low for fruits, vegetables, flowers and other
perishable products due to inadequate infrastructure to handle all such perishable products.

20
(iii) Pricing efficiency is high for food grains and oilseeds even in spatially separated markets as price
movements were not higher than transportation costs in more than 80 percent market pairs. Similarly,
inter-seasonal price rise is not greater than storage cost.

(iv)The improvement in marketing efficiency depends on the competitiveness of the markets. In

enhancing the competitiveness of markets, information has a crucial role and this information is not
equally accessible to all the market participants. In this connection, encouragement needs to be
provided to generate and host useful portals, databases and websites on agricultural marketing.

5. MARKETING COSTS, MARGINS AND PRICE SPREAD

Market functionaries or institutions move the commodities from the producers to consumers. Every
function or service involves cost. The intermediaries or middlemen make some profit to remain in the
trade after meeting the cost of the function performed.

In the marketing of agricultural commodities, the difference between the price paid by consumer
and the price received by the producer for an equivalent quantity of farm produce is often
known as farm-retail spread or price spread. Sometimes, this is termed as gross marketing
margin. The total or gross margin includes:

(i) The cost involved in moving the product from the point of production to the point of consumption,
i.e., the cost of performing the various marketing functions and of operating various agencies; and

(ii) Profits of the various market functionaries involved in moving the produce from the initial point of
production till it reaches the ultimate consumer. The absolute value of the marketing margin varies
from channel to channel, market to market and time to time for a product.

CONCEPTS OF MARKETING MARGINS

There are two concepts of marketing margins.

(1) Concurrent Margins

These refer to the difference between the prices prevailing at successive stages of marketing at a
given point of time. For example, the difference between the farmer's selling price and retail
price on a specific date is the total concurrent margin. Concurrent margins do not take into account
the time that elapses between the purchase and sale of the produce.

(ii) Lagged Margins

A lagged margin is the difference between the price received by a seller at a particular stage of
marketing and the price paid by him at the preceding stage of marketing during an earlier
period. The length of time between the two points denotes the period for which the seller has held the
product. The lagged margin concept is a better concept because it takes into account the time that
elapse between the purchase and sale by a party and between the sale by the farmer and the purchase by
the consumer.

21
The method of calculating lagged margins is based on the same principle as that involved in the first in-
first out method of accounting. However, it is difficult to obtain data on time lags between purchase
and sale with a view to maintaining continuous series of marketing margins.

ESTIMATION OF MARKETING MARGINS AND COSTS

Three methods are generally used in the computation of marketing margins and costs.

(i) Chasing of Lot Method

A specific lot or consignment is selected and chased through the marketing system until it reaches
the ultimate consumer. The cost and margin involved at each stage are assessed. The difficulties
or limitations of this method are:

(a) It is difficult to chase the movement of a lot from the producer to the ultimate consumer because
either the product gets processed or the lot gets mixed up with other

(b) Most of the lots lose their identity during the process of marketing,lots.

(c) There is no assurance that the lot selected is representative of the whole product.

This method is appropriate for such perishable farm commodities as fruits, vegetables, and milk,
because the lag between the time the commodity enters the marketing system and time of its final
consumption is very small.

(ii) Sum of Average Gross Margins Method

The average gross margin at each successive level of marketing is worked out by dividing the
difference of the money value of sales and purchase by the number of units of the commodity
transacted by a particular agency. The average gross margins of all the intermediaries are added to
obtain the total marketing margin as well as the break-up of the consumer's rupee.

The following formula may be used to work out the total marketing margins:

MT=Σ(S-P)/Q

where

M, Total marketing margin

S = Sale value of a product for ith firm

P = Purchase value of a product paid by the ith firm

Q = Quantity of the product handled by ith firm

i = 1, 2,...............n. (number of firms involved in the marketing channel)

This method requires considerable effort in the location and examination of the records kept by
the intermediaries. The main difficulties in using this method are:

22
(a) Traders may not allow access to their account books. It would then be difficult to obtain complete
and accurate information. Moreover, some traders often make manipulated entries in their account
books to evade sales tax, VAT and income tax; and

(b) This method necessitates adjustment for the difference between the quantities purchased and sold
because a part of the product is wasted during handling.

(iii) Comparison of Prices at Successive Stages of Marketing

Under this method, prices at successive stages of marketing at the producer's, wholesaler's and
retailer's levels-are compared. The difference is taken the gross margin of an intermediary is worked
out by deducting the ascertainable costs from the gross margin earned by that intermediary. This
method is appropriate when the objective is to study the movements marketing costs and
margins in relation to prices and cost indices. The main difficulties encountered in the use of this
method are:

(a) Representative and comparable series of prices for the same quality at Successive stages of
marketing are not readily available for all the products;

(b) Adjustment for a loss in the quality of the product at various stages of marketing due to wastage and
spoilage in processing and handling is difficult;

(c) The price quotation may not cover the price of a product of a comparable quality; and

(d) The time lag between the performance of various marketing operations is not properly accounted
for.

PRODUCER'S PRICE

This is the net price received by the farmer at the time of first sale. This is equal to the wholesale price
at the primary assembling centre, minus the charges borne by the farmer in selling his produce. If PA,
is the wholesale price in the primary assembling market and C is the marketing cost incurred by the
farmer, the producer's price (PF) may by worked out as follows:

PF = PA - CF

Producer's Share in the Consumer's Rupee

It is the price received by the farmer expressed as a percentage of the retail price (ie., the price paid
by the consumer). If P, is the retail price, the producer's share in the consumer's rupee (P_{s}) may be
expressed as follows:

Ps = (PF/ Pr) * 100

Total Cost of Marketing

23
The total cost, incurred on marketing either in cash or in kind by the producer seller and by the
various intermediaries involved in the sale and purchase of the commodity till the commodity
reaches the ultimate consumer, may be computed as follows:

C=C F +C m1 +C m2 +C m3 +.....+C mn

where

C= Total cost of marketing of the commodity,

C = Cost paid by the producer from the time the produce leaves the farm till he sells it, and

Cm = Cost incurred by the ith middleman in the process of buying and selling the product.

Some of the costs are linked with the quantity marketed and some are linked with the value of the
commodity. The former is a fixed charge, while latter is a variable one. The actual rates of charges are
converted in terms of the weight unit or Rs. 100 worth of produce sold. The ad valorem charges are
calculated on the basis of the actual market price for the physical unit or Rs. 100 worth of produce sold.

FACTORS AFFECTING THE COST OF MARKETING

Studies on the cost of marketing reveal that there is a large variation in the cost per quintal or per Rs.
100 worth of the produce. The factors which affect marketing costs are:

(i) Perishability of the Product: The cost marketing is directly related to the degree of perishability.
The higher the perishability, the greater the cost of marketing, and vice versa.

(ii) Extent of Loss in Storage and Transportation: If the loss in the quality and quantity of product,
arising out of wastage or spoilage or shrinkage during the period of storage or in the course of
transportation is substantial, the marketing cost will go up.

(iii) Volume of the Product Handled: The larger the volume of business or turnover of a product, the
less will be the per unit cost of marketing.

(iv) Regularity in the Supply of the Product: If the supply of the product is regular throughout the
year, the cost of marketing on per unit basis will be less than in a situation of irregular supply or supply
restricted to a few months of the year.

(v) Extent of Packaging: The cost of marketing is higher for the commodities requiring packaging.

(vi) Extent of Adoption of Grading: The cost of marketing of ungraded product is higher than that of
the products in which grading can be easily adopted. However, elaborate grading adds to the cost.

(vii) Necessity of Demand Creation: If substantial advertisement is needed to create the demand of
prospective buyers, the total cost of marketing will be higher.

(viii) Bulkiness of the Product: The marketing cost per unit weight of bulky products is higher than
that of products which are not bulky.

24
(ix) Need for Retailing: The greater the need for the retailing of a product, the higher the total cost of
marketing;

(x) Necessity of Storage: The cost of the storage of a product adds to the cost of marketing, whereas
the commodities which are produced and sold immediately without any storage attract lower marketing
cost.

(xi) Extent of Risk: The greater the risk involved in the business for a product (due to either the failure
of the business, price fluctuations, monopsony of the buyer or the prevalence of unfair practices), the
higher is the cost of marketing.

(xii) Facilities Extended by the Dealers to the Consumers: The greater the facilities extended by the
dealer to the consumer (such as return facility for the product, home delivery facility, the facility of
supply of goods on credit, the facility of offering entertainment to buyers, etc.), the higher the cost of
marketing.

HOW TO REDUCE MARKETING COSTS

There are various ways of reducing marketing costs. No single factor can bring about any perceptible
reduction in these costs. However, a combination of factors may bring about a significant reduction in
the cost of marketing. Some ways of reducing marketing costs for farm products are:

(1) Increase the Efficiency of Marketing

An increase in the efficiency of marketing can be brought about by a wide range of activities between
producers and consumers. Some major areas in which improved efficiency may result in a reduction in
marketing costs are:

(a) Increasing the Volume of Business: By increasing the quantity to be handled at a time, one can
effectively reduce marketing costs and increase marketing efficiency. Group marketing by farmers can
help in this regard.

(b) Improved Handling Methods: The new methods of handling, such as pre-packaging of perishable
products, the use of fast transportation means, the development of cold storages and an efficient use of
labour are some of the methods by which efficiency may be increased and costs reduced.

(c) Managerial Control: The adoption of proven management techniques

increases efficiency. By a constant monitoring of costs and returns, the efficiency at each stage in
marketing may be stepped up.

(d) Change in Marketing Practices and Technology: Changes in marketing practices and technology
(such as sale of orange juice instead of orange, retailing food services through super markets, and
integration of marketing functions) reduce marketing costs and increase marketing efficiency.

(ii) Reduce Profits in Marketing: Profits in the marketing of agricultural commodities are often the
largest because of the inherent risk at various stages of marketing.

25
RELATIONSHIP OF FARMER'S PRICE, MARKETING COSTS AND CONSUMER'S PRICE

The farmer receives what the consumer pays after the various costs of marketing have been deducted.
This residual, expressed as a percentage of the price paid by the consumer (retail price), is the farmer's
share. The farmer's share may be calculated as follows:

where

FS= Farmer's share in the consumer price expressed as a percentage

RP= Retail price

MC =Marketing costs, including margins

PF= Price received by the farmer.

26
 6. Market Structure: Conduct and Performance Analysis
The term structure refers to something that has organization and dimension-shape, size and
design; and which is evolved for the purpose of performing a function. The term market
structure refers to the size and design of the market. It also includes the manner of the
operation of the market. Some of the expressions describing the market structure are:

1. Market structure refers to those organization characteristics of a market which

influence the nature of competition and pricing, and affect the conduct of business
firms.
2. Market structure refers to those characteristics of the market which affects the traders’
behaviour and their performances.
3. Market structure is the formal organization of the functional activity of a marketing
institute.
An understanding and knowledge of the market structure is essential to identify the
imperfections in the performance of a market.

Components of market structure:

The components of the market structure, which together determine the conduct and
performance of the market, are;

1. Concentration of market power:

The concentration of market power is an important element determining the nature of
competition and thus market conduct and performance. This is measures by the number and
size of the firms existing in the market. The extent of concentration represents the control
of an individual firm or a group of firms over the buying and selling of the produce. A
high degree of market concentration restricts the movement of goods between buyers and
sellers at fair and competitive prices, and creates an oligopoly or oligopsony situation in the
market.

2. Degree of product differentiation:

Whether or not products are homogeneous affects the market structure. If the products
are homogenous, the price variations in the market will not be wide. When products are
heterogeneous, the firms have the tendency to charge different prices for their products.

3. Conditions for entry of firms in the market:

Another dimension of the market structure is the restriction, if any, on the entry of firms
in the market. Sometimes, a few big firms do not allow new firms to enter the market or
make their entry difficult by their dominance in the market. There may also be some
government restrictions on the entry of firms.

27
4. Flow of market information:
A well-organized market intelligence information system helps all the buyers and sellers
to freely interact with one another in arriving at prices and striking deals.
5. Degree of integration:
The behaviour of an integrated market will be different from that of a market where there
is no or less integration either among the firms or of their activities. Firms plan their
strategies in respect of the methods to be employed in determining prices, increasing sales,
co-ordinating with competing firms and adopting predatory practices against the rivals or
potential entrants.

Market conduct and market performance

The term market conduct refers to the patterns of behaviour of firms, specially in relation to
the pricing and their practices in adopting and adjusting to the market in which they function.
Specifically, market conduct includes;

 Market sharing and pricing setting policies

 Policies aimed at coercing rivals, and
 Policies towards specification of the quality of products.

The term market performance refers to the economic results that flow from the industry as
each firm pursues its particular line of conduct.

Critaria for measuring Market Performance:

Society has to decide critaria for the satisfactory market performance. Some of the critaria for
measuring market performance and of the efficiency of the market structure are as follows;

1. Efficiency in the use of resources, including real cost of performing various marketing
functions
2. The existence of monopoly or monopoly profits, including the relationship of margins
with the average cost of performing various functions
3. Dynamic progressiveness of the system in adjusting the size and number of the firm in
relation to the volume of business, in adopting technological innovations and in finding
and/or inventing the new form of product to maximize the social welfare.
4. Whether or not a system aggravates the problem of inequalities in inter-personal, inter-
regional or inter-group incomes. For example, inequalities increase under the following
situations:

A. A market intermediary may pocket a return greater than its real contribution to the
national product.
B. Small farmers are discriminated and are offered a lower return because of the low
quantum of surplus.

The market structure has always to keep on adjusting to changing environment if it has to

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satisfy social goals. For a satisfactory market performance, the market structure should keep
pace with changes in 1) Production pattern, 2) Demand pattern, 3) costs and patterns of
marketing functions, and 4) technological changes in the industry.
Market structure analysis using concentration ratio:

The traditional approach to study the market structure is known as Structure-Conduct-

Performance (SCP) paradigm. There is a stable, causal relationship between the
structure of an industry, firm conduct and market performance. The SCP model
predicts that the structure of an industry indirectly affects its performance through its
impact on the market conduct. Since conduct is difficult to observe directly, the focus is
on identifying market structure elements such as firm’s size (market concentration of
sellers) and testing their impact on profitability, market power and strategic
behaviour. Two measures of seller concentration are: Concentration Ratio (CR) and
Herfindahl-Hirschman Index (HHI). These two are known as the traditional structural
measures of market concentration (based on market shares)
1. Concentration ratio (CR):
A concentration ratio is a measure of the total output produced in an industry by a
given number of firms in the industry. The most common concentration ratios are the
CR4 and the CR8, which means the market share of the four and the eight largest firms. The
change in concentration ratio over time is widely used as summarized indicator of structural
change in the market.

Example: The beverage industry is composed of 5 firms with market shares as follows;
Company A has 30% market share
Company B has 30% market share
Company C has 20% market share
Company D has 15% market share
Company E has 5% market share.

The three-firm concentration ratio for the beverage industry is 80% (30%+30%+20%)
The four firm concentration ratio for the beverage industry is 95% (30%+30%+20%+15%)

The concentration ratio of the n largest firms in an industry can be calculated as follows
𝐶𝑅𝑛 = ∑𝑛
𝑖=1 𝑆𝑖 i= 1,2,3,….n
𝑄𝑖
𝑆𝑖 =
𝑄
where,

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 Si = The share of ith firm in total output of the industry
Qi = quantity of ith firm/seller in the market
Q = total output in the industry

The centration ratio ranges from 0 to 100 per cent based on which the extent of market
competition can be guessed
No concentration:

0% means perfect competition or at the very least monopolistic competition. If for example
CR4=0 %, the four largest firm in the industry would not have any significant market share.

Total concentration

100% means an extremely concentrated oligopoly. If for example CR1= 100%, there is
a monopoly
Low concentration

0% to 50%. This category ranges from perfect competition to oligopoly.

Medium concentration

50% to 80%. An industry in this range is likely an oligopoly.

High concentration

80% to 100%. This category ranges from oligopoly to monopoly

Limitation of concentration ratio:

The definition of the concentration ratio does not use the market shares of all the firms in the
industry and does not provide the distribution of firm size. The concentration ratios just
provide a sign of the oligopolistic nature of an industry and indicate the degree of
competition. The Herfindahl-Hirschman index provides a more complete picture of
industry concentration than the concentration ratio.

2. Herfindahl-Hirschman Index (HHI):

The HHI is a measure of size of firms in relation to the industry and an indicator of the
amount of competition among them. It is defined as the sum of the squares of the market
shares for each firm within the industry and is always less than one.
𝐻𝐻𝐼 = ∑𝑛 2 i= 1,2,3,….n
𝑖=1 𝑆𝑖

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Where Si is the market share of firm i in the market and n is the number of firms.
Decrease inHHI index
Example: The beverage industry comprises 5 firms with market shares a
follows:Company A has 30% market share Company B has 30%
market share Company C has 20% market shareCompany D has
15% market shareCompany E has 5% market share.

Herfindahl-Hirschman Index for the beverage industry will be calculated as

follows;(0.30)2 + (0.30)2 + (0.20)2 + (0.15)2 + (0.05)2 =

0.245

Example 2. For instance, two cases in which the six largest firms produc
90% of the goods in a market:
Case 1: All six firms produce 15% each.
Case 2: One firm produces 80% while the five others produce 2% each.
We will assume that the remaining 10% of output is divided among 10
equally sizedproducers.
The six-firm concentration ratio would equal 90% for both case 1 and case 2. But
the first case would promote significant competition, where the second case
approaches monopoly.The Herfindahl index for these two situations makes the lack
of competition in the second case strikingly clear:

Case 1: Herfindahl index = (0.152+0.152+0.152+0.152+0.152+0.152)

+
(0.012+0.012+0.012+0.012+0.012+0.012+0.012+0.012+0.012+0.012)
= 0.235
Case 2: Herfindahl index = 0.802 + 5 * 0.022 + 10 * 0.012 = 0.643

Increases in the Herfindahl index generally indicate a decrease in competition and an

increaseof market power, whereas decreases indicate the opposite

A HHI index below 0.01 indicates a highly competitive

index.
A HHI index below 0.15 indicates an unconcentrated
index.
A HHI index between 0.15 to 0.25 indicates moderate
concentration.
A HHI index above 0.25 indicates high concentration

BEST OF LUCK

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