Salient features of market and demand analysis
Purposes of marketing studies
Some lessons from past livestock marketing studies
31. In reference to agricultural commodities, marketing is the performance of all business activities involved in the flow of goods and services from the point of initial production until they are in the hands of the ultimate consumer (Kohls and Uhl, 1985). Marketing involves the transformation of goods in space, time and form from producers to consumers. We want these processes to be efficient, i.e. the transformations in space, time, and form should be accomplished at the lowest possible cost consistent with consumer preferences and incomes. Thus, the fundamental issue is economic efficiency in meeting consumer demand. The marketing system must provide information flows from the consumer back through the processing, transportation and storage functions to the producer. The producer responds to price signals producing commodities in relative quantities dictated by prices and costs. The efficient marketing system responds by providing goods and services over time and space and in the form consumers want at the lowest possible cost.
32. The general justification for marketing studies is to determine whether or not the marketing system is functioning efficiently. It is thought that efficiently functioning markets benefit both producers and consumers. Marketing research can range from studies of aggregate demand to those addressing the questions of how items are placed on the grocery store shelf. Such a broad range of issues requires different approaches to research. Kohls and Uhl (1985) present the following main approaches: (1) market functions, (2) market organization (structure, conduct and performance), and (3) participating institutions and organizations.
33. Market functions are classified as:
a) physical functions of transportation (space utility), storage (time utility), and processing (form utility);b) facilitative functions including standardization, financing, risk bearing, and market intelligence (or information); and
c) exchange functions including buying (assembling) and selling.
34. Market organization is analysed in the following terms:
a) structure - number and size of firms, product differentiation, and conditions of entry;
b) conduct - firm's price, product and promotional strategies; and
c) performance - trends in food prices, stability of prices, margins, profits, trends in marketing costs etc.
35. In analysing the institutions of marketing, the concern is with the nature and character of the various intermediaries and related agencies and the place in the marketing process the intermediaries occupy. These can be classified as follows:
a) Merchants which comprise retailers and wholesalers;
b) Agents including brokers and commission agents;
c) Speculators;
d) Processors and manufacturers; and
e) Facilitative organizations such as grain exchanges, livestock auctions, and stockyards.
36. Demand and supply relationships are also of interest in market studies. In demand analysis, the main parameters of interest are the relationships between consumption and product price (price elasticity) and the relationship between consumption and income (income elasticity). The price elasticity of demand measures the percent change in consumption expected from a one percent change in price. Income elasticity measures the expected change in consumption from a one percent change in per caput income. The location of demand, quality of product demanded, the form of the commodities (or product mix, especially for perishables) and accompanying services are also important in connection with consumption/demand analysis.
37. Both the price and income elasticities are useful in projecting the future levels of demand. Price elasticities are also useful in assessing the probable impact of government policies affecting commodity prices or the probable impact on consumption of increased marketing efficiency. Demand analysis including the patterns of consumption are also useful in product promotion. Consumption patterns can be affected by demographics (e.g. family income, size, age composition, religion, urbanization, ethnicity, education), commodity price levels, availability and prices of substitutes, etc.
38. Marketing studies are thus undertaken for various reasons, including the following:
i. To understand the efficiency of the existing marketing system and of alternative marketing systems. This may help in developing lower cost or more effective marketing which may, through lower marketing margins, result in both higher prices for producers and lower cost for consumers. The higher producer prices may stimulate production, while the lower consumer prices will stimulate demand. This should not be construed to mean that traditional marketing systems are inefficient. As will be mentioned later, many studies have found existing traditional systems to be efficient in the context of the infrastructures of their economy.ii. To learn how the marketing system links with the whole production system. This will help in understanding and minimizing marketing constraints to increased agricultural output.
iii. To learn how government pricing policies will affect consumption and production of certain commodities and estimate the potentials for stimulating or inhibiting output through price policy.
iv. To study how consumption patterns are affected by demographics, ethnicity, urbanization, etc. This may be especially useful in identifying niches in terms of consumer groups and commodity forms.
39. In the livestock sub-sector, some rather notable mistakes have been made as a result of misdiagnosis of the efficiency of traditional marketing systems. It is fair to say that these diagnoses were not founded on careful research. For example, during the 1960s many observers diagnosed the private livestock marketing systems in Africa to be inefficient and not capable of bringing sufficient capital for needed development of marketing infrastructure and information systems. This led to large donor investments in marketing infrastructure, mainly through statal and parastatal marketing organizations, sometimes to the detriment of the more efficient private agents.
40. The performance of the statals and parastatals, with few exceptions²/ proved mostly disappointing to disastrous. Ariza-Nino et al (1980) found that... "Throughout the 1970s the traditional marketing system for livestock and meat in West Africa demonstrated remarkable ability to adjust to changing conditions. It should continue to do so in the future. Given the shortcomings of the physical infrastructure, the system operates efficiently. Little evidence of monopoly power or collusion among traders and butchers has been found. High marketing costs and rates of return on capital in cattle trade reflect the high transport costs and taxes involved, and risks and uncertainties encountered. Calls for reorganization of the livestock and meat trade appear unnecessary."
2/ Notable exceptions appear to be the Zimbabwe Cold Storage Commission, the Malawi Cold Storage Company and the Botswana Meat Commission.
41. Bekure and McDonald (1985) conclude..."In the past governments in Africa have intervened in various ways in order to regulate and increase the efficiency of the marketing system. These interventions have ranged from the control of livestock and meat prices to the outright purchase and sale of animals and meat. Experience, however, shows that the scope for increasing efficiency lies neither in attempts to regulate and control the market participants, nor in efforts to control prices, nor in the creation of parastatals but rather in facilitating the operations of the market participants and instituting measures which reduce their costs."
42. Most of the agricultural marketing policy and marketing efficiency studies of the 1970s have dealt with livestock and meat marketing. There are virtually no parallel studies of dairy marketing systems. For this reason most of ILCA's current and planned work in marketing focuses on dairy products.
43. Mbogoh (1984) reviewed some experiences of dairy development and marketing in selected sub-Saharan African countries including Kenya, Ethiopia, Burundi, Zambia and Nigeria. Overall, he found that the pricing problem appeared to be at the core of dairy development and marketing improvement programs. Marketing and processing development tends to be along lines that involve very high cost operations, and in order to keep consumer prices down, the practice has often been to limit the price paid to producers. In some cases, direct sales of raw milk to consumers have been banned under the ruse of protecting human health. However, few studies demonstrating a significant health problem have been undertaken to support this contention. The undeclared and real objective is to eliminate competition from the more efficient traditional marketing system. Mbogoh (1984) notes that the major goal of development-oriented policies should be to try to achieve improvements in both operational and pricing efficiency of the production and marketing systems.
44. von Massow (1985) studied dairy imports and import policy in Mali and their implications for the dairy sector in the Bamako area. He found that the marketing system then in existence did not provide sufficient services to stimulate domestic production. Local milk production was largely neglected in favour of processing and distributing imported milk products. His results suggest that greater emphasis on market system development was necessary to stimulate local production.
45. Debrah and Anteneh (1987) studied milk sales by intra-urban, pert-urban and rural producers in and around Addis Ababa, Ethiopia. Rural producers were stratified into two sub-samples: one group located near rural fluid milk collection centers (0-3 km) and the other group located far from collection centers (> 3-15 km). They found that small intra- and peri-urban producers sold whole milk directly to nearby households. Approximately 50% of the milk consumed in Addis Ababa was produced by intra-urban producers. Larger producers, mainly located in the pert-urban areas, sold milk to the Dairy Development Enterprise (DDE), a state-owned milk processing plant, at approximately 50 to 60% of the price per litre which the smallholders received by selling fresh milk directly to consumers.
46. The small-scale producers (with 1 to 3 lactating cows) are able to economically sell their surplus to nearby neighbours. As the number of lactating cows increases, the cost of direct sales to neighbours in terms of labour time increases while the per unit cost of transportation to the dairy plant decreases. Thus, the larger producers in the intra- and peri-urban areas find it economical to sell to the dairy plant while the smaller scale producers find it more economical to bypass the dairy plant and sell directly to consumers. Another factor encouraging sales to DDE is that preferential treatment in the allocation of concentrate feeds is given to those producers who deliver to DDE.
47. Despite the need to import hay from the surrounding countryside at considerable expense, the small scale urban producers are able to compete successfully with pert-urban and rural producers in supplying urban consumers. Their marketing costs are low. They can deliver the milk to a nearby consumer within minutes of milking; total transport costs are minimal; refrigeration and packaging are also saved. Consumers boil the milk (usually even if it has already been pasteurized) so lack of processing by smallholders poses no health problems and eliminates yet another cost of marketing through commercial channels. A major part of the cost of hay is recovered through the sale of dung cakes for fuel.
48. Indeed, the contrast with the costs of marketing through commercial channels is remarkable. The DDE plant receives milk at EB 0.503/ per litre and sells at EB 0.70 per litre. Thus, the marketing margin (which is substantially subsidized) is EB 0.20 per litre or 40% of the price paid to producers. The small-scale producers sell directly to consumers for EB 0.74 to 0.86 per litre.
3/ EB = Ethiopian Birr = US$ 0.48 (1990)
49. The DDE, however, is playing an important marketing role by serving the larger scale producers and extending a market for fluid milk into the rural areas. The farmers are responding to the marketing opportunity by shifting from butter production to fluid milk. Careful financial monitoring is important to indicate economic efficiency of its operations and pinpoint the possibilities for increasing the operating efficiency.
50. Thus, the parallel formal and informal marketing channels existing for the same product may improve overall efficiency over what could be achieved with only one or the other system. The phenomenon of smallholder dairying in intra- and peri-urban areas is not unique to Addis Ababa, but can be found in many sub-Saharan African cities, especially in the highland and semi-arid zones. The main economic considerations supporting this pattern are: first, small-scale milk production is profitable and competitive; second, transport costs in both collection and distribution are very high and by locating close to the consumers both are minimized; third, milk is highly perishable, so locating close to the consumer eliminates the need for expensive refrigeration, processing and packaging; and fourth, quality control by consumers is easy.
51. While direct sales are economically feasible for urban and peri-urban producers, rural producers often have very limited direct outlets for fresh fluid milk. Preservation and transport to urban markets is expensive and frequently not feasible. Various traditional processed products (e.g. butter, ghee, soured milk, cottage cheese) have long been the main dairy products of smallholders and pastoralists.
52. Waters-Bayer (1986, 1988) has studied dairy production and marketing of the settled Fulani agro-pastoralists in central Nigeria. While their herds number 50 to 60 head, they are still considered small scale in terms of dairy production. Average daily milk surpluses per household, above requirements for calves, varied from 2 kg in the dry season to 6 kg in the wet season. The women of the household divide the surplus between household use and sales. These producers are typically located in rural rather than urban areas.
53. The Fulani producers in this area have traditionally produced and marketed milk in two main processed forms: a soured milk product called nono, and butter. Women market the nono and butter on a regular but not necessarily daily basis. Another form of marketing involves additional processing by combining the milk with a cereal dumpling (usually of millet, but sometimes of maize or sorghum) or with kuka juice4/ (Waters-Bayer, 1988) Prices vary by season per unit liquid milk which is also diluted more in the dry season with kuka juice. Thus the de facto variability in the price of milk is even greater than the variation in the price per unit of liquid milk product sold.
4/ A mixture of water and kuka, the pith of baobab fruits.
54. Optional marketing through a modern commercial dairy plant is very inefficient by comparison - "Per litre of raw milk, the closest dairy plant offered less than one quarter of that which women gain as year-round average by processing it as nono and butter" (Waters-Bayer, 1988). The plant did not offer collection service from the rural areas, and made no adjustment in price during the dry season. It is perhaps significant that the main purpose of the dairy plant has been to recombine imported powdered skim milk and butteroil for sale as liquid milk usually at relatively low prices compared to local dairy products.
55. There is a growing demand from rising populations for dairy products. Urban fluid milk markets are attractive for urban and pert-urban producers. Rural producers may mitigate high transport and preservation costs by processing their milk into butter and cheese. Further research into improving small-scale processing and marketing may provide greater benefits to rural producers than promotion and development of large-scale modern dairy processing plants. The justification of each system is based on economic efficiency considerations. In the case of dairy products, space, time and product form aspects of marketing are all critically linked. First, we are dealing with a highly perishable product. Second, production is far removed from consumption centers in many parts of Africa.
56. There is a need to explore and describe the existing marketing infrastructure and the present marketing chains linking production with consumption in each country. Currently, ILCA has dairy consumption surveys underway or recently completed at Bamako in Mali and at Ibadan and Kadunain Nigeria. We plan to initiate another in the Mombasa area in connection with the Kenya coastal dairy research program.
