After three years of following food and farming in Ireland, there is one thing that is repetitive when it comes to marketing. It is the highlighting of this or that new market opportunity.
Probably most famously of all we had the ‘opening up’ of the US for Irish beef and especially for ‘grass-fed’ beef from Ireland. Within hours a number of us were pointing out that the USDA and American Grassfed Association had clearly and legally defined what ‘grass-fed’ meant in the USA and Irish beef, or at least very, very little, was going to qualify as grass-fed.
Then there was the mention of Egypt followed by the realization that Irish farmers were not going to be able to produce beef cheap enough. One hopes for a better conclusion with regards to Turkey.
One reads about how proud Ireland is to be selling to something like 125 countries around the World. I think I recently said that Ireland ‘splatters’ beef around the World. It appears to be more about shifting beef per se rather that placing it into a market via a carefully structured supply-chain that is going to operate successfully infinitum.
For the farmers it is about downloading some beef cattle via the live export market in the belief that less animals will force their supply-chain partners to pay more for what remains in Ireland. In contrast, when one looks into the premium beef markets of say the UK one realizes that it is all about closely coordinated supply-chain partnerships. Meanwhile, Ireland operates supply chains that are quite contrary and often highly antagonistic. It is not the way forwards.
What concerns me is that it appears to be the blind leading the blind; albeit with a handful of supply-chain partners sitting in the middle who probably know exactly where they are going. The farmers complain [endlessly] about them but are they doing much about it; or able to for that matter?
As I have often written, I believe that there are opportunities out there for premium Irish beef products. The small-scale, family farming systems of Ireland should also lend themselves to producing small volumes of select, niche-market-targeted beef. Yes, there is a major issue of how the farmer gets that product to the premium-paying consumer and some small-scale, route-to-market investments need to happen. But why are they not?
I believe that at the core of the problem is good quality market evaluation. And it is not just a problem in the beef sector; it is a problem across pretty well all the sectors where new product development is needed. That is not to say that the major players in the agri-foods industry are not innovating and doing this work themselves; by and large they have the resources to do so.
It is the small-scale, local initiatives that could use direct-from-farm raw materials that are poorly served. It is the very premium food producing activities that could and should add value to farm produce that are suffering, or just not getting off the ground. By and large they are being left to find their own way; that is if they try at all. In the long-term it is a failing that is costing Irish farmers and rural communities dearly.
If Ireland is ever going to be a food nation that exports premium food products AND competes with France or Italy as a premium foods producer on international markets, the country’s potential producers need to be well supported when it comes to evaluating and understanding what their markets are and what products they need to create to best service the consumers within those markets. Just saying that you produce the best food in the World does not suffice.
These thoughts brought me back to my lecture notes from teaching at the University of London’s agricultural faculty. It also led me to look again at the farm / agricultural business management manual that I wrote for retraining academic staff in the universities and colleges of the old Soviet Union. Even back then we were teaching that market evaluation was the starting point. It is still highly relevant but in Ireland one fears that the idea of doing thorough market evaluations is lost due to the prevalent ‘commodity’ group-think mentality that grips the nation.
At the end of this post I will include the section from the manual on undertaking a market review [written in the mid-90s in an old Soviet era apartment block in Tashkent]. It is not necessarily an activity for a farmer to undertake [although maybe it is one for their representative organisations]. Some of the ideas will be relevant to those who wish to become food producers. It is, however, important that they understand what others should be producing for them. Too often they are, to be frank, being fobbed off with second-rate, superficial information. The bar needs to be raised.
Often this is not easy work and it is becoming more difficult in an era when [some] governments choose not to fund market information provision. Usually it is more likely to be found published by the foreign services of those who see themselves as trading nations. Make no bones about it, this is not easy work and often requires tenacity, but if one is going to consider themselves as being market-led it has to be done. What is the alternative, to make investments in the hope that the market is really there? Or, even more simplistically, that the global population is growing so somebody somewhere will want to eat your produce [or soak up your milk production], so long as it is cheap enough.
At times over the years I have found myself looking at products and working out the prices that exist at the various points in the supply chain from retail price back to the ex-farm price. For local sales with short-supply chains this might be relatively straight-forward. For international sales it may be more complicated but equally, give that it is more likely to mean scale, more important.
Just take the earlier mentioned cattle sales to Turkey. If this is seen as a great opportunity, where is the presentation of the data that relates to the Turkish market [consumption trends, retail prices, likely target level in the market, likely landed prices in Turkey, a summary of who are the likely competitors [to establish the likelihood of success], shipping costs, quarantine costs etc.]? It is important that those who are going to consider supplying the market are as fully informed as possible. And when they are as likely as not going to be Irish-based traders and farmers, this information needs to be provided for them. Is it and if not, why not? Without it are they not just being asked to take a punt in the dark?
The following is a section from my farm business training manual. As stated in the first paragraph, this was not written as a prescriptive methodology, it was about encouraging the student to ask questions and to be inquisitive. It was also about raising their expectations concerning the information they, as a manager, should expect to have to support their decision making. My apologies for the layout as this was a copy and paste from an old Word document.
2.2 PRODUCT MARKET ANALYSIS
Having identified the enterprise possibilities for the farm/food processing business the markets for the resultant products should be analyzed. This should identify, for example, the volume that can be sold, the quality requirements of the market, the marketing channels and associated marketing costs and the product’s prices. The depth required will be dependent on the situation. For a small private farmer / food processor, the market may only be situated in the local town and therefore relatively easy to identify and analyze, whereas for a large agribusiness the market may cover a large geographic region and involve the supply of produce to various market outlets and processing businesses. In this case there will be many questions regarding, for example, quality requirements, supply volumes and suitable marketing and transport systems to consider.
2.2.1 Market reviews
The following sections do not define an exact methodology for undertaking a market review as each review will differ according to the business situation and product or commodity under consideration. It will, however, illustrate a few of the questions the manager may be looking to answer and a few of the general points that may warrant consideration when attempting to answer these questions.
2.2.2 Why undertake a market review?
The following points illustrate some of the reasons for preparing a review of a particular commodity or product market. It is frequently a valuable undertaking when evaluating and recommending changes to a business and, particularly, when the change introduces a new “unknown” enterprise to the business.
The main objectives of the review should be to identify;
- the possible volume that the farm can produce and market.
- the impact, if any, that the farm’s likely sales volumes will have on the market.
- the quality requirements for the market in question.
- the probable marketing channels for the farm’s produce or commodity.
- the probable prices the farm will receive for its product or commodity.
Points 1 and 2 are particularly important for products when the business’ proposed production volume could have an influence on the actual market. If it alters the supply and demand balance it may affect the prices received for the product. With commodities like wheat it is unlikely that the production plans of a single business will have any impact on the total supply situation and, hence, any influence on price. With these commodities there is usually an easily accessible market for in the business’ production. The downside of this, however, is that the business will have to accept the market’s price and the business will have little opportunity to influence it.
It is important to identify the quality requirements of an individual market to ensure production meets the markets specifications. Allied to this will be the identification of quality-price differentials within the market; i.e. the price premiums paid for produce of differing standards. If these price differentials can be identified questions relating to whether to target production at producing high yields of low quality or lower yields of higher quality can be answered.
Identifying the different marketing channels for a product or commodity will be valuable information when assessing a marketing strategy. Associated with this will be the identification of each channel’s quality standards and specifications and the marketing costs associated with selling the produce through a particular marketing channel.
All long-term and short-term planning will require price predictions which are soundly based or the results of the planning process will be of little value. The planning horizon under consideration will dictate the time period of the review; long-term investments will require long-term price predictions.
2.2.3 Geographic market size
An important initial deliberation with a market review is the geographic size of the market under consideration. Depending on the product or commodity in question it could be a global, regional, national, regional or local market. Defining this in the first instance can considerably reduce the time involved in preparing the market review. A few points to consider about the geographic size are:
- Product perishability. Will product perishability reduce the market size? Milk production is often located around major urban areas for this reason. It is an important consideration with fresh produce that requires controlled-atmosphere storage if it is to be transported any distance.
- Transport feasibility, technology and cost. This is linked to the first point but it considers cost. In most cases it is possible to transport products to a market; but at a cost. Can this cost be justified or is it going to make transportation uneconomic? Transport costs in relation to the product or commodity’s value should be considered. It may be technically feasible to transport a bulky commodity like potatoes but does the transport cost in relation to the relatively low value of the potatoes make it uneconomic to transport the potatoes any great distance?
- Import protection. Do import regulations prohibit entry of your produce into another country’s market? If so, the geographic market is immediately limited by the import restrictions. In some cases, imports may only be allowed when the home country’s producers cannot produce the product in question. The opposite situation will occur if the government restricts imports into one’s own domestic market. If this is the case home producers will not have to consider the impact of foreign producers supplying their home market. In these situations, one should always be aware of the possibility of import restrictions being lifted as their removal may have a major impact on prices. This is particularly important if long-term investments are being considered.
- With retail outlets, i.e. farm shops, the geographic market size may be limited by the transport infrastructure in the locality of the retail outlet. Access to the site may be determined by car ownership or the availability of public transport. These will all influence the catchment area for the outlet and the geographic area to which consideration should be given when assessing the potential customer base and possible competitors for a farm’s retail outlet.
- Product substitutions may have an impact on the overall market size under consideration. For example, sunflower oil can often be readily substituted by groundnut oil, palm oil, rapeseed oil and soybean oil. The market under consideration is not, therefore, a regional market for sunflower oil but the global market for vegetable oils. If a large scale production and processing system is being considered for one of the vegetable oils the market review needs to consider and encompasses producers and consumers in virtually all climatic zones as it is the world market which will influence the final price of the vegetable oil in the home country.
- Consideration should be given to whether the market size will change in the long-term. This will be important if consideration is being given to long-term investments. The time-scale for stability in the geographic market size may be dictated by, for example:
- Are transport costs or feasibility a limiting factor, and will this change over the long-term?
- Will there be a change in government policy relating to import protection?
- Will the global trend towards market liberalisation have any impact?
After the market size has been identified the market can be evaluated in terms of, for example, its volume, supply base, demand and consumption, trade patterns and prices.
2.2.4 Production and supply
This will be a global, multi-national, national, regional or local review depending on 2.2.3. Questions concerning production and supply will relate to, for example;
- Who are the producers and suppliers for the market?
- With retail outlets, what is the local competition like?
- What volumes do they produce, supply or retail?
- Are there seasonal supply patterns?
- Are there “windows” within the annual supply profiles?
The above is reasonably self-explanatory. Another interesting question to consider, however, relates to identifying comparative advantages between producers. These advantages may be due to:
- climate which influences yield, quality, disease incidence etc.
- production costs; esp. labour costs where the producer is in a low cost economy or region.
- national government support for market promotions, infrastructure etc.
- the supplier being in a country with a weak currency where exchange rates movements reduce the supplier’s export prices. This can work the other way if the producer is using imported inputs.
- transport costs and logistics; does a country have access to deep sea ports, international airports, existing supply channels etc.?
A final question to consider is; “how important will the supply volume from the business in question be in the overall market?”. If it is a commodity market like wheat it will be very little; if it is a highly perishable product the volume may be significant. If it is going to be significant will this influence future market prices?
2.2.5 Consumption and demand
This will be a global, multi-national, national, regional or local review depending on 2.2.3. Factors to consider will include:
- Population growth.
- Per capita incomes.
- As incomes increase consumption and expenditure moves away from basic staples towards more expensive alternatives. In the first instance consumption of staples may increase but as incomes rise further the staple will be substituted for a product which provides, or is perceived to provide, greater benefit to the consumer. For example, as incomes increase food may be prepared with olive oil in preference to sunflower oil.
- With retailing the income levels of customers may be important in determining the likely demands of the outlet’s customers.
- As consumer purchasing power increases the purchase of luxury items increases.
- Changing diets. This may be due to, for example:
- health concerns reducing fat intake or increasing the consumption of fresh fruit.
- rising incomes may allow a switch to healthier products in the diet.
- Consumer preferences will influence consumption. Preferences are frequently related to incomes as an increase in purchasing power allows the consumer greater freedom of choice. Examples of expressions of consumer preferences are;
- buying processed foods rather than purchasing raw ingredients and preparing meals.
- Urbanisation. The urbanisation of a country’s population may encourage a move away from traditional staple diets. A developing country’s infrastructure may preclude the transportation of traditional staples into cities and it may be easier and cheaper to ship in an easily transported commodity like wheat as an alternative.
- Age profile. The age profile of consumers may influence demand as older customers may have a preference for traditional products. Younger consumers may favour processed prepared foods rather than prepare meals from traditional ingredients.
- Substitutability and price of competing products. An important impact on the consumption of one product may come from the price of an alternative product. If a consumer is considering purchasing a particular apple variety, the final selection of the individual variety is likely to be influenced by the price of other apple varieties. The consumer will be weighing up the benefits of additional quality and flavour against the price premium to be paid for different varieties. Pears may be considered as an alternative to buying apples so the price of pears will influence the buyer’s choice.
- Relationships with complimentary products. In some instances, the consumption of one product may be closely linked to another, i.e. it may be traditional to use two ingredients together in a festive meal. In these cases, a change in demand for one product may create a similar change in demand for the complimentary product.
- Government promotions and consumer subsidisation; i.e. promoting fresh fruit consumption on the basis of perceived health benefits.
The following are a few questions and points which may be important.
- Who are the major exporters or suppliers onto the internal market?
- Who are the major importers or consumers in the internal market?
- Who are the major trading partners?
- Who are the main competitors for the business, region or country that the review is being undertaken for?
- When selling produce directly through retail outlets, who are the main competitors?
- Is trade dominated by a few major businesses?
- It is important to be aware of the influence of local or foreign government policy relating to trade. Import tariffs and/or barriers may be in place which will limit trade. Export subsidies may also exist and these may influence trade patterns and market prices.
- Be aware of the impact of trade agreements between trading blocs?
- Will GATT have an impact on future trade patterns in the market under investigation?
- Will exchange rates have an influence on trade? As an exporter weak currencies are an advantage as it reduces the price of their products or commodities in overseas’ markets. As an importer, a weak currency is a disadvantage as purchases become more expensive. The opposite occurs for countries with strong currencies.
- Exchange rates against the US dollar may also be important as many commodities are traded in US dollars.
Probably the single most important aspect of a market review will be the provision of information on which to base future price predictions for the product or commodity in question. Historic assessment of prices, quality-price differentials, market channel price differences etc., will provide a valuable basis from which to make future projections. Frequently this information will provide the primary basis for what can be a very subjective prediction. On occasions well researched and modelled price projections are available from economists, i.e. local agricultural universities and colleges, market research companies, but in many cases the manager is working alone so estimates based on experience and judgement may have to suffice.
The most important price information collated should relate to:
- Average unit price
- Quality-price relationships. It is important to identify price differentials relating to quality. Consideration can then be given to the likely trade-off between yield and quality and whether management should target production towards high yields of a lower quality and, hence, receive a lower price or towards producing lower yields of a product which is of a higher quality and which thus receives a high price.
- Seasonality of prices. A knowledge of seasonality in prices will be important in determining whether production should be targeted at achieving the higher prices which can be received at the beginning and end of the home production season. If management attempts to produce early or late crops, will yield penalties and/or higher costs be incurred?
- Market outlet premiums. Identification of markets where premium prices can be achieved may be important. If a market has price premiums what are the marketing, packaging/packing and transport costs associated with selling to this market? Hence, are the premiums great enough to justify the extra marketing costs.
Estimating long-term price trends will be very important when undertaking long-term planning for investment in, for example, land, orchard systems, storage facilities etc.
It is important to consider the impact of a government’s agricultural policy regime on price. In some cases, it may actually dictate producer prices. A secondary question when considering long-term planning is therefore; how long will the policy regime exist?
As with the discussion on trade the impact of exchange rates on prices should be assessed.
Note: When preparing data for a market review it will usually be based on historic trends. Rather than providing data from every year it may be sufficient to present data from points in time; say every few years. To remove annual variations when doing this it is, however, advisable to use a three or, possibly, a five year averages of the years around each point. In some counties of the CIS and Eastern Europe, however, it is possible that the rate of change in the economy in terms of prices and incomes will mean that historical data will have little value. In these situations, historical physical consumption figures and trends will be of greater value in making price projections.