AEA 304 AGRICULTURAL MARKETING AND PRICE

COURSE
GUIDE

AEA 304
AGRICULTURAL MARKETING AND PRICE

Course Team Professor James Olukosi (Course

writer)- Landmark University, Omu-
Aran Kwara Sate

NATIONAL OPEN UNIVERSITY OF NIGERIA

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AEA 304 AGRICULTURAL MARKETING AND PRICE

© 2023 by NOUN Press

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First Printed 2023

ISBN: 978-978-058-889-2

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AEA 304 AGRICULTURAL MARKETING AND PRICE

MODULE 1 SCOPE AND NATURE OF AGRICULTURAL MARKETING

Unit 1 Agricultural Marketing Defined

Unit 2 Role of Agricultural Marketing

UNIT 1 AGRICULTURAL MARKETING DEFINED

1.0 Introduction
This unit is very important because it gives the basic definition of agricultural marketing
and explains what it entails. It describes the nature and the scope of agricultural
marketing and the necessity for deep understanding of its subject matter. It provides the
foundation and general understanding of the course as a whole. It will also help you to
understand subsequent units.

2.0 Objectives
By the end of this unit you should be able to:

 define agricultural marketing

 describe the evolution of agricultural marketing
 explain the relationship between marketing and production.

3.0 Main Content

3.1 Meaning and Scope of Agricultural Marketing

Agricultural marketing can be defined from both the micro and macro view points. The
micro view point is concerned with the individual participants in marketing be it the
farmer or the business firm. From this perspective, agricultural marketing can be defined
as the performance of all business activities which direct the forward flow of goods and
services to consumers in order to accomplish the producer's objectives. Many people
consider marketing as equivalent to selling or transferring the product to another person
for a price. Selling is central to the micro concept of marketing but it is only a part of it.
Marketing includes packaging, storage, transportation, pricing, financing, risk bearing
and even product design.

The macro view point of marketing on the other hand, is a "big picture" view. It
examines the total system of economic activities concerned with the flow of agricultural
products from producers to final consumers; the kinds of institutions and the price
making mechanisms that guide those flows; the interactions among consumers,
agribusiness firms, farmers, and even governments that determine the levels of
expenditures; and the sharing of those expenditures as income to market participants.

Marketing and markets are not the same thing and need to be distinguished from each
other. Marketing involves all those legal, physical and economic services which are
necessary to make products from the farm available to the consumers:

* in the form and amount desired by the consumers,

* at the place desired by the consumers,

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

* at the time desired by the consumers,

* at the price consumers and middle men are willing to pay to take possession.

Thus marketing leads to the creation of form, place, time and possession utilities. For
example a tonne of wheat grain produced in Kano or Bornu State does not give a bread
consumer in Lagos satisfaction until it is transported to a flour mill where it is
processed into wheat flour and further transported to a bakery in Lagos where it is
transformed into the final product (bread) which gives tne consumer the necessary
satisfaction. A market on the other hand is generally an area or setting in which price
making forces (demand and supply) operate. It may be a city, state or a place of
business n a given town. Such is referred to as a market place. A market also refers
to any arrangement that brings buyers and sellers together, it could be physical contact
between buyers and sellers or contact by letter writing, telephone, telex or through
other means of communication.

3.2 Evolution of Agricultural Marketing

Modern marketing has evolved from a series of exchange systems Initially people were
concerned with production for consumption and inter-household exchange. Such
pattern of production was primarily subsistence in nature providing little or no room
for specialization as each household had to produce practically ail its need. The
existence of marketing is a direct result of specialization of production in the
economy. Initially, most farm families were self sufficient or produced purely to meet
subsistence needs. They produced most of the food crops and livestock products they
needed on their small land holdings. For example, they ground their own cereal grains
into flour, spun their fibre locally, butchered their meat etc. but with time people
discovered that their limited and specific resource endowments and talents allowed
them to produce some things better than others. Increased demand for goods and
services produced out of the farm made specialization necessary. As the individual
farmer specialized, it gave rise to the production of marketable surpluses which could
not be exchanged easily for goods and services produced out of the farm.
Trade by batter was popular in the early days but due to its obvious disadvantages such
as the necessity for double coincidence of wants, lack of unit of measure, difficulty of
holding large stocks of commodities in storage for future exchange etc, the use of
money as a medium of exchange evolved. This marked the beginning of the
development of an efficient marketing system. Thus with the development of an
efficient marketing system, it becomes possible for consumers to enjoy what they cannot
produce irrespective of the distance between them and the producers.
3.3 Relationship between Marketing and Production

In a simple sense marketing may be considered as activities which take place in the
market. It is the collective term used to describe exchange between buyers and sellers,
who attempt to maximize profit or subjective utility. It may be thought of simply as
the process of making goods available for consumption. Marketing therefore covers
ail business functions, including production and in its broadest sense, it covers also
all production decisions. If a farmer is producing at a commercial level, he has to think
first and foremost of the market outlet for the proposed enterprise. Thus decisions
regarding the variety of crop to grow or the breed of animals to keep, are marketing
decisions.

Some scholars narrow down the definition of marketing. For example some do not
believe that functions such as storage, transportation and processing are part of
marketing. Such scholars define marketing essentially as information gathering and
communication while others go further by confining marketing to the exchange function

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AEA 304 AGRICULTURAL MARKETING AND PRICE

only. Although these more restrictive definitions are defensible, they do not entirely
escape the production-marketing paradox because communication and negotiation of
exchange require productive-resources, at least that of human labour.

Resources are combined in various forms in the production process to generate the
output, thus production creates utilities. Marketing on the other hand creates utilities of
form, place, time and possession with the goods and services produced. Marketing is
therefore part and parcel of the production process. It supplements production in that it
makes what is produced available to consumers and users at the time, place and form
required. Marketing thus constitutes a bridge between production and consumption.

PRODUCTION <======> MARKETING<======>CONSUMPTION

4.0 Self Assessment Exercise

1. Discuss the scope of agricultural marketing.

2. Explain the relationship that exists between marketing and production.

5.0 Conclusion

In this unit you have learnt about the meaning and scope of Agricultural Marketing. You
have learnt about the evolution of agricultural marketing and the relationship between
marketing and production.

6.0 Summary

In this unit you have learnt that Agricultural Marketing is:

 defined from both the micro and macro view points.
 from the micro view point, concerned with the individual participants in
marketing be it the farmer or the business firm.
 from the macro perspective, is a "big picture" view that examines the total system
of economic activities concerned with the flow of agricultural products from
producers to final consumers; the kinds of institutions and the price making
mechanisms that guide those flows; the interactions among consumers,
agribusiness firms, farmers, and even governments.
 a generator of form, place, time and possession utilities. You have also learnt that:
 it evolved from trading by batter to point of using money as medium of exchange.
 Agricultural marketing is part and parcel of production.

7.0 Tutor marked Assignment (TMA)

1. Explain both the micro and macro aspects of agricultural marketing.

2. How did agricultural marketing evolve?
3. Explain the four utilities created by marketing.

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8.0 References & Further Reading

Abbot, J.C. and J.P. Makeham (1980) Agricultural Economics and Marketing in the
Tropics, London.

Breimyer, H.F. (1976) Economics of the Product Markets of Agriculture, Iowa State University
Press, Ames, Iowa, Chapter 1

Breimyer, H.F.(1973) "The Economics of Agricultural Marketing: A Survey" in Review of

Marketing and Agric. Eons. (Australia) 41 (1973): pp.155-165

Kohl's, R.L and J.N. Uhl (1980) Marketing of Agricultural Products, 5th Ed. Macmillan
Publishing Company, Inc., New York.Chapters1and 2.

Kotler, P. (1997) Marketing Management: Analysis, Planning, Implementation and

Control 91h Ed. ,Prentice Hall Inc., New Jersey. Chapter 1.

Ode, M.O, B.O. Duru-Nnebue and C.M. Mathen (2007) Fundamentals of Marketing:
Principl and Applications. Newcomb Communications, Nagwanatse House,
Kaduna, Chapter 1.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles
and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter1.

Rhodes.V.J. (1978) The Agricultural Marketing System. Grid Publishing Inc., Columbus.
Ohio, Chapters 1 and 2.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 2 THE ROLE OF AGRICULTURAL MARKETING

1.0 Introduction

You have learnt in the previous unit that agricultural marketing is the link between the
production and the consumption of agricultural products. This unit is therefore aimed at
making you understand the role of marketing in more detail and the challenges.

2.0 Objectives

By the end of this unit you should be able to explain:

 the strategic position of the consumer

 the pivotal role of the farmer
 the economic importance of agricultural marketing
 the possibilities of expanding agricultural products
 the challenges facing agricultural marketing

3.0 Main Body

3.1 The Place of the Consumer in Marketing

In a market economy, much emphasis is placed on the consumer. This philosophy of
marketing is known as the "marketing concept". His consumption and satisfaction is
said to be the ultimate goal of the system. If many consumers decide that they do not
like to shop or Supermarket A or to eat in Restaurant B, those institutions will wither
away. If sufficient numbers of consumers decide that they prefer beef to chicken for most
of their meals, then cattle producers will prosper for a time while poultry farms will not.
No agricultural product or agribusiness has a guaranteed lease of life. Each must continue to
earn its position in the market place depending on the tastes and preferences of the
consumers.

In view of the strategic position of consumers in marketing, millions of naira are spent
annually on advertisement and sales promotion to influence the consumers' demand.
These merchandising activities are aimed at persuading consumers to attribute certain
desirable characteristics to one brand of product in relation to a competing brand, even
though the products are identical from an objective point of view. This fact, of course, is
one of the reasons firms, including farmers strive to have control over the marketing
system.

Most consumers are found to be passive in their consumption. In case of industrial

products some firms are highly successful in influencing consumers' demands for their
specific products for example in the soft drink industry. Whereas, for agricultural
products because of the homogenous nature of the products the influence of sellers on
consumers' choice is insignificant. In these cases a successful marketing programmer
must be consumer oriented in the sense that it must be concerned with achieving
consumer satisfaction. Part of that satisfaction will be supplied through effective
packaging, advertising and merchandising.

3.2 The Role of the Farmer in Agricultural Marketing

The farmer plays a very pivotal role in agricultural production and marketing as he is
always the first point of contact.

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i. The farmers' activities are usually focused on meeting the immediate needs of the
family members while the excess output are usually put into the market as part of the
overall economic development and agricultural transformation strategies of the nation.
ii.The farmer remains pivotal in agricultural transformation and poverty reduction in
the nation as he contributes and influences agricultural development strategies through
the adoption of new technologies and ideas for enhanced agricultural production.

iii. The farmer's income from agricultural production has helped the
commercialization of agriculture as this has increased trade in high value crops and value
added traditional crops.
iv. The delivery of extension services, production planning, delivery of service,
monitoring and evaluation are services rendered by various experts to complement and
enhance agricultural transformation and these services are rendered essentially because
the farmer is available to adopt them.
3.3 Economic Importance of Marketing and Markets

In a free market economy, the price system and competition provide the coordinating
mechanism for determining the flow of resources into production and the flow of goods
and services into use. It is within the marketing system that prices, allocation of
resources, income distribution and capital formation are determined. Therefore, the
structure and performance of the marketing system may have some significant effect on
the total production of a given commodity, on consumer prices, on adoption of improved
technology in production and marketing methods and in fact upon the growth and
development of the entire economy.

The existence of markets makes possible the existence of specialized production. Since
people can exchange what they can produce with what they cannot produce through the
marketing process, they am encouraged to concentrate on a particular line of production
where they gain more skill and efficiency. The mechanism by which people cart
exchange what they can produce with what they cannot produce is marketing system.
The extent of specialization in an economy depends on exchange and the rate at which the
exchange economy emerges depends upon the performance of its marketing system.

As the marketing process becomes complex, more and more steps come between the
producer and consumer. Agencies or individuals appear whose only business is to
facilitate the process. These agencies are the middlemen or marketing intermediaries. In
the early stages of development, farmers sold directly to consumers. In the rural
communities farmers still sell directly to consumers. However, such does not make for a
developed marketing system as it consequently affects the productivity of the farmers. A
good and efficient marketing system accelerates the pace of economic development by
encouraging specialization which leads to increase in output.

Other roles of marketing in economic development include:

i. Generation of foreign exchange earnings;
ii. Sustenance of a country’s economic growth through the development of an
exchange economy;
iii. Provision of incentive to farmers in order to adopt new and improved
technologies, which will lead to increased agricultural production;
iv. Provision of income and sources of livelihood to the marketing agencies or
intermediaries
v. Encouraging specialization and expansion of output.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

3.4 The Possibilities for Expansion of Agricultural Products

Expanding agricultural production in Nigeria would require overhauling some existing

policies that have constrained agricultural output over the years. Similarly, those engaged
in agricultural production would require other forms of encouragement. Areas that require
further emphasis include:
i. The granting of price and tax incentives to producers.

ii. An increase in the number of processing and storage plants to avoid post-harvest
losses.
iii. Enforcement of the land use decree which was passed and incorporated into the 1999
Constitution with the aim of making land readily available for large 'scale agricultural
activities. This has the possibility of expanding agricultural production in the country.
iv. Making available the results of research from Agricultural Research
3.5 Some Special Features of Agricultural Products
There are certain inherent characteristics of farm products which make special demand on
marketing systems and organizations. These are:
i. Bulkiness:

Farm products are usually bulky. Their weights and volumes are great in relation to their
monetary value, especially when compared with many manufactured goods. As a result,
transport and storage costs for such products tend to be high in relation to their value.

ii. Perishability:

Some crops such as rice (in the form of paddy) retain their quality for a long time but
most farm products are perishable. Fruits and vegetables rapidly become over ripe and begin
to decay if they are
not consumed or kept in special storage. Milk is especially perishable in hot climates and
without special treatments: it may keep for only a few hours.
iii. Seasonality:

The seasonal nature of farm products imposes constraints on the marketing system. At
harvest time there is a heavy demand for marketing facilities such as storage and
transportation. At other times of the year, these facilities are hardly used at all. This
situation is made worse by the small size of the average production unit.
Over the greater part of Africa and Asia for instance, the average size of a holding is not
more than two hectares; so many farm products start their journey to the markets as the
surpluses of many thousand separate farms. The output of a farmer over and above the
food requirements of his family is called the marketable surplus. Generally, in
developing countries, the marketable surplus is small hence there are very many small
holder farmers trying to produce food and fibre for the teeming population and many
middlemen are involved in the distribution system.

3.6 Problems Confronting Agricultural Marketing

Over the years, agricultural marketing has not received the type of attention accorded

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agricultural production. Although there have been attempts in the past for organized
marketing institutions like the defunct Marketing Boards: to intervene; the farmer has
continued to face problems in the marketing of his produce due to a number of factors:

i. The prevalence of poor infrastructural facilities such as poor federal roads,

inadequate road network and poor telecommunication
services between the rural areas where agricultural production takes place and the
urban areas which serve as markets for the produce from the rural areas.
ii. There is the problem of inappropriate on-farm storage facilities thus leading to
wastage of farm produce.

iii. Irrigation facilities are still very poor despite the existence of River Basin and Rural
Development Authorities.

iv. The extension service delivery system is still inadequate and especially women
extension personnel are very limited to handle gender issues.
v. The land tenure system in some cultural settings especially in the south tends to constrain
land availability.
vi. Over the years, prices of inputs such as herbicides, fertilizers and pesticides have risen
steeply and these have constrained their adoption and subsequent impact on yield and
production levels
Unavailability of credit to farmers whilst the cost of borrowing is generally high for
operators in the agricultural marketing chain.
There is dearth of information relating to inputs, modern technologies and market
trends.
The existing policies are not supportive enough for agricultural marketing
transformation such as the land use act, tariffs on imports of agro-inputs and machineries.
4.0 Self Assessment Exercise
1. Why is the consumer sovereign in the marketing system?
2. What are those special features of agricultural products that pose problems for
marketers?
5.0 Conclusion
In this unit you have learnt about the strategic position of the consumer, the pivotal role of
the farmer, the economic importance of agricultural marketing, the possibilities of
expanding agricultural products and the challenges facing agricultural marketing.

6.0 Summary
In this unit you have learnt that:
 the consumer is sovereign
 the farmer remains pivotal in agricultural transformation and poverty
reduction
 the existence of markets makes possible the existence of specialized production
 a good and efficient marketing system accelerates the pace of economic development
by encouraging specialization which leads to increase in output, generation of foreign
exchange earnings
 there are certain features of agricultural products that compound the marketing problems

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7.0 Tutor-Marked Assignments

1. What are the economic importance of agricultural marketing?

2. What are the roles of the farmer in agricultural marketing?

3. What in your opinion are major problems confronting agricultural marketing?

8.0 References and Further Reading

Abbot, J.C. and J.P. Makeham (1980) Agricultural Economics and Marketing in the
Tropics, London.

Breimyer, H.F. (1976) Economics of the Product Markets of Agriculture, Iowa State University
Press, Iowa, Chapter 1

Breimyer, H.F.(1973) "The Economics of Agricultural Marketing: A Survey" in Review of

Market and Agric. Eons. (Australia) 41 (1973): pp.155-165

Kohl's, R.L and J.N. Uhl (1980) Marketing of Agricultural Products, 5th Ed. Macmillan
Publishing Company, Inc., New York. Chapters 1and 2.

Kotler, P. (1997) Marketing Management: Analysis, Planning, Implementation and

Control 91h Ed. Prentice Hall Inc., New Jersey. Chapter 1.

Ode, M.O, B.O. Duru-Nnebue and C.M. Mathen (2007) Fundamentals of

Marketing:Principles and Applications, Newcomb
Communications, Nagwanatse House, Kaduna, Chapter 1. Olukosi, J.O., S.U. Isitor
and M. O.

Ode (2012) Introduction to Agricultural Marketing: Principles and Applications. Living

Books Series, GU Publications, Abuja FCT, Nigeria. Chapter 1.

Rhodes.V.J. (1978) The Agricultural Marketing System. Grid Publishing Inc., Columbus. Ohio,
Chapters 1 and 2.

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

MODULE 2 APPROACHES TO AGRICULTURAL MARKETING

Unit 1 The Five Approaches To Agricultural Marketing

Unit 2 The Functional Approach I: Physical, Pricing and Exchange
Unit 3 The Functional Approach II: Facilitating Function
Unit 4 Ware housing and Marketing Policies

UNIT 1 THE FIVE APPROACHES TO AGRICULTURAL MARKETING

ANALYSIS
1.0 Introduction
There are five major approaches to the analysis of marketing problems. This unit gives a

brief description of the five approaches.

2.0 Objectives

In this unit you would learn about the

 the functional approach,
 institutional approach,
 commodity approach,
 behavioural systems approach and
 structure- conduct- performance approach.

3.0 Main Body

3.1 Functional Approach

This method classifies the activities that occur in the marketing process into functions. A
marketing function may be defined as a major specialized activity performed in
accomplishing the marketing process.

Under this functional approach, marketing functions are classified into three. These are:

a. Physical function
b. Exchange function
c. Facilitating function

3.2 Institutional Approach

This approach studies the various agencies and business structure which perform the
marketing function. It tends to answer the question who does what in marketing",
"Who" refers to the agency or institution while "what" refers to the function that is
being performed. Marketing institutions are the wide variety of business organizations
which have developed to perform certain marketing functions. The institutional
approach considers the nature and character of the various middlemen and all other
intermediaries in the marketing machinery. It also includes the arrangement and
organization of the marketing systems. This approach emphasizes the human element of
marketing.

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3.3 Commodity Approach

This approach concentrates on the study of the marketing of all related products such as
livestock products which include milk, meat, cheese, butter etc or crops such as cereals
(rice, maize, sorghum and millet) or tubers such as yam, cassava and potato. Given this
nomenclature we can talk about the food grains marketing system, or beef marketing
system or cotton marketing system in Nigeria.

3.4 Behavioural Systems Approach

The marketing process is continually changing in its organization and functional

combinations. A major problem faced by a market analyst is understanding and
predicting change The behavioural systems approach is used to analyze the behaviour of
firms as it affects their decision under different market structures. It examines the
market, its operators or the organizations involved as a system of behaviour. This
enables one to understand anticipated but unforeseen changes in the marketing system.

The behavioural systems approach stipulates that food marketing should be looked at as
a number of behavioural systems involved in various kinds of decision making. It
emphasizes the multidisciplinary approach to the study of the marketing system.

3.5 Market Structure and Performance Approach

Market structure analysis emphasis is the nature of market competition, and attempts to
relate the variables of market performance to types of market structure and conduct.
Market structure is a description of the number and nature of participants in a market.
Market conduct deals with the behaviour of firms. Firms that are price-makers are
expected to act differently from those in a price taker type of industry.
Market performance is a reflection of the impact of structure and conduct on product prices,
costs, the volume and quality of output. If the structure of a market is that of monopoly
rather than pure competition, then one could expect poor market performance.
4.0 Self Assessment Exercise
1. Discuss the five approaches to agricultural marketing analysis.
5.0 Conclusion
In this unit you have learnt about the five approaches to agricultural marketing analysis.

6.0 Summary
You have learnt that:

 The functional approach is classified into the Physical function, exchange

function and facilitating function
 The institutional approach studies the various agencies and business
structure which perform the marketing function. It considers the nature and
character of the various middlemen and all other intermediaries in the marketing
machinery.
 The commodity approach concentrates on the study of the marketing of all
related products such as livestock products which include milk, meat, cheese,
butter etc or crops such as cereals - rice, maize, sorghum and millet.
 The behavioural approach analyzes the behaviour of firms as it affects their

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decision under different market structures.

 The market structure approach analyses the nature of market competition, and
attempts to relate the variables of market performance to types of market
structure and conduct.

7.0 Tutor- Marked Assignment

Explain the behavioural approach and the institutional approach to studying agricultural
marketing.
8.0 References and Further Reading

Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products 5th Ed., Macmillan
Publishing Company Inc., New York, Chapters 1 and 2.

Kotler. R (2002) Marketing Management. 11th Edition, Prentice-Hall of India, New Delhi,
Part 2 p. 111.

Mortensen, W.R (1977) Modern Marketing of Farm Products. The Interstate Printers and
Publishers. Inc. Danvile. Illinois. pp. 17-26.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria.
Chapter 2.

Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products: Economic Analysis.
Iowa State University Press. Iowa, USA, Chapter 2

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 2 THE FUNCTIONAL APPROACH: PHYSICAL AND PRICING

FUNCTIONS

1.0 Introduction

The agricultural marketing process can toe accomplished principally through the physical
functions performed on commodities and by utilizing the facilitating activities. These
involve marketing tasks that aid the marketing process in relation to the transfer of farm
produce from the farm gate through the marketing institutions to the ultimate consumers or
users.

2.0 Objectives
By the end of this unit, you would have learnt about aspects of:
 Physical functions of agricultural marketing and
 Pricing and exchange functions of agricultural marketing

3.0 Main Body

3.1 The Physical Functions

The physical process of moving the farm produce from the area of production must
involve some form of handling of the commodity. For example, cassava tubers harvested
on the farm must be handled in one form or the other to get it through other processes.

i. Assembly

Produce harvested by small-holder farmers from various locations must be brought together
at convenient points in concentrated forms for ease of transport and storage. Where such
farmers belong to agricultural cooperatives, the co-operative organizations maintain
facilities for storage and each member subscribes for use. These storage facilities are also
referred to as warehousing. Apart from the farmers and marketing channels, it is also
necessary for manufacturers to place high premium on storage or warehousing facilities
to guard against consequences of market disruptions. The disruptions can be engendered by
many factors such as industrial action by labour or sabotage as is the case with the oil
installations in the Niger Delta area.
Market participants have continued to seek more efficient financial and operational
methods to manage risk in an environment of diminishing profit margin. The storage
operators would certainly come in as relief to producers and marketing agents as they
will hedge them from transportation and storage risks.

2.2.1.2 Transportation

This is the physical movement of the farm products from one location to another.
Transportation adds to the commodity the utility of place which is the satisfaction a
consumer derives as a result of having the product he wants in the place where he wants
it. Place utility of a commodity is the value it acquires or the satisfaction it gives as a
result of a change of location. Transportation could be by road, rail, ship or air.

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The transportation system facilitates the movement of goods from the farm to the
intermediate processing and distribution centers and to the final market. To be adequate
as a marketing service, transportation should provide facilities for convenient and
adequate handling of commodities, care of product while in transit, speed of movement
especially for perishable goods and these must be achieved at a reasonable cost.

2.2.1.3 Processing

This is the conversion of a commodity from its raw state to a form more acceptable to
the buyers or to the next stage in the distribution chain. It changes the form of the
product to make them ready for use. The objectives of processing are quality
enhancement, preservation and product differentiation. Processing adds to the product
the utility of form or utility of transportation.

Most farm products do not give satisfaction in their raw form until they are transformed
into more acceptable forms through processing. For example, wheat does not give
satisfaction to a consumer in its raw form until it is processed into wheat flour which
could be used to prepare a variety of food items such as bread or biscuits. In the same
manner seed cotton does not give a consumer satisfaction until it is ginned into lint and
seed and the lint used to manufacture clothes. The development of processing facilities
has added variety to the diet of many families and reduced the work in the home as
many households now depend on processed food, for example baked beans, tomapep,
tinned tomatoes, corn flakes etc.

Processing methods are mainly traditional, intermediate methods and improved or

advanced technology. Traditional methods of processing agricultural products are the
simple methods that are not capital intensive such as sun drying of pepper, tomatoes,
grains: grating of cassava and frying of garri. Intermediate methods include the use of
improved manually operated processing equipment such as shellers, graters, simple
extractors and fryers. Advanced technology involves the use of more expensive and
sophisticated machines in processing. For example, the use of modern plants in
processing cassava into garri or the use of sophisticated machine in transforming milk into
cheese and butter, or the transformation of groundnut into vegetable oil and groundnut
cakes.

iv. Packaging

Before some commodities can move very far in the market channel they must be put into
convenient packages. Potatoes are frequently packed
before shipment: tomatoes and peppers are packed in crates and baskets before they are
carried from the north to the southern cities of Nigeria. Onions are packaged in bags and
baskets while eggs are carried in special egg crates.

The primary objective of packaging is to put the products in containers for easy
handling, for effective storage and to protect them from damages while in transit. Not
only is packaging convenient for producers and consumers but it also provides some
means of identification for the products. It enables a product to be identified with an
advertising or manufacturing firm. It also makes the product more attractive to the
buyers.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Packaging makes handling easier, prevents losses due to bruising and exposure, and
divides the product into convenient lots for the buyer. As consumers become more and
more choosy about the appearance of food and fibre products, the impact of packaging
becomes more recognized.

3.2 Pricing and Exchange Function

This function implies buying and selling which are the two sides of the same transaction.
This implies an agreement on the price, a transfer of title and ownership, provision of
time and place of delivery and method of payment. Between the farmer and the final
consumer, a product may be bought and sold once or many times. If the transaction occurs
once or a few times such a product is said to have a long marketing chain where the
exchange function is not well developed, buyers and sellers higgle and haggle before
agreeing on a common value for the commodity or service. In a well developed
marketing system, values of commodities are fixed as price tags. The usefulness of these
price tags depends on the honesty and integrity of the seller. A detailed discussion of the
role of price in marketing is presented in later units.

4.0 Self Assessment Exercise

Discuss the physical functions of moving the farm produce from the area of production to
the point of consumption.

5.0 Conclusion

In this unit you have learnt about the physical functions and the price and exchange
function.

6.0 Summary
You have learnt that the:
 Physical functions entail assemblying of produce from various local producing
centres , transportation, processing and packaging.
 Pricing and exchange function implies buying and selling which are the two sides
of the same transaction.

7.0 Tutor – Marked Assignment

Discuss the pricing and exchange functions.

8.0 References and Further Reading

Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products 5th Ed., Macmillan
Publishing Company Inc., New York, Chapters 1 and 2.

Kotler. R (2002) Marketing Management. 11th Edition, Prentice- Hall of India, New Delhi,
Part 2 p. 111.

Mortensen, W.R (1977) Modern Marketing of Farm Products. The Interstate Printers and

17
 AEA 304 AGRICULTURAL MARKETING AND PRICE

Publishers. Inc. Danvile. Illinois. pp. 17-26

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria.
Chapter 2.

Shepherd, G.S. and G.A. Futrell (1970) Marketing FarmProducts

Economic Analysis Iowa State University Press. Iowa, USA, Chapter 2

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 3 THE FUNCTIONAL PPROACH: FACILITATING FUNCTIONS

1.0 Introduction

You have learnt in the previous unit about the physical functions which include activities
that involve physical handling of the farm products. There are other types of functions
which do not involve the physical handling of the products. Some of the facilitating
functions which you will learn in this unit fall under this category, though some activities
considered in this unit are facilitative but can equally be termed physical.

2.0 Objectives

In this unit you will learn about the facilitating functions including:
 Sorting, grading and standardization
 Risk bearing and insurance
 Financing
 Market intelligence and
 Promotion

3.0 Main Body

3.1 Sorting, grading and standardization

Sorting is also a functional marketing activity. Sorting is a physical separation of

products of different qualities. Such separation, however, may or may not conform to
established standards. Thus a tomato farmer may sort out small or damaged or mouldy fruits
before selling them.
Grading and standardizing go further than sorting. They refer to grouping of products in
accordance with predetermined standards and specifications. Grading means the
sorting of products into different lots of some hierarchical market quality, each
bearing its own name and label. Quality may be distinguished by size, shape, flavour,
degree of ripeness, length of staple (in cotton) or other commercial value of a product.
The purpose of grading is to help buyers select the most suitable lots of some produce
for the uses they have in mind. Accurate grading permits the buyer to purchase more
precisely what he wants and is willing to pay for and to this extent it increases his
satisfaction and makes the marketing system more efficient.

Grading makes physical examination of the different produce unnecessary since each lot
or grade has to conform to a predetermined quality standard. This is more important in
the case of export crops where the buyers and sellers are separated by a long distance
making physical examination of the product almost impossible.
Inspection is closely related to grading and in many cases a part of it. Inspection is the
physical part of grading. It is the physical examination of the product by designated
officers for the purpose of ascertaining the grade of the commodity. For example, seed
cotton is graded by produce examiners from the Ministry of Agriculture in the markets
before it is sold to cotton buyers.
Agricultural products as derived from the farm in their natural forms lack uniformity.

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

However, buyers and consumers desire uniformity therefore some basis of description
of products is necessary for the purpose of standards. These stand ards are based
upon some factors, For example, t he main factors considered in determining the
grade of palm oil are in the moisture content, fatty acid and the amounts of impurities
contained.

Similarly for cotton they are:

i. Percentage of immature seed cotton
ii. Percentage of damaged or stained seed cotton
iii. Presence of insects and insect damages and leaves trash
iv. Presence of foreign fibres and stalks, and the
v. Presence of minerals and moisture,

Grading and standardizing yield some advantages throughout the marketing system
because products can be bought and sold without previous examination. Marketing
values are better appreciated as a result of grading and products of like grades can be
stored in bulk. Grading and standardizing make possible the payment of premium
prices for high quality products.
3.2 Advantages of Uniform Grading of Farm Produce

Pricing and Operational efficiency in markets can be increased through a uniform

grading system due to the following:

i. As a result of uniform grading, producers strive at improving the quality of their

produce and thus earn higher prices.
ii. It increases the precision of the price formation process through greater knowledge of
the quality of the products.
iii. It could increase the level of competition and expand the geographical limit of the
market.
This is because an acceptable and meaningful system of grading reduces the need for
direct physical inspection of produce by buyers.
iv. It permits a more systematic allocation of the available supplies of a commodity to
different uses in the market. For example, certain types and quantities of some fruits and
vegetables are more preferable for canning than others. Grading into different market
classes and quality ranges therefore facilitates allocation of the produce to different uses.
v. Grading limits the time and expenses incurable on bargaining and haggling about
product quality in the market.
vi. It increases the ability and potential to buy and sell on description alone rather than only
after personal inspection. For example, large volumes of cocoa, cotton and grains could
be sold if they were graded without the buyers having to see the product.
vii. It may reduce the amount of expensive advertisement and promotional devices that are
based on unimportant or non-existent quality characteristics. In a marketing system
where products are not graded, consumers or users may rely on a brand to be assured of
consistent quality even though other unbranded and slightly promoted products could
meet their needs.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

3.3 Risk bearing and Insurance

Other facilitating functions which make possible the smooth performance of the
exchange and physical functions but are not directly involved in either the exchange of
title or the physical handling of products in the marketing system are (i) risk bearing and
insurance; (ii) financing; and
(iii) market intelligence. These are discussed below.

Marketing entails risks because products may be destroyed by fire, flood, pests,
transportation accidents or theft. At every stage in the marketing process some risk is
involved. Apart from risk associated with physical damage of products, there is also
risk of strike action by workers which may stop the operation of plants or may stop
the shipment of finished goods to their destinations. When these occur the marketing
agents incur some losses. In order to minimize these risks, some insurance policies
could be taken as it is done in advanced countries where the marketing system is well
developed.

In less developed countries this important function of risk bearing is not usually
performed either because the insurance companies are not willing to insure against
marketing risks or because the volume of their business is usually small. In Nigeria the
Agricultural Insurance Scheme introduced by the Federal Government in 1987 does
not cover marketing risks. It is our hope that with time this insurance programme will
be expanded to cover all aspects of agricultural marketing.

3.4 Financing

This is the provision of money and credit necessary to carry product over time
throughout the marketing channel. Time lag is involved in the marketing process in
two ways:
There is time lag in moving the product from the producer to the final consumer. It
could be a few days for perishable products and months for less perishables such as
grains, cotton and paddy rice.
There is a time lag due to unfavourable market situation which may arise as a
divergence between demand and supply.

As a result of these time lags, traders are forced to tie up capital for a long time. Merchants
require capital to finance the holding of stocks, to pay for storage expenses, to process and
distribute the products.
Financing could be in the forms of loans or advance from banks and other lending
agencies or tying up the owner's capital resources. Other informal sources of market
finance such as borrowing from money lenders, friends and relatives are also very
important in less developed countries.
3.5 Market Intelligence

This involves collection, analyzing and dissemination of large variety of data necessary for
the smooth operation of the marketing system. Efficient marketing is dependent on
information. An efficient price mechanism is dependent on well-informed buyers and
sellers. The performance of all the marketing functions depends, to a large extent, on
good information. Information made available through market intelligence is useful in a
number of ways.

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

a. It helps to evaluate the possible alternative marketing channels.

b. It reveals different ways of performing marketing functions
c. It helps producers to understand market potentials for new products.

3.6 Promotion

Promotion is one of the four elements of the Marketing Mix. The other marketing
elements are product, place and price. It is assumed in marketing that for a product to
gain acceptance, all the four elements of product, place, price and promotion must be
properly combined in order to achieve the desired marketing objectives. Promotion as an
integral constituent of marketing also encompasses four elements of advertising,
personal selling, publicity and sales promotion.

Sales promotion is simply a collection of marketing incentives designed and

implemented in the short run for consumers and the marketing institutions with
the aim of stimulating purchase.
Sales promotion is also usually referred to as "below-the-line" as this acronym simply
refers to the promotional activities that are implemented directly by the firm without the
usual 10-15% commission to advertising agencies. Many examples of sales promotion
tools can be mentioned: prices off, patronage awards, contests, free trials, point of
purchase displays and agricultural shows. All these can be employed at different times to
stimulate interest and purchase of products.

3.6.1 Promo-tools for Agricultural Marketing

The use of promo-tools is generally more prevalent in the promotion of manufactured
products than agricultural products. This is probably so because of the near uniformity of
agricultural products. For example, it is usually difficult to differentiate between yams.
Despite this difficulty in their distinction agricultural produce marketers can still make
use of discounts or rebates for large purchases. The use of free samples can also be a sales
promotional tool for many agricultural products such as fruits and legumes. In some cases,
agricultural marketers can resort to the use of free or reduced transport rates to attract
customers. By and large, the use of individual sales promotional items may not achieve
much for a particular agricultural produce marketer. There is usually a tendency for the
collective promotion of produce. This is however made possible when farmers form co-
operative societies. There are societies such as the Soya Bean Farmers Co-operative
Societies and the likes. Since the farmers come under one umbrella with an executive to
oversee the Administrative and Marketing functions the promotional decisions are the
responsibilities of the executives. Decisions regarding tie price and other incentive
schemes are therefore their prerogative. By and large, there is usually a preference for
participation in promotional outlets such as Agricultural Shows and cultural events at
both the local and state levels. This is partly due to the fact that Government a times
subsidizes the costs of such promotions.

3.6.2Merits and Demerits of Individual and Collective Promotion

a) Merit of Individual Promotion: Although it has been stated earlier on, that collective
promotion is more popular, but some advantages of individual promotion of agricultural
products can be identified.
i. Where doubts about quality can affect the general demand for a particular
agricultural produce individual promotion can restore confidence to stimulate demand.
ii. There is speed in planning and execution of a promotion campaign.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

3.6.3 Demerits of Individual Promotion

i. Individual promotion can sometimes be wasteful because of similarities of items. It is
therefore not certain that buyers will only come to buy the promoted produce rather than that
of t h e competitor.
ii. Individual promotion may be ineffective in agricultural marketingas compared to
manufactured goods promotion.
iii. There is relatively higher cost for individual promotion than collective or co-operative
form of promotion.
3.6.4 Merits of Collective Promotion

Collective promotion involves the union of farmers or agricultural marketers who

undertake a common promotion for their produce. In most cases, their produce would
be similar and they have a defined organizational structure to handle the organization
and execution of the promotional campaign.

The promoters who may be farmers' groups or co-operative societies have a defined structure
that manages the organization and execution of the promotion campaign to the advantage of all
the members.
Collective promotion reduces the overall cost of promotion for all the members.
In collective promotion, there is no need for product differentiation which can only add to the
cost of products.

3.6.5 Demerits of Collective Promotion

i. Some products within the group may be of inferior quality and therefore collective
promotion only helps to promote such poor products.
ii. Collective-.promotion does not stimulate the spirit of entrepreneurship in
agricultural marketing.
iii. It is not popular in free market enterprise bee could differentiate his products through
proc which makes it possible for him to receive higher prices.

Self Assessment Exercise

1. Why is market intelligence important in agricultural marketing today?
2. What is the impact of uniform grading on marketing efficiency?

5.0 Conclusion

In this unit you have learnt about sorting, grading and standardization, risk bearing and
insurance, financing, market intelligence and promotion.

6.0 Summary
You have learnt that:
 the Sorting is a physical separation of products of different qualities.
 Sorting is a physical separation of products of different qualities
 Grading makes physical examination of the different produce unnecessary since
each lot or grade has to conform to a predetermined quality standard. Pricing and

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

 Operational efficiency in markets can be increased through a uniform grading system

due to the following:
 Improving quality of products
 Reduce advertisement cost
 Improves allocation of available supplies
 Increases precision in price formation
 Increase level of competition
 No time lost in bargaining

Other facilitating functions include risk bearing, financing, market intelligence and
promotion. There are many merits and demerits of individual and collective promotion.

7.0 Tutor-Marked Assignment

1. Discuss the merits of individual promotion.

2. Discuss the demerits of collective promotion.
3. Discuss the aspect of risk bearing.

8.0 References and Further Reading

Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products 5th Ed., Macmillan
Publishing Company Inc., New York, Chapters 1 and 2.

Kotler. R (2002) Marketing Management. 11th Edition, Prentice- Hall of India, New Delhi,
Part 2 p. 111.
Mortensen, W.R (1977) Modern Marketing of Farm Products The Interstate Printers and
Publishers. Inc. Danvile. Illinois. pp. 17-26.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja
FCT, Nigeria. Chapter 2.

Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products: Economic
Analysis.Iowa State University Press. Iowa, USA, Chapter 2.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 4 WAREHOUSING MARKETING POLICIES

1.0 Introduction

Most often produce are not sold immediately after production or purchase. Therefore
firms require storage facilities. This unit introduces you to warehousing and marketing
policies

2.0 Objectives

In this unit you would learn about:

 Warehousing
 Marketing policies
 Relationship between warehousing and marketing policies
 Different modes of distributing agricultural products in Nigeria
 Impact of freight charges on agricultural produce
 Cost of physical distribution

3.0 Main Body

3.1 Warehousing

Rarely are products sold as soon as they are produced; and as such firms would require
storage facilities. Two types of warehouses meet this need: the storage warehouses hold
goods for a much longer period of time while distribution warehouses serve as way
stations for goods as they pass from one location to the other. Warehouses can be
wholly owned by firms or space can be rented as needed. Although companies have
more control over wholly owned facilities, warehouses of this sort can tie up capital and
a firm’s resources. Common operations in warehouses usually require the inspection of
goods, trading of inventories, repackaging of goods and invoicing. Agricultural produce
may be treated with chemicals or other traditional methods to extend their storage life.

3.2 Marketing Policies

Marketing policies are the conditions of sale or terms of sales which the seller usually
circulates to their customers. Marketing policies therefore vary from one company to
another and will also depend on the nature of goods and services offered.

3.3 Relationships between Warehousing and Marketing Policies

It is necessary for manufacturers to place high premium on storage to guard against

consequences of market disruptions. The disruptions can be engendered by many
factors such as industrial action by labour or sabotage as is the case with oil
installations in the Niger Delta area.

Market participants have continued to seek more efficient financial and operational

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 AEA 304 AGRICULTURAL MARKETING AND PRICE

methods to manage risk in an environment of diminishing profit margin. The storage

operators would certainly come in as relief to producers and marketing agents as they
will hedge them from transportation and storage risks. The development of an efficient
storage system will require government to make enabling laws in order to allow for parties
to enter into financial contracts with less bureaucracy.

3.4 Different Modes of Distributing Agricultural Products in Nigeria

The mode of distribution here refers to the physical movement of agricultural produce
from one location to another. There are four distinct modes of distributing agricultural
produce in Nigeria. These are: rail, road water and air.

i. Railways: The railway system was established primarily for the purpose of
evacuating agricultural and mineral products for exports.

The railways have, however, not made any appreciable impact on internal trade. The
performance of the railway as a mode of transportation has declined in recent times.
The main reasons for railway decline are:

a. Poor management which has necessitated the invitation of foreign managers to

resuscitate the railway system without success.
b. The improvement of road transport in goods haulage thus serving as a potent
competitor.
c. The decline in freight offerings of what have traditionally been railways most important
commodities such as groundnuts and tin.
ii. Road: Road transport has been the backbone of commercial freight movement as
fleets of trailers and tankers haul goods across the country every day and night. In
general about 80 percent of the movement of goods is affected by road. The road
transport business is however plagued by the incessant problems of non-availability or
scarcity of essential vehicle spare parts. The roads are also poorly maintained coupled
with the fear of armed attacks at night. All these have however not diminished the
growing importance of road transport.
iii. Water: The Niger and Benue Rivers and their tributaries form the major inland
water way system for the movement of goods and persons. Low water levels whenever
there is insufficient rainfall and increasing competition from road transport are the
factors that tend to diminish the importance of water transport in Nigeria. If the water
transport is to regain its importance, then dredging of the waterways must be undertaken.
iv. Air: There are only four viable international airports in Nigeria. They are the Lagos,
Abuja, Port-Harcourt and Kano Airports. Air cargo lifting is therefore relatively small at
present. With greater industrialization and the globalization of trade, air transport of
cargo will surely increase in importance.
3.5 Impact of Freight Charges on Agricultural Produce

The effects of freight charges on any agricultural produce depend largely on the mode of

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AEA 304 AGRICULTURAL MARKETING AND PRICE

transport used. The following are factors to be considered.

a. Speed: This is indicated by the time needed to move produce from the point of
production to the point of consumption.

b. Frequency of service: The number of vehicles moving between production

and consumption points per time period. The less the frequency the higher the freight
charges.

c. Dependability: Ability to meet the required period prior to schedule.

d. Operational Capability: This is the ability to handle all kinds of freight from the
very large to fragile or perishable crops.

e. Cost: To be more specific, this is the average cost per ton and kilometer, and this will
vary depending on the specific mode and the agricultural product being transported.

2.6 Costs of Physical Distribution

Physical distribution or logistics is concerned with the efficient movement of agricultural

products from the farmers (production) to the consumers or users. A number of associated
activities to be performed are grouped into four main categories called "physical
distribution activity centers" namely; transportation, inventory, warehousing and
communications. These are costs incurred during the physical distribution of agricultural
produce through the activity centers.

i. Transportation Costing: The various cost elements involved in moving produce

from origin to destination come under three basic costs.

a. Line haul costs: These are the freight charges for physical movement using
any of the modes from one terminal to another.

b. Terminal costs: These are costs incurred for handling freight at transport
terminals.

c. Pick-up and delivery costs: The costs for pick-up and delivery within a
terminal area.

ii. Inventory Carrying cost: Inventory costs to a farmer can range between

25 per cent and 30 per cent of the value of the inventory. Costs in this category would
include cost of capital tied up as inventory, the investment expenses for procuring and
maintaining any needed special storage equipment. Also to be considered are insurance
(on value) and Tax (on value).

iii. Warehousing Costs: Special consideration should be given to both the fixed
and variable costs of maintaining a warehouse. For example, the fixed costs are such items

27
 AEA 304 AGRICULTURAL MARKETING AND PRICE

as utilities and salaries. In some cases, space and labourers' costs will be considered as
variable with volume. Also to be considered as warehousing costs would be unit loading
costs such as packaging and then the handling costs.

iv. Communication Costs: Communication must flow constantly between the farmers,
middlemen engaged- in produce marketing and the consumers/ users. This is especially
necessary for big farms that will need to receive orders and communicate marketing terms
from time to time. Amongst the communication devices today is the mail which is the
cheapest: then the courier which is very expensive. However in recent times, the GSM
(Global systems) phones and e- mails have become prevalent for very fast
communication between two points

All the costs mentioned above have a remarkable impact on the cost of physical
distribution of agricultural produce in Nigeria.

4.0 Self Assessment Exercise

1. What are marketing policies?

2. Discuss the various costs of distribution.

3. What are the “physical distribution activity centres”?

5.0 Conclusion

In this unit you have learnt about warehousing, marketing policies, relationship between
warehousing and marketing policies, different modes of distributing agricultural
products in Nigeria, impact of freight charges on agricultural produce and the cost of
physical distribution.

6.0 Summary

You have learnt that:

 Because products are rarely sold as soon as they are produced firms require storage
facilities.
 There are two types of warehouses to meet this need.
 First type of storage warehouses hold goods for a much longer period of time.
 The second one is called distribution warehouses which serve as way stations for
goods as they pass from one location to the other.
 Common operations in warehouses usually require the inspection of goods, trading of
inventories, repackaging of goods and invoicing.
 Agricultural produce may be treated with chemicals or other traditional methods to
extend their storage life.

You have also learnt that

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AEA 304 AGRICULTURAL MARKETING AND PRICE

 marketing policies are the conditions of sale or terms of sales which the seller usually
circulates to their customers.
 the development of an efficient storage system will require government to make
enabling laws in order to allow for parties to enter into financial contracts with less
bureaucracy.
 the four distinct modes of distributing agricultural produce in Nigeria are the rail, road
water and air.
 the effects of freight charges on any agricultural produce depend largely on the mode of
transport used. and the factors to be considered are speed, frequency of service,
dependability, operational capability and cost.
 physical distribution or logistics is concerned with the efficient movement of
agricultural products from the farmers (production) to the consumers or users.
 a number of associated activities to be performed are grouped into four main categories
called "physical distribution activity centers" namely; transportation, inventory,
warehousing and communications. These are costs incurred during the physical
distribution of agricultural produce through the activity centers.

7.0 Tutor- Marked Assignment

1. How would you determine the impact of freight charges on agricultural produce?

2. What is warehousing?
3. What is the relationship between warehousing and marketing policies?

8.0 References and Further Reading

Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products 5th Ed., Macmillan
Publishing Company Inc., New York, Chapters 1 and 2.

Kotler. R (2002) Marketing Management. 11th Edition, Prentice-Hall of India, New Delhi,
Part 2 p. 111.

Mortensen, W.R (1977) Modern Marketing of Farm Products. The Interstate Printers and
Publishers. Inc. Danvile. Illinois. Pp 17-26.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria.
Chapter 2.

Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products: Economic Analysis.
Iowa State University Press. Iowa, USA, Chapter 2.

29
 AEA 304 AGRICULTURAL MARKETING AND PRICE

MODULE 3 MARKETING AGENCIES

Unit 1 Marketing Agencies

Unit 2 Market Organization and Expansion

UNIT 1 MARKETING AGENCIES

1.0 Introduction

Marketing agencies or intermediaries carry out marketing functions or offer marketing

services. This unit examines their activities to enable you understand the part they play
in marketing.
2.0 Objectives
By the end of this unit you would learnt about the various types of market middlemen
namely:

 Merchant middlemen
 Agent middlemen
 Speculative middlemen
 Processors and manufacturers

3.0 Main Body

3.1 Who are the Marketing Agencies?

Marketing agencies are the middlemen involved in carrying out the marketing
functions discussed in MODULE 2. They could be individuals or agribusiness
organizations that specialize in performing the various marketing functions involved in
the purchase or sale of goods as they are moved from producers to consumers.
Marketing agencies could be individuals acting independently, or they may be
partnerships, large firms, cooperatives or government corporations. It is important to
distinguish between the various types of middlemen by the functions and services they
undertake rather than by their ownership. For example, a farmer who is the producer
may also play the role of a rural buyer, wholesaler or retailer.

Marketing middlemen could be classified into four broad groups namely:

a. Merchant middlemen
b. Agent middlemen
c. Speculative middlemen
d. Processors and manufacturers

3.2 Merchant Middlemen

This group of middlemen takes titles to and owns the goods it handles. The merchant
middlemen buy and sell for their own gain. Examples of merchant middlemen include
the rural buyers, wholesalers and retailers.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

3.2.1 Rural Buyers

This group of middlemen undertakes the initial task of assembling produce from farms
or local rural markets. They may be farmers who collect the produce of other
cultivators. They may be landlords, village shopkeepers, wholesale merchants,
processors, cooperatives or government procurement agencies.

The rural buyer may either act on commission or purchase on his own account. He may
furnish credit to the farmers. He will probably arrange for the transport of his purchase
to a central wholesaling or processing point. He relieves the producers of further
marketing responsibilities.

3.2.2 Wholesalers

The wholesaler has a central role to play in a marketing system. He takes the product
from farms or rural buyers and sells to retailers, to other wholesalers in the domestic
and foreign markets arc to processors and manufacturers, Wholesalers need a lot of
capital to be able to have in stock large assortments of goods. Thus they normally take
loans from the banks to do their marketing business and bear most of the marketing risks.
Some of the conditions necessary for effective wholesaling business include:

i. A place of business with accounting and communication facilities,

ii. Access to capital and
iii. A good knowledge of the product handled.

3.2.3 Retailers

The main function, of the retailer is to obtain supplies and display them for sale in forms
and at times and places convenient for the consumers. Usually the retailer buys from one
or more wholesalers, sometimes on credit and serves consumers who buy smaller
quantities on day to day basis.
Frequently, retailers sort, process and repack food to suit consumer's
individual requirements. This may take place while the consumer watches, as in cutting
of meat or behind the scene where prepackaging is acceptable as in the packing of garri
into bags by garri traders in Bendel State. One marketing firm may control a number of
retail outlets and it may set up its own buying organization which acts as a wholesale
supplier. Such chain store buying agencies may deal directly with processors, large
producers or producer groups. By so doing the retailing agency obtains price
advantage through large scale purchases.

3.3 Agent Middlemen

This group of middlemen acts only as representatives of their principals. They do not
normally take title to, and therefore do not own the products they handle. They receive
their income in form of fees and commissions. Agent middlemen in reality sell services
to their clients and not physical goods to consumers.
There are two types of agent middlemen, namely the commission men and the brokers.
3.3.1 Commission Agents

Producers and wholesalers frequently want to offer their produce in markets where they

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cannot conveniently attend in person. Commission agents specialize in buying for such
people and take

charge of the goods on their behalf. They are encouraged to behave well to their clients
by being paid a percentage of the price obtained. Commission agents do not normally
bear marketing risks since they are operating for their principals. Commission agents are
used mainly when direct offers tend to be low, or where monopsony buying is in
operation. For example, the licensed buying agents (L.B.As) of the defunct commodity
boards were commission men. Even now the cotton merchants have commission men
buying cotton for them in the rural cotton markets. Commission agents have more
powers to take decisions on behalf of their principals.
3.3.2 Brokers

This group of middlemen brings potential buyers and sellers together The function of
this group is to provide an intimate knowledge of supplies, requirements and prices in
various markets. The term "broker" is restricted to agents who do not take title to or
physically handle goods. The actual transfer of ownership takes place between the original
buyer and seller, with the broker acting as a counsellor and intermediary in return for a
fee.

Brokers are in touch with a wide selection of specialized dealers and are we!! supplied with
up to date information on markets and prices Brokers can therefore offer a wider market
than would otherwise be accessible to the buyer or seller.

3.4 Speculative Middlemen

This group of middlemen buys the products with the aim of selling them at a time when
prices rise. They often attempt to earn their profit from short-run fluctuations in prices.
Other names used for speculative middlemen are hoarders and spreaders.

Speculative middlemen could be wholesalers or retailers who are to take greater risks.
Though their immediate motive is profit, they can also perform a useful service, known
as arbitrage. They buy when prices are low and resell when prices rise. They may also
buy and sell in different areas when there are differences in prices over space. If there is
competition, this kind of buying and selling is useful because it can prevent prices from
fluctuating between wider extremes.

3,5 Processors and Manufacturer

These are mainly agribusiness firms that undertake some action on farm products to
change their form. Sometimes they function as buying agents in the producing areas.
Some also undertake the wholesaling of their finished products to retailers for example,
meat packers, flour mills, fruit and vegetable canners, such as Vegfru Company and
Nasco Cornflakes Company in Jos.

4.0 Self Assessment Exercise

1. Discuss the nature and types of middlemen involved in agricultural marketing in
Nigeria.

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5.0 Conclusion
In this unit you have learnt about the various types of market middlemen namely,
merchant middlemen, agent middlemen, speculative middlemen, processors and
manufacturers.

6.0 Summary

In this unit you learnt that:

 Marketing agencies are the middlemen involved in carrying out the

marketing functions
 Marketing middlemen are classified as merchant middlemen, agent
middlemen, speculative middlemen and processors and manufacturers.
 Merchant middlemen take titles to and own the goods they handle. They buy
and sell
For their own gain.
 Examples of merchant middlemen include the rural buyers, wholesalers and
retailers.
 Agent middlemen sell services to their clients and not physical goods to
consumers. They earn their incomes in form of fees.
 The two types of agent middlemen are the commission men and the brokers.
 Speculative middlemen buy the products with the aim of selling them at a time
when prices rise.
 The processors are the agribusiness firms that undertake some action on farm
products to change their form.

7.0 Tutor-Marked Assignment

1. Write short notes on the Agent middlemen.

2. Write short notes on the merchant middlemen.

8.0 References and Further Reading

Abbot. J .C. and J.P. Makeham (1980) Agricultural Economics and Marketing in the
Tropics, FAO London. Chapter 4.
Hays, H.M. (Jnr.)(1975)"The marketing and storage of food grains in Northern Nigeria",
Samaru Miscellaneous Paper No. 50, Institute for Agricultural Research, Zaria.
Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products.
5th Ed. New York. Chapter2.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria.
Chapter 3.

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UNIT 2 MARKET ORGANIZATION AND EXPANSION

1.0 Introduction
Another area of interest in the study of marketing is how middlemen and institutions are
grouped together in carrying out the marketing functions. The grouping of middlemen and
institutions is referred to market organization.
2.0 Objectives
By the end of this unit you should be able to describe:
 market channels for different agricultural products
 marketing chains for different agricultural products
 market integration and
 growth by diversification.
3.0 Main Body
3.1 Marketing Channel

A marketing channel is simply the path of a commodity from its raw form to the finished
form or the path of a product as it moves from the producers to the final consumers.
Marketing channels are important in evaluating marketing systems because they indicate
how the various market participants are organized to accomplish the movement of a
product from the producer to the final consumer.
The two types of marketing channels are (i) centralized channel and (ii) decentralized
channel.
A centralized marketing channel is one in which the farmer's products are brought together
in larger central and terminal markets. There they are purchased by the processors or
wholesalers from commission men and brokers who act as the farmer's selling agents. A
decentralized channel on the other hand is one that does not use such established large
market facilities, rather, wholesalers and processors purchase directly from the farmers.
The marketing channel for agricultural products in Nigeria is mainly the decentralized type.
Figures 3.1, 3.2, 3.3, 3.4 show the marketing channels for different agricultural products
in Nigeria.

Farmer

Bulking traders Rural assemblers

Rural urban link wholesalers urban wholesalers/commission agents

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Inter-regional urban retailers

Urban consumers

Inter-regional wholesalers Regional wholesalers Urban wholesalers Retailers

Consumers

Figure1: Generalized marketing channel for food grains in Nigeria (Adapted from
H.M. Hays, 1973

Producers

Rural buyers

Wholesalers

Retailers

Consumers

Figure 2 : Marketing channel for cowpeas

3.2 Marketing Chains

The marketing chain describes the succession of markets through

which products pass until they reach the consumers. Marketing chain
is part of the marketing channel. The study of marketing chain is
important in that it reveals the relative importance of various markets or
exchange points in the marketing system.

Some commodities have a long marketing chain, for others the chain is
short. Along marketing chain implies that the commodity changes hands
many times before reaching the final consumer. The longer the chain is, the
higher the price that the consumer will have to pay for the commodity. The

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length of the chain depends on the nature of the commodity and how far the
consumers are from the producing areas. Figure 3.5 is an example of a
marketing chain for food crops.

Farmers

Rural assemblers

Wholesalers

Retailers

Processors and
Manufacturers e.g.
Flour Mills and
Breweries

Wholesalers
and retaiers

Consumers
Main channel
Less important channel
Figure 3: Marketing channel for maize in Nigeria

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Farmers

Commission Agents

Cotton Merchants

Ginnery

Export Local processors

Textile mills & Oil crusers
Clothes
Foreign Processors &
Vegetable oil

Foreign Consumers Local Consumers Livestock

Farms

Figure 4: Marketing channel for seed cotton

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3.3 Organizational Expansion

There are two main ways in which marketing firms can grow in size, namely integration and
growth by diversification.

3.3.1 Market Integration

Market integration is the grouping of firms that perform similar functions under one
management. It enables marketing firms and agribusiness firms to grow in size and increase
their market power.

There are two types of integration: namely vertical integration and horizontal integration.

Vertical integration: This is one in which a firm combines activities which are not similar to
its present function but related to them in sequence of marketing activities. The simplest
meaning of vertical integration is ‘Ownership’. When a firm owns two or more levels of
production or marketing, it is vertically integrated. A livestock feed company which feeds its
own livestock rather than selling the feed alone is said to be vertically integrated. Likewise a
meat packer which owns retail stores and sells meat directly to consumers is vertically
integrated. For example, a meat packer may decide to increase the scope and size of its firm by
integrating backwards to reach the producers by opening buying points for livestock or
producing his own livestock and integrating forward to reach the consumers by opening up
cold stores, or supermarkets and other retail points.

Horizontal integration: This refers to a situation where a firm gains control over other firms
performing similar activities at the same level in the marketing sequence. For example, small
firms that handle dairy products could decide to merge with bigger and more viable ones. In the
same vein smaller firms that handle processed meat could decide to merge with bigger firms in the
same business. Such mergers enable the firms involved to enjoy a wider market share of the
product and also to exercise greater market power. In some countries, the governments enact laws
to discourage excessive merger of big firms with a view to discourage monopolistic and
oligopolistic tendencies.

3.3.2 Growth by Diversification

This is the growth in size or expansion of marketing firms or agencies by the merger of
organizations that do not have any direct relationship to the activity of the individual
firms. For example, Leventis Group consists of firms engaged in brewery, meat processing,
supermarkets, farming, glass production, bottling of soft drinks etc. UAC also comprises of
Kingsway, SCOA Motors, bottling firms, breweries, farming, etc. All these integration efforts
are attempts to organize or co-ordinate the marketing firms to obtain increased operating
efficiency or wider market power in the selling or buying process. Other advantages of
integration are as follows:
a. It has effect of shortening the marketing chain between the producer and the final
consumer. Integration thus helps to reduce marketing margin.

b. Integration could increase the profit of a firm because it may place a firm in a more
advantageous bargaining position while its greater share of the market power could help the

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firm to influence the market price.

c. Integration could also enable a firm to operate with greater efficiency and lower cost.
It guarantees steady supply of inputs to agribusiness firms and ensures uninterrupted flow of
products to consumers.

However, some of the disadvantages of market integration is the concentration of market power
in a few firms. For example, vertical integration of a firm already possessing substantial market
power may be anti-competitive because it may make entry more difficult for potential
competitors and it gives the integrated firm the power to exert a price squeeze. For example. a
flour mill that dominates milling and then integrates forward into baking could squeeze the other
bakers by raising flour price to them.

4.0 Self Assessment Exercise

1. Distinguish between marketing chain and channel.

2. What is horizontal integration?

5.0 Conclusion
In this you have learnt about market channels for different agricultural products, marketing chains
for different agricultural products, market integration and growth by diversification.

6.0 Summary

In this unit you learnt that:

 A marketing channel is the path of a commodity from its raw form to the finished form or
the path of a product as it moves from the producers to the final consumers.
 There are two types of marketing channels namely centralized channel and decentralized
channel.
 A centralized marketing channel is one in which the farmer's products are brought together
in larger central and terminal markets. There they are purchased by the processors or
wholesalers from commission men and brokers who act as the farmer's selling agents.
 A decentralized channel on the other hand is one that does not use such established
large market facilities, rather, wholesalers and processors purchase directly from the farmers.
 A marketing chain describes the succession of markets through which products pass until
they reach the consumers.
 Marketing chain is part of the marketing channel.
 Some commodities have a long marketing chain, for others the chain is short.
 A long marketing chain implies that the commodity changes hands many times before
reaching the final consumer.

You also learnt that:

 There are two main ways in which marketing firms can grow in size, namely integration and
growth by diversification.
 Market integration is the grouping of firms that perform similar functions under
one management.
 There are two types of integration: namely vertical integration and horizontal integration.

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 Vertical integration occurs when a firm combines activities which are not similar to its
present function but related to them in sequence of marketing activities.
 Horizontal integration refers to a situation where a firm gains control over other firms
performing similar activities at the same level in the marketing sequence.
 Growth by diversification is the
growth in size or expansion of marketing firms or agencies by the merger of organizations that
do not have any direct relationship to the activity of the individual firms.
 Integration also has effect of shortening the marketing chain between the producer and
the final consume, thus helps to reduce marketing margin.
 Integration could increase the profit of a firm by placing a firm in a more advantageous
bargaining position .
 Integration could also enable a firm to operate with greater efficiency and lower cost.
 Some of the disadvantages of market integration is the concentration of market power in a
few firms thus leading to anti-competitiveness.

7.0 Tutor –Marked Assignment

1. What is vertical integration?
2. What are the advantages and disadvantages of market integration?
3. Describe the two types of marketing channels?

8.0 References and Further Reading

Abbot. J .C. and J.P. Makeham (1980) Agricultural Economics and Marketing in the Tropics,
FAO London. Chapter 4.
Hays, H.M. (Jnr.)(1975)"The marketing and storage of food grains in Northern Nigeria",
Samaru Miscellaneous Paper No. 50, Institute for Agricultural Research, Zaria.
Kohls. R.L. and J.N. Uhl (1980) Marketing of Agricultural Products. 5th Ed. New York.
Chapter2.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter 3.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

MODULE 4 MARKET STRUCTURE ANALYSIS

Unit 1 Characteristics of Market Structure

Unit 2 Types of Market Structures
Unit 3 Market Conduct and Performance

UNIT 1 CHARACTERISTICS OF MARKET STRUCTURE

1.0 Introduction

The concept of market structure is used to study the number, size distribution and power of
market participants. This concept was made popular by the industrial organization economists
but its application in the study of agricultural marketing is growing very fast. The main
application of the market structure model has been in the developed countries: however, its
usefulness may I being realized in less developed countries as well.
2.0 Objectives
By the end of this unit you should know what market structure is all about.
3.0 Main Body

3.1 Market Structure Defined

Market structure can be defined as those characteristics of the organization of a market which
seem to influence strategically the
nature of competition and pricing within the market. Among the factors considered important in
determining market structure are:
a. the number and relative size of buyers and sellers.
b. the degree of product differentiation
c. the ease of entry and exit of buyers and sellers into and out of the market
d. status of knowledge about costs, prices and market conditions among the participants in
the market.

Market structure relates essentially to the degree of competition by a market. It tends to consider
whether the number of firms producing a product is large or whether the firms are of equal sizes or
dominated by a small group. It is also concerned with whether entry for new firms is easy or
difficult and whether the purchase of the product is in a competitive state or not. Structure also
relates to the degree of market knowledge which is available to these firms. These factors are
considered one by one in the next few sections.

3.1.1 Number and Size of Firms

The concept of market structure is used to explain some of the most important limits upon the
freedom of action, and therefore the managerial options of any buyer or seller. In general, the
effect of the relative size of buyers and sellers is pretty obvious. A single large seller, lacking any
close competitor and offering a highly desired product to many small, competing buyers has the

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capacity to set a very high price The opposite of such monopoly power in selling is a single large
buyer who buys from many small, competing sellers. This single buyer (monopsonist) is likely
to set a buying price lower than if several other buyers were competing with him

3.1.2 Nature of the Product

Some products are standardized (homogenous,; Most covers feel the product of one seller is
virtually not different from those of other sellers. For example, a farmer selling cassava or maize
will find it difficult to convince buyers that his product is different. The contrast is that of
livestock feed for which there are different brands. Examples are Sambo Feeds, Pfizer Feeds,
Sanders Feeds, Top Feeds, Vital Feeds, Animal Care Feeds, Rebson Feeds and Noma Feeds.
Each feed mill claims that his product is different or better in quality than others. The livestock
farmers also believe that the feeds are different in quality, that is, the products are different in the
eyes of the buyers.
Where product differentiation exists it is possible for firms selling differentiated products to act
like small monopolies. The firms need not fear that price undercutting will completely erode the
markets for their products. Thus the nature of the product will help to determine the types of
behaviour that can be anticipated under different market situations
3.1.3 Entry and Exit Conditions

This refers to the ability of a firm to enter or leave a market. There are definite barriers that
might exist. For example, products that are patented cannot be produced and sold by firms other
than the firm which holds the patents for a period of time. In addition to patents, there may be
other legal restrictions which forbid other firms from participating in the market. For an
example, the government could create monopsony firms like the defunct cotton boards. Other
factors that may influence entry and exit include absolute cost advantages held by existing firms or
absolute entry costs that are prohibitive. An example of the latter is the substantial capital
requirements associated with undertakings in the steel industry or the large capital needed to
enter produce buying business or large capital for one to enter the poultry business.

3.1.4 Market Knowledge

This refers to the information available to buyers and sellers that enables them to take
decisions in the market environment in which they operate. It is believed that buyers and
sellers will make more rational decisions if they have more information at their disposal
pertaining to prices in different markets and the qualities of the various products. Market
knowledge extends beyond information concerning prices as it also includes knowledge of the
actions that competitors take as well as information about future market conditions.

4.0 Self Assessment Exercise

How does the nature of product affect the behavior in the market?

5.0 Conclusion
In this unit you have learnt about market structure that determines the behaviour of the market
system.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

6.0 Summary
In this unit you have that:

 Market structure is defined as those characteristics of the organization of the market

which seem to influence strategically the nature of competition and pricing within the market.
 Factors which determine market structure are:
 the number and relative size of buyers and sellers,
 the degree of product differentiation,
 the ease of entry and exit of buyers and sellers into and out of the market
 the status of knowledge about costs, prices and market conditions among the participants
in the market.

 The larger the number of buyers and sellers the greater the degree of competition
 The greater the degree of product differentiation the higher the prices that individual firms
can charge for their products
 The easier the entry and exit of firms into the market the greater the degree of competition
 The greater the rate of information flow about costs, prices and market conditions among
participants the greater the level of competition.

7.0 Tutor - Marked Assignment

1. Discuss the importance of number and relative size of sellers and buyers to market behaviour.
2. Discuss the importance of status of knowledge among participants to market behaviour.

8.0 References and Further Reading

Bain, J.S. (1968) Industrial Organisation, 2nd Ed. John Wiley & Sons. N.Y. Bateman. D.I.
(1972) "The Marketing Environment" in Marketing Management in Agriculture. D.I Bateman
Ed Ejiga, N.O.(1979) “Marketing System for Agricultural Products in
Kaduna State” A Consultancy Report, Institute for Agricultural Research. Zaria.

Faris, P.L. (1964) Market Structure Research: Theory and Practice in Agricultural Economics,
IOWA State University Press. Ames.
Hans, G. (1973)7he Marketing System of Fruits and Vegetables in Ibadan - A Case Study
Published by Post-Graduate Training Centre for Agricultural Development, Institute of
Socio-Economics of Agricultural Development, Technical University of Berlin.
Holms, A.S. (1971) Market Structure, Conduct and Food grain pricing Efficiency: An Indian
Case Study. MSS Educational Publishing Company, Inc. New York.
Muller, W.F. (1959) "Some Market Structure Considerations in Economic Development"
Journal of Farm Economics. May, p.425.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter 4.
USDA (1973) "Empirical Studies of the Organization and Performance of Industries", In Market
Performance Concepts and Measures, p. 37.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 2 TYPES OF MARKET STRUCTURES

1.0 Introduction

Having learnt about the characteristics of market structures in the previous unit, it is necessary
to learn about the types of market structures. This will enable you to appreciate the behaviour
and performance of participants in the market system.

2.0 Objectives

By the end of this unit, you should be able to describe the four basic types of market structures
which are:
 Atomistic (or pure) competition
 Monopolistic competition and Monopsonistic competition
 Oligopolistic competition and Oligopsonistic competition
 Pure monopoly.

3.0 Main Body 3.1Atomistic or pure competition

This is a situation where there are many firms on the seller side of the market that produce
and sell a product which is standardized in the eyes of the buyers. A purely competitive
market is also characterized as one that has virtually no barriers to entry or exit. The level of
market knowledge is used to distinguish between pure and perfect competition. Where the three
characteristics mentioned above exist we say it is a state of pure competition, but if in addition there
is the existence of full market knowledge or perfect market knowledge, we call it a perfect
market or perfect competition. The same term 'Pure competition' is used on the buyers' side of
the market where there are many buyers purchasing a standardized product. Atomistic competition
is difficult to find in practical life situation but the agricultural sector most closely illustrates it.

3.2 Monopolistic and Monopsonistic Competition

This is a situation where there are many firms selling differentiated products. It is a state of
competition because many sellers are involved. The only difference between this and pure
competition is in the nature of the product-differentiated product. The feed mills are typical
examples of this market structure. There are many feed mills scattered all over Nigeria but they all
sell differentiated products as branded formula feeds and feed supplements. What do we mean

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by product differentiation? A product is said to be differentiated if it is a little bit different in

the eyes of the buyers. The difference may be in the nature of the product, the quality of the
product or in such aspects of packaging, branding or conditions of sale. For example, Coca
cola and Pepsi are both soft drinks but they are different in the eyes of the buyers. They may differ
in taste, the brand names are different and the bottles are different.

The models of monopolistic and monopsonistic competition have the structural characteristics
of (a) many buyers and many sellers, (b) product or service differentiation, and (c) relatively
easy entry or exit. Since the products are-differentiated, it generally pays the firms to engage in
merchandising (advertising), sales promotion, product and service improvement through
research and development. Secondly, product differentiation permits each firm to set its own
price. Thus a firm selling in a market under monopolistic competition is a "price marker" not a
"price taker".
3.3 Oligopolistic and Oligopsonistic Competition

This is the type of market structure in which few firms are engaged in buying and selling, if few
firms are engaged in selling a homogenous product, this is referred to as purely oligopoly. On
the other hand, a situation where a few firms are engaged in selling differentiated products is
referred to as differentiated oligopoly.
On the buying side of the transaction, few firms or buyers that buy a homogenous product is
referred to as pure oligopsony and a situation where a few buyers buy differentiated product is
referred to as differentiated oligopsony. In all cases of oligopoly or oligopsony, entry into the
market is difficult and even, in a few cases, virtually impossible.
Oligopolistic firms are price makers when they have differentiated products. Pricing tends to
be a delicate issue in oligopoly market structure because of the fewness of firms participating in
the market. Thus any foreseeable gain in the market share of one firm usually leads to a
perceptible loss in the market share of one or more of its few competitors. Hence, any simple
move by one firm such as price cut which erodes the market share of other rivals will result in a
price war.
One marked feature of oligopoly market structure is the interdependence of the few buyers and
sellers involved in the market, such interdependence could lead to collusion. While
interdependence may limit the managerial discretion of a firm, it could also provide marketing
or procurement opportunities not available in the competitive market structures. These
opportunities revolve around the fact that certain actions taken in recognition of mutual
interdependence may benefit the whole group. Under this structure, it is common for a big firm
among the few sellers that has a larger proportion of the market share, to play the role of price
leadership while the other firms follow suit. Oligopolies with homogeneous products have nearly
identical prices while oligopolies with differentiated products may have a considerable variety of
prices.

3.4 Pure Monopoly

This is a market structure in which there is a single firm selling a unique product. A monopoly is
also characterized by completely blocked entry conditions and the continued effort to keep the
market to itself, On the buyer's side, a market structure in which there is a single buyer buying a
unique product is called monopsony market. Monopsonies may exist in geographically
restricted areas where there may be only one purchaser of farm products in certain highly
dispersed farming areas. This one buyer thus has influence over the price he pays those sellers
with whom he or she deals. A monopsonist can retain his or her position only by blocking the

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entry of other buyers in the market in which he operates. An example of a monopsonist in Nigeria
was the defunct Cotton Board which was the only body empowered by law to purchase and gin
seed cotton produced in Nigeria. Table 1 summarizes the different types of structural
characteristics.
Table 1: Market Structure in the Agricultural System. Structural Characteristics Market

Structure
Nature of (a) (b)
No. of Firms product Seller side Buyer side
1 Many Standardized Pure competition Pure competition
2 Many Differentiated Monopolistic Monopsonistic
competition competition
3 Few Standardized Pure Oligopoly Pure Oligopsony
4 Few Differentiated Differentiated Differentiated
Oligopoly Oligopsony
5 One Unique Monopoly Monopoly

4.0 Self Assessment Exercise

1. Describe the conditions that pertain to atomistic competition.
2. Describe the conditions that pertain to pure monopoly.
5.0 Conclusion

In this unit you have learnt about the four basic types of market structures which are atomistic
(or pure) competition, monopolistic /monopsonistic competition, oligopolistic /oligopsonistic
competition and pure monopoly.

6.0 Summary

In this unit you have learnt that:

 Pure competition is a situation where there are many firms on the seller side of the
market that produce and sell a product which is standardized in the eyes of the buyers and it is
characterized as one that has virtually no barriers to entry or exit.
 Perfect competition exists if in addition to the above pure competition conditions, there is the
existence of full market knowledge or perfect knowledge.
 A product is said to be differentiated if it is a little bit different in the eyes of the buyers
 Monopolistic competition is a situation where there are many firms selling
differentiated products. It is a state of competition because many sellers are involved.
 Monopsonistic competition is a situation where there are many buyers buying
differentiated products. It is a state of competition because many sellers are involved.
 Product differentiation permits each firm to set its own price. Thus a firm selling in a market
under monopolistic competition is a "price marker" not a "price taker".
 Oligopolistic competition is the type of market structure in which few firms are engaged
in selling. If few firms are engaged in selling a homogenous product, this is referred to as
purely oligopoly. On the other hand, a situation where a few firms are engaged in selling
differentiated products is referred to as differentiated oligopoly.
 Oligopsonistic competition is the type of market structure in which few firms are
engaged in buying. If few firms are engaged in buying a homogenous product, this is referred

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to as purely oligopsony. On the other hand, a situation where a few firms are engaged in buying
differentiated products is referred to as differentiated oligopsony.
 Pure Monopoly is a market structure in which there is a single firm selling a unique
product. A monopoly is also characterized by completely blocked entry conditions and the
continued effort to keep the market to itself,
 Pure monospsony is on the buyer's side, is a market structure in which there is a single
buyer buying a unique product. A monopsony is also characterized by completely blocked entry
conditions and the continued effort to keep the market to itself.

7.0 Tutor – Marked Assignment

1. Define the following:

a. Monopoly
b. Oligopoly
c. Monopsony d.Oligopsony
d. Pure competition

2. Compare and contrast the following:

a. Monopoly and monopsony
b. Pure competition and puree monopoly
c. Pure competition and perfect competition

8.0 References and Further Reading

Bain, J.S. (1968) Industrial Organisation, 2nd Ed. John Wiley & Sons. N.Y.
Bateman, D.I. (1972) "The Marketing Environment" in Marketing Management in Agriculture.
D.I Bateman Ed

Ejiga, N.O. (1979) “Marketing System for Agricultural Products in Kaduna State” A
Consultancy Report, Institute for Agricultural Research. Zaria.

Faris, P.L. (1964) Market Structure Research: Theory and Practice in Agricultural Economics,
IOWA State University Press. Ames.
Hans, G. (1973)7he Marketing System of Fruits and Vegetables in Ibadan - A Case Study
Published by Post-Graduate Training Centre for Agricultural Development, Institute of Socio-
Economics of Agricultural Development, Technical University of Berlin.
Holms, A.S. (1971) Market Structure, Conduct and Food grain pricing Efficiency: An Indian
Case Study. MSS Educational Publishing Company, Inc. New York.
Muller, W.F. (1959) "Some Market Structure Considerations in Economic
Development"
Journal of Farm Economics. May, p. 425.

48
AEA 304 AGRICULTURAL MARKETING AND PRICE

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter 4.
USDA (1973) "Empirical Studies of the Organization and Performance of Industries", In Market
Performance Concepts and Measures, p. 37.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 3 MARKET CONDUCT AND PERFORMANCE

1.0 Introduction

In the previous two units you have learnt about the characteristics and types of market structures
that lead to market conduct. The ultimate goal is to show you how the structure and the conduct
lead to the performance of the market.

2.0 Objectives

By the end of this unit you should be able:

 to describe market conduct and linkage to market structure

 to describe market performance and linkage to market structure and conduct

3.0 Main Body

3.1 Market Conduct

Market conduct relates to the behaviour of the firms or the decision that firms make relating to
their pricing and output policy and other competitive tactics. Market conduct is related to
market structure. In other words, market conduct refers to the actions which firms follow in
adopting or adjusting to the market in which they buy and sell. It includes the method employed
by groups of firms in determining price and output, sales promotion policies, policies that are
directed at altering the nature of the product sold and various selling tactics that are employed
to achieve specific market results. The most important factors used in assessing market conduct are:
a. Methods of determining price and output.
b. Sales promotion policy
c. Product policy
d. The presence or absence of exclusionary tactics directed against established rivals or
potential entrants.
e. Research and development.

Since market conduct refers to certain behavioural characteristics of firms in the market it
therefore specifically amount other things refers to:

i. Pricing practices which encourage grading and standardization of agricultural

commodities;
ii. Uniformity of market charges:
iii. Pricing practices free of collusion and unfair tactics as well as black marketing; and
iv. Pricing policies which encourage product quality improvement and greater consumer
satisfaction.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Market conduct is heavily influenced by the market structure. It is the link between market
structure and performance. Since the behaviour of sellers in a market could adversely affect the
efficiency of the entire system, government throughout the world watch closely the conduct of the
market with a view to taking remedial actions when the conduct is being pursued is viewed as
inimical to efficient marketing.

Seller Side
Pure Competition Monopolistic Competition Oligopoly Monopoly

Perfect competition
Imperfect competition

Market power Increasing or control

Figure 6: Various market structure

The greater the No. of The more the less market power (control) each
(1) buyer or seller has less in-terference with
buyers and sellers competition
market mechanism of supply and Demand

The greater the size of the less the more market power (control) each buyer
(2) buyers & sellers & competition or seller has more interference with the
smaller the numbers & in market market mechanism of supply and Demand.

Figure 7: Effect of number and size distribution of buyers and sellers on market power.

3.2 Market Performance

This is a concept that is related to structure and conduct. It is defined as the strategic end
result of market adjustments engaged in by buyers and sellers. In other words, market
performance is the appraisal of the extent to which the interactions of buyers and sellers in a
market stimulate results that are consistent with social purposes.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

The main features used in assessing market performance are:

a. The level of profit;
b. Scale and utilization of plants and firms;
c. Sales and promotion costs;
d. Character of the product and progressiveness.
Market performance, in other words, is the assessment of how well the process of marketing is
carried out and how successfully its aims are accomplished. Specifically market performance is
connected with:
i. Technological progressiveness ;
ii. Growth orientation of agricultural firms
iii. Efficiency of resource use; and
iv. Product improvement and maximum market services at the least possible cost.

It is difficult to measure market performance because of the subjective nature of performance

measures. However, performance measures could be modified to suit the nature of the particular
problem The term performance has come into increasing use in place of efficiency even though it
is less precise but probably more generally applicable, Performance is believed to be more
generally applicable because it embraces a wider dimension than efficiency, thereby giving a
better picture of the marketing system..
3.3Possible Achievements Market Structure, Conduct Can Performance Can Produce

If market structure, conduct performance are well applied, they can help in shaping the
marketing system in the country and can help in achieving these specific aims:
i. The resources committed to marketing will be efficiently used.
ii. More workers can be employed since there will be increased production and hence
increased marketing services
iii. There will be better or lower consumer prices, with reasonable returns to the producers,
enough to encourage them to increase their production.
iv. It would ensure that pre- harvest losses are kept to the minimum since there will be
available storage facilities in the marketing channels.
v. Consumers will be aware through education and advertisement of the movement of
prices, as well as the quality of products they wish to buy.
vi. Farmers, middlemen and consumers will also have complete information which they all
need for planning so as to estimate production and watch price movements.

4.0 Self Assessment Exercise

1. Discuss what is meant by market conduct.
2. Discuss what is meant by market performance.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

5.0 Conclusion

In this unit you have learnt about market conduct and performance and how they are related to
structure. You also learnt about possible achievement derivable from the structure, conduct
and performance concept.

6.0 Summary

In this unit you have learnt that:

 Market conduct relates to the behaviour of the firms or the decision that firms make relating
to their pricing and output policy and other competitive tactics.
 Market conduct is related to market structure.
 Since the behaviour of sellers in a market could adversely affect the efficiency of the entire
system, it follows that it can equally affect the performance.
 Market performance is defined as the strategic end result of market adjustments engaged in
by buyers and sellers.
You have also learnt that there are possible achievements market structures, conduct and
performance can help to make in the economy if properly applied.

7.0 Tutor – Marked Assignment

1. What is market conduct? What factors are used to assess market conduct?
2. What factors do you consider important in assessing performance?
3. Enumerate potential achievement of structure, conduct and performance concept.

8.0 References and Further Reading

Bain, J.S. (1968) Industrial Organisation, 2nd Ed. John Wiley & Sons. N.Y.
Bateman, D.I. (1972) "The Marketing Environment" in
Marketing Management in Agriculture. D.I Bateman Ed

Ejiga, N.O. (1979) “Marketing System for Agricultural Products in Kaduna State” A
Consultancy Report, Institute for Agricultural Research. Zaria.

Faris, P.L. (1964) Market Structure Research: Theory and Practice in Agricultural Economics,
IOWA State University Press. Ames.
Hans, G. (1973)7he Marketing System of Fruits and Vegetables in Ibadan - A Case Study
Published by Post-Graduate Training Centre for Agricultural Development, Institute of Socio-
Economics of Agricultural Development, Technical University of Berlin.
Holms, A.S. (1971) Market Structure, Conduct and Food grain pricing Efficiency: An Indian
Case Study. MSS Educational Publishing Company, Inc. New York.
Muller, W.F. (1959) "Some Market Structure Considerations in Economic Development”
Journal of Farm Economics. May, p. 425.

53
AEA 304 AGRICULTURAL MARKETING AND PRICE

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter 4
USDA (1973) "Empirical Studies of the Organization and Performance of Industries", In
Market Performance Concepts and Measures, p. 37.

54
AEA 304 AGRICULTURAL MARKETING AND PRICE

MODULE 5 MARKETING MARGINS, COSTS AND EFFICIENCY

Unit 1 Marketing Margins

Unit 2 Marketing Costs
Unit 3 Marketing Efficiency

UNIT 1 MARKETING MARGINS

1.0 Introduction

In the previous module you learnt about market structure, conduct and performance. You learnt

that business firms or concerns behave according to the dictates of the market structure. Other

important driving force is how much return they make on top of the costs of their endeavour.

This unit and subsequent two units deal with the marketing margins, the costs and efficiency.

2.0 Objectives

By the end of this unit you would be able to:

 determine marketing margin
 describe what brings variability in marketing margins
 discuss the incidence of margin changes
3.0 Main Body

3.1 Marketing Margin

This refers to the difference in prices paid for a commodity at different stages of the
marketing system. Time, place, form and possession are important factors that affect
marketing margin. Therefore, marketing margin represents difference in price of a given
commodity at different stages of time, form, place and possession as it moves from the
primary producer to the ultimate consumer. For example, the difference between the price
paid to the primary producer (farmer) for 100kg bag of paddy and the wholesale or retail price of
the milled rice derived from that paddy represents the market margin.

Marketing margin could be considered from the following two points of view:
a. Marketing margin is the difference between the price paid by consumers and that received
by the producers, and
o. Marketing margin is the outcome of the demand for and the supply of such services.

Under the first definition, marketing margin is simply a difference between the primary and
derived demand for a particular product. For example, if consumers want to eat bread, the
demand for bread is primary demand while the demand for wheat which is needed to produce the
bread is derived demand. In the same manner, the supply of wheat grain is primary supply while

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AEA 304 AGRICULTURAL MARKETING AND PRICE

the supply of bread is derived supply. Thus a retail price is established at the point where the
primary demand and the derived supply intersect as shown in Figure 8. The farm level price is
established at the intersection of the derived demand and primary supply curves. The difference
between the retail price and farm level price is the marketing margin.

The second definition refers to marketing margin as the price of a collection of marketing services.
This price is a function of the demand for and supply of all such marketing services, which include
such items as assembly, processing, transportation and retailing. Marketing margin differs from
one product to another because the marketing services needed also differ from product to
product. Some products are highly perishable, consequently they require specialized handling,
storage techniques and processing. Examples of highly perishable products are fruits, vegetables
and dairy products.

3.2. The Size of the Marketing Margin

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AEA 304 AGRICULTURAL MARKETING AND PRICE

The magnitude of the total marketing margin reflects the effect of the product characteristics on
the complexity of the marketing functions that must be performed as the product passes through
the marketing system. Thus the marketing margin varies from product to product depending on
the following characteristics:

i. Processing

Products that need to be processed into different forms as desired by consumers usually attract
higher marketing margins. The more work that must be done in changing the form of a product
and providing the services to satisfy the consumer, the greater the marketing charges will be.
ii. Perishability

Marketing of perishables such as fruits and vegetables is usually more costly than marketing
non-perishables because product deterioration is greater. Expensive refrigerators may be
needed to transport the perishables through the different stages in the marketing channel.
For example, transporting frozen fish from Lagos, Port Harcourt and other Nigerian ports to
the north require specialized refrigerated vans.

iv. Bulkiness in Relation to Value

Some products require more space in both transportation and storage. This inevitably increases
the marketing charges. Food grains like maize, sorghum, cowpea and millet are bulky and
often cost up to N100 per 100kg bag to transport from one market to another, depending on the
distance.

v. Extreme Seasonally of the Product

Commodities that are seasonal require facilities that may only be partially used during the rest
of the year, if such commodities are also perishable increased marketing costs result. If a
product is harvested only in one season of the year storage may be required leading to greater
storage and handling costs.

vi. Institutional Factors

Institutional factors such as a high degree of vertical integration or a highly organized system
of accurate market information might give rise to differences in the size of the marketing
margin. Vertical integration of marketing firms could result in lower marketing margin because
it shortens the marketing chain Viewed from another angle, vertical integration of marketing
firms could result in higher marketing margin because the marketing firms through
integration could gain market power and control over the price paid by consumers. A highly
organized system of accurate market information might give rise to differences in the size of
the marketing margin because availability of reliable market information could keep the
consumer aware of the prices that obtain in different markets. Table 2 shows that the marketing
charges range between 31 and 85% while the farmer's share of the consumers' naira for the selected
food crops range from 15 to 69%.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Table 3 shows that marketing margin varies from crop to crop and from one location to another. The
marketing margin can be computed using the following formula:

Marketing Margin =

3.3. Incidence of Margin Changes

Marketing margin is not static. It changes over time because it is determined by the
intersection of the primary demand and derived supply on the one hand and the derived
demand and primary supply on the other hand. Therefore any change that affects the demand
and supply relations will also affect the marketing margin. Whenever there is a change in the
marketing margin it is likely to affect either the price received by the producer or the price
paid by the consumer or both. Whichever way it goes depends on the slope and elasticity of
the demand and supply curves.

If the slopes of the demand and supply curves are equal, a change in marketing margin will
mean equal but opposite changes in retail and farm prices. In a situation where the slope of
the demand curve is steeper or less elastic than that of the supply curve, the effect of price
change at the consumer level will be greater than at the producer level. On the other hand, if the
slope of the supply curve is steeper, that is less elastic, than that of the demand curve; the effect
of price change at the producer level will be larger than at the retail level. Generally, it is
believed that most farm products are more price inelastic in supply than demand, in such cases
the incidence of a given margin change would be greater at the farm level than at the retail
level.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

4.0 Self Assessment Exercise

1. What are the major factors that cause variations in the size of the marketing
margin agricultural products?
2. Show graphically how marketing margin can be determined.

5.0 Conclusion

In this unit you have learnt about determination of marketing margin, what brings
variability in marketing what are the incidence of margin changes.

6.0 Summary

In this unit you have learnt that:

 Marketing margin refers to the difference in prices paid for a commodity at
differ marketing system.
 Marketing margin differs from one product to another because the marketing
services needed product to product.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

 Some products are highly perishable, consequently they require

specialized handling, stora processing.
 The magnitude of the total marketing margin varies from product to
product depending o perishability, bulkiness in relation to value,
extreme seasonally of the product and institut
 The marketing margin can be computed using the following formula:
Marketing Margin =
Marketing margin is not static. It changes over time because it is determined by
the intersection demand and derived supply on the one hand and the
derived demand and primary supply on the ot Therefore any change that
affects the demand and supply relations will also affect the marketing

7.0 Tutor – Marked Assignment

1. What is marketing margin?

2. What is the marketing margin if the selling price and supply price are N1200,
N1000 respectively?

8.0 References and Further Reading

Brown, D.O. (1965) "The use of Marketing Margin Data to Reflect Marketing
Efficiency Appropriate Market and Price Policy. Seminar an Marketing
of Agricultural Commodities, I Agricultural Economics, Seminar Series -
V, pp. 127-137.
Buse. R.C. and G.E. Brandeu (1968) "The Relationship of Volume, Prices and
Costs to Marketing Margins for Farm Foods". J. Farm Econ.:42: 362-370.
Downey, W.D and J.K. Trocke (1981) Agribusiness Management, McGraw-Hill
International Book 241.
Dutia, B.P. and R. Chandra (1965) "Study of Marketing Margin of Rice", Seminar
on Marketin Commodities, Indian Society of Agricultural Economics.
Seminar Series v, Publisher, T. R. Sundar 115-126.
Lele. U. (1971) Food, Grain Marketing in India: Private Performance and Public
Policy, Ithaca, N University Press, pp. 21-22.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural
Marketing: Principles and Applications. Living Books Series, GU
Publications, Abuja FCT, Nigeria. Chapter 4
Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products - Economic
Analysis, Iowa State University Press, Ames, Iowa, USA, Chapters 18 and
19.
Tomek, W.G. and K.L Robinson (1981) Agricultural Product Prices, Second
Edition, Cornell University Press, Ithaca and London pp. 119-139.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 2 MARKETING COSTS

1.0 Introduction

In the previous module you learnt that business firms or concerns

behave according to the dictates o structure.

As you learnt in Unit 1 of this module, another important driving force

apart from the market structure margin. While the previous unit dealt
with marketing margin, this unit deals with the aspects of mar

2.0 Objectives

By the end of this unit you should be able to explain the various aspects
of costs incurable in the per marketing functions.

3.0 Main Body

3.1 Marketing Costs Defined

Marketing costs are the actual expenses incurred in the performance of the
marketing functions as a c from the farm to the ultimate consumers. It
includes the cost of transportation and handling, marketin assembling,
processing, distribution, cost of packaging, sales promotion and
advertisement cost and o taxes, levies and excise duties. Marketing costs
are often erroneously assumed to be synonymou margin but the true
relationship is that marketing margin includes marketing costs plus the
normal prof by the market intermediaries as the commodity passes
through the marketing system. Marketing cos and variable costs.

The following are important components of the marketing costs.

a. Transfer costs
b. Processing costs
c. Storage costs
d. Sales promotion and advertisement costs,

3.2 Transfer Costs

These are the costs of moving products from producing to consuming
areas. They consist of terminal .costs. Terminal costs are those costs
related to transport of equipment and cost of functions perfor loading and
unloading sometimes called handling charges. These costs are incurred
irrespective of therefore they are fixed costs. Transfer cost is therefore a
function of terminal and transportation cost.
T=C + bR
Where T= transfer cost;
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AEA 304 AGRICULTURAL MARKETING AND PRICE

C= terminal cost
R = transportation cost b = unknown coefficient

3.3 Processing costs

These are the expenses incurred in the creation of utility of

transformation. Processing cost technology used in processing. For
example in the traditional method of processing paddy rice, includes:
a. cost of firewood
b. depreciation on equipment
c. cost of labour
d. cost of drying
e. cost of milling

3.4 Storage Costs

These are costs incurred on the preservation of farm produce until the
time when they are needed. Most agricultural products are seasonal and
farmers' harvests therefore have to be stored over time for orderly
distribution at a later period.
In computing storage costs the following elements of costs are
considered:
a. Depreciation cost of storage structures;
b. Interest on money invested in stored products;
c. Cost due to physical loss of weight through drying, insect and
rodent attack and deterioration by decay through physiological
changes;
d. Rent on storage structure;
e. Cost of storage chemicals such as insecticides;
f. Insurance cost if any;
g. Loss from poor consumer acceptance of the stored product; and
h. Loss resulting from once decline while the product is in storage.

3.5 Sales Promotion and Advertisement Costs

Sales promotion or advertisement cost is the cost incurred in the process

of exhibiting the product acceptance and in conveying information to
consumers on the availability of certain products. Ad include the cost of
advertising the product over television, newspapers or radios, while sales
promo the cost of providing free samples, making face to face contact
between the sales men and consumers.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

4.0 Self Assessment Exercise

Describe in your own words and give justification for the various
components of storage costs.

5.0 Conclusion

In this unit you have learnt about the various components of costs
incurable in the performance of functions namely, transfer costs,
processing costs, storage costs, sales promotion and advertising cos

6.0 Summary

In this unit you have learnt that:

 Marketing costs are the actual expenses incurred in the performance

of the marketing functions moves from the farm to the ultimate
consumers.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

 It includes the cost of transportation and handling, marketing

charges, cost of assembling, proc distribution, cost of packaging, sales
promotion and advertisement cost and other costs such as taxes, duties.
 Marketing margin includes marketing costs plus the normal profit
(or loss) earned by the mark as the commodity passes through the
marketing system.
 Marketing costs consist of fixed and variable costs.
 Important components of the marketing costs are transfer costs,
processing costs, storage co promotion and advertisement costs.
 Transfer costs are the costs of moving products from producing to
consuming areas, ma charges normally incurred irrespective of distance
covered, therefore they are fixed costs.
 Processing costs are expenses incurred in the creation of utility
of transformation.
 Storage costs are incurred on the preservation of farm produce
until the time when they are n
 Sales promotion or advertisement cost is the cost incurred in the
process of exhibiting th consumer acceptance and in conveying
information to consumers on the availability of certain prod
7.0 Tutor – Marked Assignment

1. Define marketing costs

2. Mention and discuss components of marketing costs

8.0 References and Further Reading

Brown, D.O. (1965) "The use of Marketing Margin Data to Reflect

Marketing Efficiency Appropriate Market and Price Policy. Seminar an
Marketing of Agricultural Commodities, I Agricultural Economics,
Seminar Series - V, pp. 127-137.
Buse. R.C. and G.E. Brandeu (1968) "The Relationship of Volume,
Prices and Costs to Marketing Margins for Farm Foods". J. Farm
Econ.:42: 362-370.
Downey, W.D. and J.K. Trocke (1981) Agribusiness Management,
McGraw-Hill International Book 241.
Dutia, B.P. and R. Chandra (1965) "Study of Marketing Margin of Rice",
Seminar on Marketin Commodities, Indian Society of Agricultural
Economics. Seminar Series v, Publisher, T. R. Sundar 115-126.
Lele. U. (1971) Food, Grain Marketing in India: Private Performance and
Public Policy, Ithaca, N University Press, pp. 21-22.

64
AEA 304 AGRICULTURAL MARKETING AND PRICE

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to

Agricultural Marketing: Principles and Applications. Living
Books Series, GU Publications, Abuja FCT, Nigeria.
Chapter 4
Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products -
Economic Analysis, Iowa State University Press, Ames, Iowa, USA,
Chapters 18 and 19.
Tomek, W.G. and K.L Robinson (1981) Agricultural Product Prices,
Second Edition, Cornell University Press, Ithaca and London pp.
119-139.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 3 MARKETING EFFICIENCY

1.0 Introduction

You have learnt in the previous unit about the marketing costs which are
necessary to determi margins accruing to the various market participants.
Another important aspect of the marketing need to know is the efficiency
of the market. This is what this unit is all about.

2.0 Objectives

By the end of this unit you should be able to:

 define marketing efficiency

 estimate marketing efficiency
 identify the various type of efficiency.

3.0 Main Body

3.1 Market Efficiency Defined

Efficiency in the agricultural industry is the most frequently used

measure of market perfor marketing efficiency is a common objective of
farmers, food marketing firms, consumers and the Efficiency is an
engineering terminology which is measured as a ratio of output to input.
For exa efficiency of automobiles is expressed as kilometers (output) per
litre of petrol used (input). Marketi be defined as the maximization of the
ratio of output to input in marketing.

Marketing inputs include the resources used in providing marketing

services such as labour, packa finance etc. On the other hand marketing
output includes time, form, place and the possessi consumers derive from
the marketing of the product. Thus marketing inputs are the costs of pro
services where as marketing outputs are the benefits or satisfaction
created, or the value added to th passes through the marketing system.
Efficiency ratios can be expressed in physical terms or in monetary
terms. If monetary terms are u concept becomes a ratio of benefits to
costs. For example in moving paddy rice through the marketi consumer
buys it as milled rice, the paddy is transported, processed and possibly
stored. The cost of functions makes up the input cost of marketing where
as the value of the milled rice obtained fro paddy is the output of
marketing.

Expressing marketing efficiency in both physical quantity and monetary

terms we have:

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Marketing efficiency (ME) =

or
M.E. =

It is easier to estimate the input cost of marketing than the output of

marketing. While the input co simply the sum of all the prices of resources
used in the marketing process, the best measure of (consumer satisfaction)
is the price consumers are willing to pay in the market for farm products
with marketing utilities. For example, if consumers are willing to pay 5
kobo more per orange for orange fresh fruits, then it could be inferred that
the processing of fresh orange into juice adds 5k of form utility,
Marketing efficiency could be achieved in any of the following ways:
a. output remains constant while input decreases
b. output increases while input remain constant
c. output increases more than increase in input
d. output decreases more slowly than decrease in input.

The higher the efficiency ratio the higher is the marketing efficiency. Any
change in the marketin reduces the input cost of accomplishing a
particular marketing service without reducing the consu certainly an
improvement in marketing. On the other hand, any change in the
marketing process w input cost of accomplishing a particular marketing
service without reducing the consumer satisfacti improvement in
marketing. On the other hand, any change in the marketing process which
redu reduces consumer satisfaction with the end product may reduce
marketing efficiency.

The formula for measuring marketing efficiency is as follows:

Marketing Efficiency =
The answer obtained is referred to as the coefficient of marketing
efficiency.

Let us consider the following example: In two markets A & B the total
marketing costs incurred in th same product are N45,000.00 and N48,
000.00 respectively. The value added to each product through m
000.00. What is the coefficient or marketing efficiency and the most
efficient market?

Solution:
In market A, the cost of marketing is N45, 000.00 but the value added
through marketing is N10, 000

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Marketing Efficiency =

In market B, the total cost of marketing is N48, 000.00 but the value
added through marketing is N10

Marketing Efficiency =

From the calculations market A is more efficient than Market B.

3.2. Types of Marketing Efficiency

There are two types of marketing efficiency namely operational

efficiency and pricing efficiency.

3.2.1 Operational Efficiency

Operational or technical efficiency measures the productivity of

performing marketing service within t on the cost of providing marketing
services. Output per man hour one often quoted productivity r operational
efficiency. Sales per worker hour is calculated to monitor operating efficiency
in farm supply efficiency assumes that the essential nature of output of
goods and services remain unchanged and fo the costs of inputs used in
doing the jobs. For example, if a new method of storing grains which reduces
la the grains could be stored more efficiently at a lower cost. A new
method of crating tomatoes or increase the quantity handled in a given space
but also reduce damages during transportation. All thes improved
operational efficiency.

3.2.2 Pricing Efficiency

Pricing efficiency assumes a physical input-output relationship that remains

constant. It is concerned w prices reflect the costs of moving the outputs
through the marketing system. The prices that consumers pay by the marketing
system should adequately reflect marketing and production costs.
In a perfectly competitive economic environment, prices will adequately
reflect all such costs. Pricing ef refers to the improvement of the operations
of buying and selling and pricing aspect to reflect consume efficiency could
be enhanced through grading of products, standardizing and quality control
and also throu reliable market information.

On the other hand, if the market is dominated by a few firms that conspire
to maintain high prices, th lead to pricing inefficiency. Other factors
which could give rise to pricing inefficiency include information to
consumers, (ii) presence of firms that dominate a market due to location or
excellent p cases the prices paid by consumers may not adequately reflect
the cost of production and marketing.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

The first yardstick of ensuring consumer satisfaction in the marketing

process is making available to t he will be prepared to pay for in the market
place. In marketing, consumer satisfaction is met through having products
available at the right place through storage by having products available
at th through processing by having products available in the right form.

Three basic assumptions must be fulfilled for pricing efficiency to take

place, they are:
a. The consumers must be provided with numerous alternatives from
which they can choose.

b. The price must reflect the cost of providing the goods and
services.
c. Free entry into and exit from the market, so that the consumers'
freedom of choice is not restricted. Thus pricing efficiency is the result of the
nature of competition and balance of economic power that exist in
the marketing system. A monopoly market structure will
certainly adversely affect the pricing efficiency of the market.

3.3 Estimation of Pricing Efficiency.

Marketing efficiency could be estimated by analyzing price behaviour

over time and space. In a per market, price differential over time must be
equal to the cost of storage. If the difference in price ove than the storage
cost, it indicates pricing inefficiency. Over space, the law of market
area sti spread between two markets that trade with one another should
not exceed the cost of transfe between the locations. Where price
differential over space is in excess of transfer cost it r inefficiency. In
Figure 11 points A and B are two locations that are of equal distance
from a central perfect market conditions the prices in the two markets A
and B should be the same. However, in real assumptions of perfect
competition are not easily met. Price differential over space and
tim excess of transfer and storage costs particularly in the developing
countries. The reasons com low market integration are:
a. Lack of perfect mobility due to transport cost
b. Existence of transport bottle-necks such as bad roads
c. Uncertainty on the duration of price difference between markets
d. Lack of information about market conditions
e. Lack of scientific grading of produce with the result that prices do
not refer to equivalent grades in the two markets.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

4.0 Self Assessment Exercise

1. Discuss the reasons given for low market integration.

2. Explain the three basic assumptions that must be fulfilled for pricing
efficiency to take place.

5.0 Conclusion

In this unit you have learnt how to define marketing efficiency, estimate
marketing efficiency various type of efficiency.

6. Summary

In this unit you have learnt that:

 Efficiency in the agricultural industry is the most frequently used

measure of market perfor
 Efficiency is an engineering terminology which is measured as a
ratio of output to input.
 Marketing efficiency can be defined as the maximization of the
ratio of output to input in mar

 In physical terms:

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Marketing Efficiency (ME) = In monetary terms :

M.E. =

 The higher the efficiency ratio the higher is the marketing efficiency.

 Marketing Efficiency =

 Operational or technical efficiency measures the productivity of

performing marketing service
 Pricing efficiency is concerned with how effectively prices reflect the
costs of moving the o marketing system. The prices that consumers pay for
goods delivered by the marketing system should marketing and production
costs.
 In estimating of Pricing Efficiency, the marketing efficiency could be
estimated by analyzin over time and space. In a perfectly competitive
market, price differential over time must be equal to the the difference in
price over time is greater than the storage cost, it indicates pricing
inefficiency.

7.0 Tutor – Marked assignment

1a) Define Marketing Efficiency b) Pricing Efficiency

2. Determine the marketing efficiency for two markets Z and Y which
have incurred N10, 000 costs respectively. The value added to the
product in Z is N16, 000 while that of Y is N12, 000.
8.0 References and Further Reading

Brown, D.O. (1965) "The use of Marketing Margin Data to Reflect

Marketing Efficiency Appropriate Market and Price Policy. Seminar an
Marketing of Agricultural Commodities, I Agricultural Economics,
Seminar Series - V, pp. 127-137.
Buse. R.C. and G.E. Brandeu (1968) "The Relationship of Volume,
Prices and Costs to Marketing Margins for Farm Foods". J. Farm
Econ.:42: 362- 370.
Downey, W.D and J.K. Trocke (1981) Agribusiness Management,
McGraw-Hill International Book 241.
Dutia, B.P. and R. Chandra (1965) "Study of Marketing Margin of Rice",
Seminar on Marketin Commodities, Indian Society of Agricultural
Economics. Seminar Series v, Publisher, T. R. Sundar 115-126.
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AEA 304 AGRICULTURAL MARKETING AND PRICE

Lele. U. (1971) Food, Grain Marketing in India: Private Performance and

Public Policy, Ithaca, N University Press, pp. 21-22.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to
Agricultural Marketing: Principles and Applications. Living
Books Series, GU Publications, Abuja FCT, Nigeria.

Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products -

Economic Analysis, Iowa State University Press, Ames, Iowa,
USA, Chapters 18 and 19.
Tomek, W.G. and K.L Robinson (1981) Agricultural Product Prices,
Second Edition, Cornell University Press, Ithaca and London pp.
119-139.

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MODULE 6 ROLE OF GOVERNMENT AND

MARKETING INSTITUTIONS

Unit 1 Marketing Boards

Unit 2 Cooperative Organizations
Unit 3 Government Regulations

UNIT 1 MARKETING BOARDS

1.0 Introduction

Having learnt about the structure, conduct and performance of the

marketing system, it is clear t some outside bodies to regulate the
activities of the participants to ensure that the market perfo adversely
affect the society. This is why the role of government is important. Two
institution involved in the marketing of agricultural products in Nigeria
are discussed in this module. The first in this unit and the other in Unit 2
while regulations that government put in place are discussed i

2.0 Objectives

By the end of this unit you should be able to:

 explain the origin of marketing boards

 state the objectives of the marketing boards
 explain the operations of the marketing boards
 enumerate the performance of the marketing boards and
 enumerate the impact of the abolition of the marketing boards

3.0 Main Body

3.1The Marketing Boards

The Nigerian Marketing Boards originated directly from the West African
Marketing Boards which origin from the war time Produce Control
Boards set up by the colonial administration. The Produ were to organize
the local purchase of the principal agricultural export crops for overseas
sales in African territories. The first Nigerian Marketing Boards were
commodity boards and in this regard the the first to be established which was
later followed by the Palm Produce Board, the Groundnut Bo Board.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

Following the regionalization of the country in 1954 Regional Marketing Boards were
created. By eight Regional Marketing Boards which included the Nigerian Produce
Marketing Company (NPM was further reorganization of the Marketing Boards which
gave rise to the creation of seven diff Boards. They were the Cotton, Grains, Cocoa,
Palm Produce, Groundnut, Rubber, Root and Tub Some of these boards were
responsible for the marketing of other crops in addition to the main crop example, the
Cocoa Board was also in charge of coffee, the Cotton Board was in charge of kenaf wh
Board was also in charge of soya bean.

3.2 Objectives of the Marketing Boards

The main objectives of the Marketing Boards were as follows:

a..To secure the most favorable arrangement for the purchase of produce and arrange for

the export o b.To promote the development and rehabilitation of producing areas,
c.To help maintain legally prescribed grades and standards of quality of export produce,
d..To allocate funds to the appropriate authorities by means of grants, loans, investments
and en purpose of economic development and research. This function was discontinued
in 1976.

e..To supply produce to local processors for processing in their plants, and

f..To stabilize producer prices by fixing legal minimum buying prices for a whole
season at a time minimize price fluctuations within and between seasons.

3.3. Operations of the Board

The prices of the scheduled commodities were fixed by the Federal Government on the
advice Committee on Producer Prices. The fixed price which would be announced well in
advance of the farm reign throughout the season irrespective of the level of the world
market price. The various board commodities through the Licensed Buying Agents (LBAs)
who could be individuals, firms, or coop The boards paid commission to the LBAs as
well as fixed transport differentials.

The Marketing Boards played notable roles in the economic development of Nigeria.
The r following:

a. Stabilization of producer prices within and between seasons.

This was achieved by fixing producer prices well in advance of the production season
and announc at the beginning of each season to reduce inter-seasonal price
fluctuations.

b. They established and maintained an efficient organization for the purchase of

produc appointment of Licensed Buying Agents (LBAs) who undertook the handling of
produce from the poi until it was delivered to the boards.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

c. They contributed immensely to the improvement in quality of the export produce by

ma prescribed grades and standards. All export produce purchased by the boards were
graded before the from the farmers.

d. The Marketing Boards helped in the genetic improvement of the various crops they
h funding of research activities on those crops.

e. The various regional and federal governments used the proceeds from Marketing
surpluses to finance education, health and infrastructural development.

3.4 The Performance of the Marketing Boards

The performance of the Marketing Boards are examined on the basis of the
accumulation of tradi producer prices, operational expenses, quality control, crop
improvement and internal sale to proce showed that the boards were successful in some
aspects while not so successful in others.

1. Accumulation of trading surpluses

The Marketing Boards accumulated a lot of trading surpluses by paying farmers prices
less than wh world market. Thus by 1954 the trading surplus which amounted to £120
million was shared am regions in proportion to their contribution. This trading surplus
was, of course, to the detriment of continued to receive lower prices than the prices that
were tenable in the world market. The p stabilization which required that sometimes
prices should be lower and sometimes higher than w was negated.

2. Low Producer Prices

The Commodity Marketing Boards (CMBs) adopted a policy of fixing producer prices
that were low world market prices of the various commodities. These prices which were
fixed in advance of what prices would be were consistently lower than what could be
considered usual estimation in "futur instead of using the low pricing policy to stabilize
prices, it was more useful for generating reven Regional Governments at the expense of
the producers. All these served as disincentive to incre cash crops such as cocoa, cotton
and rubber

3. Excessive Operational Expenses

The Marketing Boards incurred a lot of expenses in the performance of their functions.
Their LBAs and transport allowances Other expenses included shipping and handling
charges paid to the Nigeria agency charged for overseas marketing, and paid to the
Nigerian Produce Marketing Company o including insurance and administrative
expenses. The operational expenses were usually toe larg Usually this code provided an
avenue for trading surpluses to disappear into wrong hands. The exc expenses vividly
attested to the inefficiency of government operated marketing agencies.

4. Quality Control

This is a function which the boards performed very well. The boards through the
Produce In introduced quality restrictions and standards or grades for acceptance and or
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rejection of produce. so well performed that by the end of 1966/67 cocoa season, 99.9%
of cocoa produced in Nigeria quality. The boards paid premium prices for high quality
produce. The grade differentials thus stim to obtain high grades through better
processing and handling of their produce.

5. Crop Improvement

Some of the boards like the Cotton Board helped in the improvement of the various crops
under th making funds available for research work on those crops. Some boards like the
Eastern Nigerian funded the establishment of agricultural faculties in some universities
while some offered scholars agriculture and related disciplines. Some of the boards also
engaged in the multiplication of improved seeds to farmers.

6. Internal Sale to Processors

Prior to 1973, local processors were forced to buy their agro-raw materials from the
boa charged processors world market prices whereas they paid less than the world
market prices to price thus paid by local processors for their raw materials were high.
The CMBs which sold only h products to the local processors found no market for the
so-called sub graded produce which wasted. The sub graded produce could have been
processed locally while exporting the good gr monopoly power of internal supply of
agro-raw materials forced the Western State Government commence on the
production of their own cotton which they could not produce as efficient in the
Northern States. This monopoly of supply of industrial raw materials was highly cri
therefore abolished in 1973.

3.5 Impact of the Abolition of the Marketing Boards in Nigeria.

As a result of the inefficiencies in the commodity system as enumerated above and also
following struct Nigerian economy in the mid-eighties, the marketing board structure was
abolished by the Federal Govern 1986. This abolition posed a lot of problems for the farmers
in the disposal of farm produce during 19 neither the farmers nor the market intermediaries
were ready for the change. However, with time both t marketing agencies adjusted to the free
market forces ushered in by the scraping of the Commodity Marketing

At present it would appear that the abolition of the commodity boards has favored the
producers of cash cr cotton and rubber as the degree of competition in the marketing system
has increased leading to higher p example, the highest price fixed by the defunct Cotton Board
for seed cotton was N850.00 per ton for the 19 in 1989 the average price of a tonne of seed
cotton was N3, 000.00. Cocoa farmers were also reported to high prices due to the fact
that they could take advantage of increased demand offered by the expo with the
devaluation of the naira.

To the food grains farmers the situation was that of glut in 1987 with the attendant very
low producer following the ban placed on the importation of grains such as wheat, rice,
and maize, the demand for gr and industrial raw materials increased significantly. This
led to very high producer prices which season to another This seasonal price variation
has encouraged the activities of speculative middle buy the grains from the farmers at
low prices immediately after harvest and resell them to the cons including the farmers) at
very high prices during period of scarcity.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

The abolition of the Commodity Marketing Boards had created a vacuum for the
strategic grains r which was hitherto performed by the Grains Board. Thus when the
prices of food grains rose to a 1989, the Federal Government ordered the state
governments to release the grains they had in stora with a view of bringing down the
retail price. Only very few states were able to comply simply beca no agency or
institution responsible for strategic grains reserve purposes.

The cash crop market also started to face some problems. With the low demand for cocoa
beans in t farmers in 1989 received poor prices for their produce. Many were unable to
settle the cost of pro chemicals which they had taken on credit in anticipation of the type
of a good market that prevailed in 1

The abolition of the marketing boards had adversely affected the supply of high quality
cotton seed fo the responsibility of the defunct Cotton Board to supply quality seed to
farmers for planting, but wit the board and the emergence of private profit motivated
cotton merchants, farmers can no longer o seeds for planting. This had remained a very
serious problem since the abolition of the marketing bo that more than fifty percent of
cotton farmers in the cotton producing states in Nigeria were not able planting in the
1989/90 and 1990/91 growing seasons. This problem of seed is unique to cotton becaus
joint product consisting of seed and lint, which are separated through the process of
ginning. A far seed cotton looses both the seed and the lint and relies on ginneries for a new
supply of cotton see following year.
Most of the cotton merchants are interested m short-run profit. They therefore quickly sell
off most o oil millers for crushing into vegetable oil instead of preserving them for planting
purposes thus dep seeds for the following year.
4.0 Self Assessment Exercise
Assess the performance of Nigerian Marketing Boards. Give arguments for and
against the boards in 1986.
5.0 Conclusion
In this unit you have learnt about the origin of marketing boards, their objectives, their
operations, th and the impact of their abolition.

6.0 Summary
In this unit you have learnt that:
 The Nigerian Marketing Boards originated directly from the West African Marketing
Boards their origin from the war time Produce Control Boards set up by the colonial
administration.
 The first Nigerian Marketing Boards were commodity boards, first among them was
the C followed by the Palm Produce Board, the Groundnut Board and the Cotton Board.
 The main objectives of the Marketing Boards were:
 to secure the most favorable arrangement for purchasing of produce and
exporting the surplus,
 to promote the development and rehabilitation of producing areas,
 to help maintain legally prescribed grades and standards of quality of export
produce,
 to allocate funds for the purpose of economic development and research,
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AEA 304 AGRICULTURAL MARKETING AND PRICE

 to supply produce to local processors for processing in their plants,

 to stabilize producer prices by fixing legal minimum buying prices for a whole
season at a time
 to minimize price fluctuations within and between seasons.
 The Marketing Boards played notable roles in the economic development of
Nigeria in:
 stabilization of producer prices
 establishing and maintaining an efficient organization for purchase of produce
 contributing to the improvement in quality of the export produce
 helping in the genetic improvement of the various crops
 using proceeds of surpluses to finance education, health and infrastructural
development.
 The boards were successful in some aspects while not so successful in others.
 As a result of the inefficiencies in the commodity system the marketing board
structure was abolished by the Federal Government of Nigeria in 1986.
 This abolition posed a lot of problems for the farmers in the disposal of farm produce
during 1987 season.
7.0 Tutor- Marked Assignment
1. a. What were the Nigerian Marketing Boards?

b. For what purposes were they established?

2. Marketing Boards in Nigeria were supposed to stabilize producer prices for

agricu To what extent were they able to achieve this objective?
8.0 References and Further Reading
Babcock, H.E.(1935) "Cooperatives: The Pace Setters in Agriculture", Journal of Farm
Economics.
Blue print on Cooperatives Development in 4th National Development Plan (1980-
1985) issued Conference on "Appropriate Strategies for Cooperative Development"
University of Nigeria, September, 1979.
Ijere, M.O. (Ed)(1975) New Trends in African Cooperatives: TM Nigerian Experience,
F Publishers, Enugu, Chapter 1 and 2.

Ode, M.O. (2005)"Agncultural loans and the performance of cooperatives" (An Analysis
of Some operatives in Kaduna State). Benin MBA (.marketing) project submitted to
Benue State Uni September.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria.Chapter 5.
Rhodes, UJ.(1978) The Agricultural Marketing System. Grid Publishing Inc:. Columbus,
Ohio, Shepherd, G.S. and G.A. Futrell (1970) Marketing Farm Products: Economic
Analysis. 5th Edition, Iowa State University Press. 1970. Chapter 20

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UNIT 2 COOPERATIVE ORGANIZATIONS

1.0 Introduction
In the previous unit, you learnt about marketing boards through which government used
to interven of the marketing system. In this unit you will learn about a second organization,
the cooperatives whi about regulations that government put in place in Unit 3.

2.0 Objectives

In this unit you will leant about the:

 cooperatives Defined
 origin of cooperatives
 characteristics of cooperative movement
 types of cooperatives
 potential benefits of cooperatives
 organization cooperative societies and
 problems of cooperatives in Nigeria.

3.0 Main Body

3.1 Cooperatives Defined

Various authors have defined cooperatives differently according to their background. Some
view business voluntarily owned and controlled by member patrons and operated by them
on non-profit b business usually evolves out of the felt needs of members who want to
solve their common pro their limited resources together for example in marketing their
farm produce or getting supplies of farm

Cooperatives, to some other authors like H.E. Babcock, an eastern cooperative leader, is
a legal, p which a group of self-selected, selfish capitalists seek to improve their
individual economic positio society.
No matter how one looks at the definitions given above, two things are common (i) A
coope institutionalized device which permits group action that can compete within the
frame-work o business organization; (ii) Cooperatives are voluntarily organized to serve
and benefit those who them

3.2 Origin of Cooperative Business

The concept of cooperative was born out of human suffering, degradation and
exploitation. M movement began in England in 1844 in the days of the Industrial
Revolution when factory worke lived in great misery and abject poverty. Twenty-eight
poverty stricken weavers in Rochadale met and ways of improving their conditions. The
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AEA 304 AGRICULTURAL MARKETING AND PRICE

result was the formation of a cooperative society which w Equitable Society of the
Rochadale Pioneers". Borrowing a leaf, other industrial workers organize similar bodies
to give them a voice to be reckoned with. The idea of cooperatives spread into other industri

3.3 Characteristics of Cooperative Movement

There are generally seven principles which are unique to cooperative organizations.
They are:
i. Open Membership
ii. Democratic control
iii. Limited interest on capital
iv. Patronage dividend
v. Cash transactions only
vi. Religious or political neutrality
vii. Constant education of members.
These principles form the spiritual bond uniting the cooperators the world over and
serve to disting from other forms of business organizations.

1. Open Membership: This principle implies that cooperative business should be

ope are interested. Usually there is no upper limit to the number of members that any
cooperative soci

2. Democratic Control: This principle implies the concept of one-man one vote. It
underlin quality of cooperation, namely that a free association of persons as human
beings on the basis of eq keep the control of cooperative business in the hands of the
patrons rather than the owners of the c based on principle of one man one vote contrary
to the other private business concerns where voti of one share one vote.

3, Limited returns or interest on capital: The return on capital in most

cooperatives is lim percentage which is fixed and determined usually between 5 and
8 %. Thus capital is something hired for the purpose of building facilities to serve
member’s needs and not investment.

The idea of a fixed low rate of interest is to discourage the profit hunger which
governs the s to eliminate gambling and speculation from the cooperative business.
It is to foster the idea th is to serve human needs not capital.
4. Patronage Dividends: This is the principle that involves deciding what is to
be done with a surplus. Whereas a limited liability company would
distribute its net surplus among in proportion to their share holding, In a
cooperative society, this is not the case. The basis f available surplus in a cooperative
society. is not capital but a member’s patronage of the soc amount of business in the
form of work, loans, services, sales and purchases, depending cooperative that the
member provides. For example in a credit and thrift society, patronage based on the
amount of money borrowed by a member from the society in a year. In this case t not
necessarily
considered as a profit as such but as representing the amount by which a member was
over charg bought goods from the society. In the case of marketing
cooperatives it is the am he was under-paid each time he sold goods to the

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AEA 304 AGRICULTURAL MARKETING AND PRICE

society and for a credit society it represe interest he has over-paid each time he
borrowed money from the society. Thus a cooperative o not necessarily aim at
accumulating profit but to provide services to members at cost.

5. Cash Transactions Only: Article 21 of the statutes of the Rochadale Pioneers

strict cooperative transactions would only be done on cash basis. This meant that no
credit was allow probably due to the fact that early cooperative societies began with little
capital and could neither affor charged on loan. Even today, experience shows that credit
business increases costs, complicates cause the premature
death of a. society. However, business transactions of the
present day require that cooperative societies modify cooperative principles to allow for
credit purchases for certain commodities especially durable an such as
television and radio sets. This i other forms
of business organizations allow hire purchase.
6. Religious and Political Neutrality: Religious and political neutrality imply that
membership society should be open to all irrespective of religious, political and ethnic
differences demonstrates the role of cooperatives as a unifying factor in the society.

7. Constant Education of Members: Members of cooperative societies

need to be e They should be trained on simple principles of Economics and Business
Management. They should Accounting and Auditing principles so that they can run the
affairs of their organization effectiv professional managers are employed to run the
affairs of the cooperative organization, the mem understand what their employees are
doing. Cooperative education also helps to enlighten advantages of cooperation.

3.4 Types of Cooperatives

There are many types of cooperative societies existing in different countries but the
most popu Nigeria are discussed below.

1. Marketing Cooperatives:
This type of cooperative performs the physical operations of marketing for their
members with the rendering marketing services to them at the least cost possible and
getting the highest possible price for

2. Producer Cooperatives

This type of cooperative is made up of the producers of the goods. For example, farmers
who pr themselves into what is called Cocoa Farmers’ Cooperatives. These types of
cooperatives are procuring inputs for their members at reasonable costs and in good
time. For example, the farmers to buy fertilizers and agro- chemicals for the members
from approved government sources and the their members at the official prices.

3. Service Cooperatives
This type of cooperative association offers relevant services like credit and thrift,
irrigation and transportation to their members at cost.

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4. Processing Cooperatives
This type of cooperative is organized for the processing of farm products such as butter,
cheese, r packaging of the products. It offers members the opportunity to process their
products. The soci buy products from other farmers process them and sell the processed
products to consumers and

5. Consumer Cooperative
This is perhaps the most popular type of cooperative society in Nigeria. The main aim
of t consumer goods to members at reasonable prices. This type of society played
prominent role early eighties when many types of consumer goods were in short
supply and the prices in the o exorbitant.

6. Multipurpose Cooperatives

This is another type of cooperative society that is becoming very common in Nigeria
in recent of cooperative combines many functions for example supply of inputs to
members, provision o and sales of consumer goods.

3.5 Potential benefits of Cooperatives to Farmers

1. Increased Profit
Farmers through cooperatives are able to increase their profit. This is achieved through
buyin quantities and at a lower price and. secondly by getting greater net returns from
the sale of their marketing cooperatives, the farmers are able to eliminate some of the
middlemen thus enjoying hi consumer's expenditure.

2. Marketing Services at Cost

Through the functions of the different types of cooperatives, farmers are able to divert
profit from t and middlemen to themselves as patrons thereby enjoying the services at
cost.

3. Reduced Cost

The greatest opportunity for cooperatives does not lie in the area of profit but its ability
to functio Cooperatives like any other form of business organization incurs costs such as
cost of labour, rent bill, and interest on borrowed capital. But cooperative organizations
are able to function at a low other business counterparts as a result of the following reasons:

I. The cost of advertising, sales promotion and other forms of soliciting should be
lower tha business. Since the main aim of cooperatives is to solve the felt needs of
members, there is no need on sales promotion and advertisement since the members are
aware of the availability of such goods.

ii. Cooperatives are also in a position to reduce cost by handling products in large
quantities competitors, thus they enjoy economies of scale in production, processing and
marketing.
iii The concept of patronage dividend which is unique to cooperatives encourages

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AEA 304 AGRICULTURAL MARKETING AND PRICE

cooperators to pa business. As they do this the volume traded increases and the unit cost
of marketing falls.
iv increase political strength: Farmers through cooperatives are able to build up
political stre them in getting timely supply of farm inputs and can also pressurize the
government to subsidize inputs.
3.6 , Organizational Structure of Cooperative Society

The organization structure of cooperative societies in Nigeria follows the general three –
tier p cooperative organization throughout the world. Initially, individuals recognize
common and desir them, so they pool their resources together towards meeting such
needs. They form primary societ District or Local Government level. For example Rice
Farmers Cooperatives may pool their resoform a secondary Rice Farmers Union to
enable them acquire rice milling plant for the use of all the involved.

APEX
UNIONS
SECONDARY
SOCIETIES

PRIMARY
SOCIETIES
Figure 12: Structural Pattern of Coorperatives in Nigeria.

In the same manner, secondary societies on the same line of activity join together to
form apex ass which they obtain some ancillary services necessary for their operations,
such as publicity, pric contact with the government and outside organizations. This
upper tier of the pyramid operates Federal levels. The various states owned cooperative
banks are apex cooperative organizations.

Problems of Cooperatives in Nigeria

Since the existence of formal cooperative societies in Nigeria, a number of problems

have been ide important of such problems are discussed below.
1. Illiteracy and ignorance of members

Most members of cooperative societies in Nigeria are illiterates and as such are quite
ignorant of the cooperation.

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AEA 304 AGRICULTURAL MARKETING AND PRICE

2. Disloyalty among officials and employees of the societies

Some of the officials of the cooperative societies especially in the rural areas are
corrupt, taking illiteracy of members to cheat them. Sometimes members are not
informed of the arrival of farm inp consumer items and sometimes society funds are
diverted to private uses.

3. Low membership

This is a serious problem confronting most primary societies. The idea of cooperative is
to reap ben together of individuals limited resources. This idea cannot be realized if the
membership is low.

4. Poor Capital Base

Most cooperative societies are not viable in business and cannot effectively compete wit
organizations due to limited capital.

5. High rate of loan default

The rate of default by cooperative members in repaying their loans is high in most cases.
This has the societies unviable. The society members sometimes regard loans
obtained from cooperativ own share of the national cake thus they do not pay the loans
and this invariably has led to the premat societies.
4.0 Self Assessment Exercise
1. Enumerate the problems usually encountered by cooperative societies.
2. What are the different types of cooperative societies?
5.0 Conclusion

In this unit you have learnt the definition of cooperatives, their origin, characteristics,
types, p organization and problems.

5.0 Summary
In this unit you have learnt that:

 Cooperatives are defined as some business voluntarily owned and controlled by

member operated by them on non-profit basis.
 Cooperative business usually evolves out of the felt needs of members who want
to common problems by pooling their limited resources together.
 The concept of cooperative was born out of human suffering, degradation and
exp England in 1844.
 The seven principles which are unique to cooperative organization are:
 Open Membership
 Democratic control
 Limited interest on capital

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AEA 304 AGRICULTURAL MARKETING AND PRICE

 Patronage dividend
 Cash transactions only
 Religious or political neutrality
 Constant education of members
 The different types of cooperative societies found in Nigeria are the Marketing
Cooperative Cooperatives, Service Cooperatives, Processing Cooperatives,
Consumer Cooperative and Cooperatives.
 The potential benefits of cooperatives include increased profit, marketing services
at cost and
7.0 Tutor- Marked Assignment

1. Why are small scale farmers always being urged to form cooperative
societies?
2. a. What is a cooperative movement?
b. Discuss the factors which distinguish cooperatives from the other forms of business
orga
8.0 References and Further Reading
Babcock, H.E.(1935) "Cooperatives: The Pace Setters in Agriculture", Journal of Farm
Economics.
Blue print on Cooperatives Development in 4th National Development Plan (1980-
1985) issued Conference on "Appropriate Strategies for Cooperative Development"
University of Nigeria, September, 1979.
Ijere, M.O. (Ed)(1975) New Trends in African Cooperatives: TM Nigerian Experience,
F Publishers, Enugu, Chapter 1 and 2.
Ode, M.O, (2005)"Agncultural loans and the performance of cooperatives" (An Analysis
of Some operatives in Kaduna State). Benin MBA (.marketing) project submitted to
Benue State Uni September.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria. Chapter 5.
Rhodes, UJ.(1978) The Agricultural Marketing System. Grid Publishing Inc:. Columbus,
Ohio, Chap Shepherd, G.S. and G.A. Futrell(1970) Marketing Farm
Products: Economic Analysis. 5th Edition, Iowa
State University Press. 1970. Chapter 20 .

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UNIT 3 GOVERNMENT REGULATIONS, SUBSIDIES. And CREDIT

SCHEMES

1.0 Introduction
In the previous unit but one, you learnt about marketing boards through which
government used operations of the marketing system. In the immediate previous unit you
also learnt about a second cooperatives. In this unit you will learn about regulations that
government put in place, subs facilities for the farmers.

2.0 Objectives
By the end of this unit you would be able to:
 explain government regulations
 discuss about subsidies
 describe about creditschemes

3.0 Main Body

3.1 Government Regulations

Regulations can be defined as an intervention by the government in the agricultural sector

to ensu sustainability. There are many who believe that government's relationship with
agricultural market of laws dealing directly with agricultural products and their
handling. This is more or less a narr large, agricultural marketing appears to cover a
much broader perspective and those that are discipline will therefore have to come to
grips with some of the more fundamental issues. Most attention is directed to:

(a) Maintaining and policing competition or preventing monopoly:

(b) Facilitate trade and providing services such as the maintenance of uniformity of
standards;

(c) Formulating regulations to protect the consumers.

This law is intended to prevent shipments of adulterated or misbranded foods, drugs and
cosmetic more or less the responsibility of the appropriate Federal agencies such as the
Nigerian Standards NAFDAC.

3.2 Subsidies in Agriculture

A subsidy is an aid to farmers to keep down the price of a commodity. One form of
subsidy is the re duties on some farm inputs and implements. This can also be done
through price support the govern during periods of bumper harvest. The government
through the appropriate agencies normally buys l grains for its strategic reserves and this
helps to guarantee farmers stable prices.

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3.3 Sources of Credit for Farmers

The major sources of credit can be classified into institutional or formal and non-
institutional source

3.3.1. Non-Institutional

The non-institutional or informal sources are those which do not have any uniformity in
their lendin interest rate or their collateral requirement.
Loan from such sources are usually made directly to the borrower by the lender and are
prevale individuals are quite familiar with and share confidence in one another. In other
words, the l borrowing farmer and reasonably vouch-safe for his (borrower’s) integrity.
The relative ease of o devoid of administrative delays, non-insistence by the lender on
security or collateral from t flexibility built into repayment programmes has made the
non-institutional sources very popular a farmers. Non-institutional sources however
have such limitations as smallness of loan, high interest Notable examples under this
source include:
i. The “Esusu”
The “Esusu” is a fund to which a group of individuals sharing common characteristic
make a contr amount of money, handed to one person. Each member is able to make use
of the money in turn, for a member in dire need of a loan or advance. These are granted
without interest payment.
ii. “Ajo”
In the case of “Ajo” individuals contribute fixed amount of money on a daily basis. The
“ajo” col remind contributors of their daily obligation, and safe keep the contributed
sum. At the end of contributors receive their total savings less one day’s contribution,
the latter being the collector’s fee
iii. Money Lenders
These people usually make their money outside the rural community but later settle
down in villag farmers at exorbitant interest rates. Some farmers who pledge their lands,
crops and buildings have their inability to pay the high interest rates charged on the
principal when due.
iv. Friends and Relations
This is part of cultural heritage whereby the prosperous help their less fortunate relatives
and frie some cases, the loan is not collected back.

3.3.2 Institutional Sources

These are sources of capital available to agribusinesses from outside the firm but from
institution institutional sources are those recognized institutions which follow
standardized procedures of lend regulated interest but normally require some collateral.
The loans from these sources are always lar those obtained from non-institutional
sources. These sources could be commercial banks, co government organizations, etc.

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i. The Agricultural Credit Guarantee Scheme Fund (ACGSF)

In order to encourage banks to meet the target set for them in the monetary policy circular,
the CBN Government established the ACGSF in 1977. The enabling legislation provided for a
fund of N100 million extended to agriculture by the banks are guaranteed up to 75%. The
funds objectives is to provide addit banks which, because of the high risk in agriculture
and the attendant loan defaults, would preferred other economic activities for lending.

This resulted in a sharp increase in agricultural lending e.g. in 1978, 341 applications
were receive and by 1988 a total number of 24,538 loan applications were guaranteed.

The Agricultural Credit Guarantee Scheme Fund is a scheme managed by the Central Bank
of N provides guarantee cover to banks who give loans to the agricultural sector of the
economy. Th banks to provide more funding to the farmers. The scheme had an
authorized share capital of N3 bil the Federal Government (60%) and the CBN (40%).

The whole process was simplified whereby what any potential beneficiary needed do
was to go t bank or Central Bank branch office in Nigeria and make inquiries there. It
was exclusively for f expected to provide collateral if the loan amount was above N20.
000.00. The collateral should be in in form of 25% cash security of the intended loan
amount in the form of savings. Once the bank h with all the relevant information and
collateral, where applicable, the way became clear for the farm the agricultural credit.

The process for loan approval and collection involved the farmer that was seeking loan to
choose an with a bank operating the Agricultural Credit Guarantee Scheme. Next, a
deposit of 25% of the loan would be paid into the account, and all the required
information provided. Finally, the applicant co loan on a loan application form, while his
bank would also need to arrange an insurance cover for Nigerian Agricultural Insurance.
ii. Commercial banks
A commercial bank is a type of financial intermediary. It raises funds by collecting
deposits from and consumers via checkable deposits, savings deposits, and time
deposits. It makes loans available consumers. Commercial banks are run to make profit
and they are therefore concerned with recei lending to businesses. They make long term,
intermediate and short term loans, lines of credit a Examples of commercial banks in
Nigeria include: United Bank of Africa (UBA) Plc, First Bank o Bank of Nig. plc.

iii. Cooperative banks

A cooperative bank is a cooperative society carrying on the business of banking. It

offers gre members to savings and borrowing facilities and at relatively cheaper costs
than traditional co Cooperative banks are owned by their cooperative patrons such as
weavers, crop farmers, carpe commercial banks which are profit oriented, cooperative
banks are service oriented, they aim at p but not at the expense of their members.
Cooperative banks operate on a smaller scale than commer usually located in rural areas.
The relationship between cooperative banks and other customer contractual relationship.

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They add a personal touch to their relationship with customers. The s cooperative banks
are usually rural people themselves; hence they do not face the many acc
communication problems staff of commercial banks face.

iv. Community banks

These are self sustaining financial institutions which are owned and managed by a
commu communities for the purpose of providing credit, receiving deposits and
rendering banking an services to their members largely on a basis of self recognition and
credit worthiness. Community were established to mobilize rural savings, promote rural
development and stimulate productive acti establishment of micro-enterprises,
enhancing rural incomes and alleviating poverty in rural areas.

v. Insurance Companies

Like other financial institutions, insurance companies look for businesses to invest
funds they ha policy holders. Most insurance companies prefer intermediate and long
term loans on fixed assets s and equipment and mortgages for collateral. If the farmer
has a policy with the insurance compa will usually grant the farmer loan amounts that
are the cash value of the policy and at very attract Examples of insurance companies
include the Nigerian Agricultural Insurance Corporation (NAI General Insurance
Company Ltd (IGI), Leadway Assurance, etc.

4.0 Self Assessment Exercise

1. Is a scheme like ACGSF necessary? Why? Why not?

5.0 Conclusion

In this unit you have learnt about government regulations, subsidies, credit and insurance schemes
put in pla assist producers and marketers.

6.0 Summary

Government regulations are directed to:

 Maintaining and policing competition or preventing monopoly:
 Facilitate trade and providing services such as the maintenance of uniformity of
standards;
 Formulating regulations to protect the consumers.
 This law is intended to prevent shipments of adulterated or misbranded foods,
drugs and cosmetics.
 In Nigeria it is the responsibility of the appropriate Federal agencies such as the
Nigerian Standards Organization and NAFDAC.
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 A subsidy is an aid to farmers to keep down the price of a commodity.

 One form of subsidy is the reduction of import duties on some farm inputs and
implements.
 Non-formal sources of credit include esusu, ajo, money lenders, friends and
relations
 Formal or institutional sources are the Agricultural Guaranteed Credit Scheme, the
commercial banks, cooperative banks, and community banks.
 Insurance companies look for businesses to invest funds they have collected
from policy holders.

7.0 Tutor- Marked Assignment

1. Discuss four informal sources of finance.
2. Discuss the following four institutional sources of finance:
i. Cooperative banks
ii. Commercial banks
iii. Community banks
iv. ACGSF
v. Insurance companies

8.0 References and Further Reading

Babcock, H.E.(1935) "Cooperatives: The Pace Setters in Agriculture", Journal of Farm
Economics.

Blue print on Cooperatives Development in 4th National Development Plan (1980-

1985) issued Conference on "Appropriate Strategies for Cooperative Development"
University of Nigeria, September, 1979.
Ijere, M.O. (Ed)(1975) New Trends in African Cooperatives: TM Nigerian Experience,
F Publishers, Enugu, Chapter 1 and 2.
Ode, M.O, (2005)"Agncultural loans and the performance of cooperatives" (An Analysis
of Some operatives in Kaduna State). Benin MBA (.marketing) project submitted to
Benue State Uni September.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria. Chapter 5.
Rhodes, UJ.(1978) The Agricultural Marketing System. Grid Publishing Inc:. Columbus,
Ohio, Chapter 12.
Shepherd, G.S. and G.A. Futrell (1970) Marketing FarmProducts: Economic Analysis.
5th Edition, Iowa State University Press. 1970. Ch

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UNIT 4 AN OVERVIEW OF THE NIGERIAN AGRICULTURAL INSURANCE

CORPORATION (NAIC)

1.0 Introduction
In the previous unit you learnt about government regulations, subsidies and credit schemes put
in place by producers and marketers. In this unit you will learn about the agricultural insurance
scheme government put in adverse effects of production and distribution of agricultural products in
the country.

2.0 Objectives

By the end of this unit you would be able to:

 explain what NAIC is all about
 explain the functions and operations of NAIC
 state the objectives of NAIC
 describe the beneficiaries of NAIC
 enumerate the perils covered by NAIC
 explain the benefits of NAIC and
 state the problems faced by NAIC.
3.0 Main Body

3.1 Nigerian Agricultural Insurance Corporation (NAIC)

Nigerian Agricultural Insurance Corporation (NAIC) is the agency that operates the
Nigerian Agri Scheme (NAIS).

Risks in agricultural undertakings are more widely spread and far-reaching than in most
other en because they go beyond all the well-known and researched entrepreneurial
hazards and uncerta business world. Such hazards include the vagaries of nature,
inclement weather conditions, pests a with flood and fire outbreaks. All of these
eventualities impact very seriously on the success agricultural enterprise. Therefore, any
nation with a clear vision for boosting its agricultural produc the food needs of its
populace and industries must of necessity put in place mechanisms that would and
uncertainties to a bearable minimum. There is need therefore, for a mechanism that
functions the farmers in business cannot be over-emphasized. This therefore necessitates
the need for an agric Nigeria.

NAIC presently is wholly owned by the Government and is the sole underwriter of
agricultural ris operating the NAIS, the premium due is subsidized to the tune of 50%.
This means that the farme the Federal Government and the State Government (where
the project is located) pay 37.5% and 12.

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3.2 The Main Objectives of the Scheme

The broad objective of the NAIS is to protect the Nigerian farmer from the effects of
natural hazar measures which shall ensure a prompt payment of appropriate indemnity
(compensation) suffi farmer in business after suffering a loss. The scheme was specially
designed to:

Promote agricultural production since it would enhance greater confidence in adopting

new and i practices and at the same time bring about greater investments in the
agricultural sector of the N thereby increasing the total agricultural production;

Provide financial support to farmers in the event of losses arising from natural disasters;

Increase the flow of agricultural credit from leading institutions to the farmers;

Minimize or eliminate the need for emergency assistance provided by Government

during perio disasters.

3.3 Functions of Nigerian Agricultural Insurance Corporation (NAIC)

With the aim of assisting the farmers in cases of unforeseen adverse farming conditio
Agricultural Insurance Company Limited (NAIC) was established with headquarters in
A beginning the insurance cover offered by NAIC was limited to only rice, maize, cattle
and po conceived to cut across wider ecological zones in the country.

According to Decree No. 37 of 1993 enabling the Corporation, its functions included the
following:

i. To implement, manage and administer the Agricultural Insurance Scheme

established by sec No. 37 of 1993

ii. To subsidize the premiums chargeable on selected crops and livestock policies
from the gran Federal, States Governments and the Federal Capital Territory, Abuja.

iii. To encourage institutional lenders to lend more for agricultural production having
regard to the a their loans provided by the Corporation.

iv. To carry on insurance business on normal commercial basis and without subsides
on premiu building, machineries, equipment and other items which form part of the total
investment on farm this aspect of its operations through well-established channels with
reputable re-insurance companie

v. To operate other types of insurance business as may be permitted by the

Commission of Insuran premiums.

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3.4 Beneficiaries of the Scheme

The scheme was established to provide security for all categories of farmers,
namely; sm large scale holder, either in groups or as individuals.

The scheme is especially compulsory for farmers that benefit from any form of
agricultu under the scheme. Most of these transactions are made by or through the
lending institutions. provides cover for the self-financed farmers, government sponsored
or assisted projects, etc in w recognized facilities may not be involved.

3.5 Perils covered by N.A.I.C

Since not all perils to which a farmer is exposed are insurable, the perils to be covered
are r pertaining to elemental and physical risks to production only. There is no cover for
economic an resulting from price fluctuations and loss of profit.

The exact perils covered in respect of crops depend on crop type, area, exposure and
ease of cont peril. The major perils covered for crops include: fire, lightening, wind
storm, flood, drought, pest, animals.

For livestock, the perils covered also depend on animal type, epidemic and endemic
diseases, etc. the various preventive measures available is also an important factor for
consideration. The major livestock include death or injuries due to: fire, lightening,
wind storm, flood and diseases.

Losses caused by negligence or by willful damage are not covered. Also, the insured
under NAIC to meet the conditions for good husbandry practices.

3.6 Benefits of the Scheme

The scheme is immensely beneficial to the farmers and hence the nation as a
whole in so m include:

i. Assurance of security to farmers

The insured farmer has an added advantage in his/her production efforts, knowing that
should a lo will not be total as NAIC will indemnify him/her. This serves as an added
impetus to his efforts.

ii. Adoption of technology

The farmer now armed with the added security advantage as mentioned in (a) above is
now positioned to follow time tested laid down guidelines that will improve his yields.
Adoption of n approach which is a major requirement for insured farmers is therefore

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compulsorily carried ou leading to greater yields and improved farm incomes.

iii. Enjoyment of premium subsidy

There is also the incentive that only 50% of the premium is paid by the farmer on crops
and livesto under subsidized category. The other half is paid on his behalf by the Federal
and State Gover project is located. This is one of the attractive features of the scheme.
More farmers are hereby en themselves of the Corporation’s policies which is the
veritable ship of financial stability through wh have been sailing to their shores of
prosperity.

iv. Facilities Easy Access to Credits Facilities

The NAIC cover also enables easy access to greater credit facilities since the insurance
cover can s security for loans. It works this way, if farmer X who has taken a loan of
N5, 000.00 which was in succeeds in paying back the loan, he will be entitled to a
bigger loan of say N10, 000.00 and above.

v. Generation/Creation of Wealth

The accessibility of greater credit facilities as mentioned in (d) would result in an

increase in the siz production, giving rise to increased income for the farmer, which in
turn, will lead to higher farm e more wealth generation and general improvement in
quality of life of the citizenry.

vi. Provision of Extension Services

Insured farmers benefit immensely from technical advisory services which are provided
by staff of t the various areas of agriculture and risk management during monitoring
visits to insured farm proj beneficiaries of the scheme. These extension services are
provided free of charge. Furthermo involved are highly reliable and tested professionals
in their fields of agriculture and seasoned insura translates to the basic fact that the
farmer can save his hard-earned money which he ordinarily wo consultants most of
which may turn out to be fakes.

vii. Assistance in Agricultural Loans Recovery

Banks whose clients have been covered under the Nigerian Agricultural Insurance
Scheme have co easy to recover loans disbursed thereby leading to more farmers
enjoying credits facilities from such

3.7 Problems and Limitations of the Scheme

A number of problems and limitations have been identified to constrain the successful

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implementating in Nigeria. These are:

(a) Inadequate infrastructural and administrative facilities;

(b) Poor farming practices and differential level of farm

(c) Inadequate funding

(d) Shortage of trained manpower to operate the Scheme

(e) Ignorance of the farmers and the general public on the operations and merits of the
Scheme; and

(f) Non-availability and unreliability of data;

(a) Inadequate Infrastructure and Support Services

Inadequacy of infrastructural facilities such as good roads and other efficient means of
transportati power supply, etc could hamper the successful operation of the scheme.
These facilities are ne facilitate prompt and speedy intimation of losses by the farmers,
for assessment of losses indemnities. Federal and State Governments are expected to
provide these facilities.

(b) Poor Farming Practices and Differential Level of Farm Developments

Poor farming practices and differential level of farm developments may cause variations
betwe average farm yields. The adoption of homogeneous geographical area as the unit
of insurance assum yields within each ecological zone. Different levels of development
may cause serious deviation of from the average. In the determination of indemnity for
crops particularly under the third stage reliance is normally placed on the standard yield
per hectare. Differential level of farm developme result in unintended over-
indemnification.

(c) Inadequate Funding

Like most publicly owned corporations, adequate and timely funding of the Scheme is
lack insurance is a very costly venture and as such arrangement for adequate funding
should be made.

(d) Lack of Trained Personnel

The successful management of the Scheme requires the availability of personnel trained
in agricult at the national, states, and 1oca1government levels as evaluators, supervisors,
loss adjusters and s an acute shortage of agricultural insurance specialists within the
Nigerian insurance industry that technical aspect of agricultural insurance.

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(e) Ignorance and Lack of Awareness of the Scheme by Farmers

The ignorance and lack of awareness by the majority of farmers of the need, practice
and valu insurance constitute a problem to the practice of the Scheme.

(f) Lack of Data

A major problem that affects the implementation of the Scheme is the dearth of data on
farm opera on crop yields and losses arising from natural hazards, as well as the
occurrences and effects of the data are necessary for the computation of premiums and
indemnities.

4.0 Self Assessment Exercise

Enumerate the limitations of NAIC in its operation in Nigeria. How do you think these
lim addressed?

5.0 Conclusion

In this unit you have learnt about NAIC its functions and operations, the objectives of
NAIC, the be covered, benefits and problems.

6.0 Summary

In this unit you have learnt that:

 NAIC is geared towards reducing the risks of agricultural businesses.

 Its broad objective is to offer protection to the farmer from the effects of natural
disast payment of appropriate compensation sufficient to keep the farmer in business
after suffering a los
 NAIC was established to assist the farmers in cases of unforeseen adverse
farming condi
 The benefits of NAIC includes
 Assurance of security to farmers
 Adoption of technology
 Enjoyment of premium subsidy
 Facilities Easy Access to Credits Facilities

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 Generation/Creation of Wealth
 Provision of Extension Services
 Assistance in Agricultural Loans Recovery
 The problems and Limitations of the Scheme are:
 Inadequate infrastructural and administrative facilities;
 Poor farming practices and differential level of farm developments;
 Inadequate funding
 Shortage of trained manpower to operate the Scheme
 Ignorance of the farmers and the general public on the operations and merits of
the Scheme;
 Non-availability and unreliability of data.

7.0 Tutor-Marked Assignment

i. Why do Nigerian farmers need agricultural insurance cover?

ii. What are the main objectives of NAIC?

8.0 References/Further Readings

Agada, J.E. (1998). “Analysis of the socio-economic factors affecting farmers’

participation in the Nigerian agricultural insurance scheme” An MSc thesis, Dept
of Agric Economics and Rural Sociology, Ahmadu Bello University, Zaria.

Federal Ministry of Agriculture, Water Resources and Rural Development (1989).

Operational Guideline for the Nigerian Agricultural Insurance Scheme

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:
Principles and Applications. Living Books Series, GU Publications, Abuja FCT,
Nigeria. Chapter 5.

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MODULE 7 COMMODITY MARKETING SYSTEMS

Unit 1 Concept and Elements of Commodity Marketing Unit 2 Marketing of Food

Grains and Seed Cotton Unit3 Marketing of Livestock and livestock Products

UNIT 1 CONCEPT AND ELEMENTS OF COMMODITY MARKETING

1.0 Introduction
The term ‘commodity’ is commonly used in reference to basic agricultural products that
are eithe form or have undergone only primary processing. Examples include cereals,
coffee and cocoa bean eggs, milk, fruits, vegetables, beef, cotton, yam, cassava and
rubber, tomatoes onions etc. A relate that the production methods, post-harvest
treatments and/or primary processing to which they hav have not imparted any
distinguishing characteristic or attributes. Therefore, within a particular grade with
respect to a given variety, commodities coming from different suppliers, and even diffe
continents, are ready substitutes for one another. Agricultural commodities are also
generic, undiffe that compete with one another on the basis of price. Consequently,
commodities contrast sharply w which have been given a trade mark or branded, in
order to communicate their marketable differenc

2.0 Objectives

By the end of this unit, you should be able to:

 understand the concept of commodity marketing
 discuss the elements of commodity marketing
 understand the stages in a commodity marketing system
 discuss the linkages between the different stages in a commodity marketing
system
 appreciate the main products involved in commodity marketing

3.0 Main Body

3.1 Concept of Commodity Marketing

Commodity marketing is crucial to the success of the rural economy and is a key
element in the de sector. In developing countries, commodity marketing has been
undermined by a variety of fa dearth of social and physical infrastructure, such as
inaccessible roads and markets; lack of proce equipment which exacerbates post-harvest
losses, etc. This development has increased the risk commodity marketing, playing a
major role n the pricing of primary commodities in developing c countries also have
policies relating to commodity marketing. Following national independence in Asian
countries, state agencies became the conduits for major commodities.

They dictated prices and purchased commodities from farmers, often without recourse
to market m time, commodity prices offered farmers by state agencies were at variance
with internation prompting farmers to cut down production, or abandon their activities

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altogether. Consequent commodities declined in many developing countries,

undermining state revenue and impoverishin livelihoods have been undermined.

However, in the early 1980s, many developing countries embraced economic reforms
encapsulate economic frameworks including Structural Adjustment Programmes
(SAPs). With economic ref owned commodity agencies were abolished in a
development that liberalized the rural economy in The advent of economic reforms
permitted private entities and individuals to engage in commodity deregulated
framework.
This development inspired competition, accompanied by favourable prices which
encouraged fa more. Thus, production of commodities escalated in many countries,
allowing rural farmers international market prices, which was denied them prior to the
1980s.

3.2 Elements of Commodity Marketing

A commodity marketing system encompasses all the participants in the production,

processing an undifferentiated or unbranded farm product such as cereals. Participants
include farm input s storage operators, processors, wholesalers and retailers, involved in
the flow of commodities from in final consumer. The commodity marketing system also
includes all the institutions and arrangemen coordinate the successive stages of a
commodity flow, such as government parastatals, tr cooperatives, financial partners,
transport groups and educational organizations related to the comm The commodity
system framework includes the major linkages that hold the system together, such
contractual coordination, vertical integration, joint ventures, tripartite marketing
arrangemen arrangements. The systems approach emphasizes the
interdependence and interrelatedness of all aspects of agribusiness, namely: from farm
input suppl assembling, storage, processing, distribution and ultimate consumption of
the product.

3.3 Stages in a commodity marketing system

The marketing systems differ widely according to the commodity, the systems of
production, traditions of the producers and the level of development of both the
particular country and the partic economy in the country concerned.
This being the case, the overview of the structure of the selected major commodities
marketed whic broad and general. The major commodities whose marketing systems
will be discussed herein livestock and meat, poultry and eggs, cotton, fruit and
vegetables, milk, tomatoes and onions. Table 3 identifies the main stages of agricultural
marketing in many countries.

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Table 3 : Stages in Agricultural Marketing

STAGE EXAMPLES
Stage 1: Commodity buyers specializing
Assembly in specific agricultural products,
including grain, cattle, beef,
palm oil, cotton,
poultry and eggs, milk.
Stage 2: Independent transporters,
Transportation transport companies, railways,
airlines, etc.
Stage 3: Grain elevators, public
Storage refrigerated warehouses,
controlled atmosphere
warehouses, heated warehouses,
freezer warehouses.
Stage 4: Commodity merchants or
Grading and government grading officials.
Classification
Stage 5: Food and fibre processing
Processing plants, including flour mills, oil
mills, rice mills, cotton mills,
wool mills, and fruit and
vegetable canning or freezing
plants.
Stage 6: Makers of tin cans, cardboard
Packaging boxes, film bags, and bottles of
food packaging or fibre
products.
Stage 7: Independent wholesalers
Distribution marketing products for various
and Retailing processing plants to retailers
(chain retail stores sometimes
have their own separate
warehouse)

In developing countries, government often plays a pivotal role in the marketing of farm
products, p the 1980s, when economic reforms were embraced in many countries. In
recent times, howeve degree of state involvement in commodity marketing defers,
depending on the commodity and mark

In general, government involvement is greatest in the case of grains, particularly rice

and wheat, products in most countries. In some cases, government or state-owned
enterprises are also directl marketing of specific industrial/commercial crops,
including tee, rubber, sugar, palm oil and coconuts, which are major export commodities
in countries.

In general, governments in the developing world are particularly interested in

influencing th marketing of staple crops since the price and level of variability of these

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commodities have impact o security and farm incomes. These, in turn, have implications
for political stability and the extent t inflationary pressure on wage rates. Also,
government interest in export crops lies in the pot exchange earnings which are critical
to economic growth and development in some of the world’s p

4.0 Self Assessment Exercise

Mention the significance of each sage in the marketing of agricultural commodities.

5.0 Conclusion

In this unit, you have been exposed to the concept of commodity marketing, as well as
its mecha also been introduced to the elements of commodity marketing system, as well
as the various stage agricultural commodities.

6.0 SUMMARY
In this unit, you have learnt that:
 Commodity marketing relates to making available to consumers a variety of pri
commodities.
 Commodity marketing involves many market players, including farmers,
middlemen, and co

 Marketing of agricultural commodities are in stages from the farm to the

ultimate consumers
 There are key linkages in the various stages of marketing agricultural
commodities critical farmers, middlemen and consumers.

7.0 Tutor-Marked Assignments

1. Discuss the elements of commodity marketing..

2. What are the different stages involved in agricultural commodities?

8.0 References and Further Reading

Sugiyama, M. (1990): “Innovative Approaches to Agricultural Marketing’. Selected

Cases In Marketing Systems for Farm Products. Tokyo.

National Open University of Nigeria (2009) Agricultural Marketing and Cooperatives,

AEM 61 Course Material.

10
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AEA 304 AGRICULTURAL MARKETING AND PRICE

UNIT 2 MARKETING OF FOOD GRAINS AND SSED COTTON

1.0 Introduction

In Nigeria grains such as millet and sorghum are produced in the northern states,
while maize produced in the more humid southern states. In recent years, however,
maize production has beco in the northern states especially in the Southern Guinea
Savanna vegetation zone. In this zone sole dominating the farming systems.

Wheat production has in the past been limited to Borno, Sokoto and Kano States where
the co mid-day season (December-March) and availability of irrigation water favour its
production. In th however, other states have started to grow wheat as a result of the ban
on wheat importation. Ste such as yam, cassava and cocoyam are very important food
crops grown predominantly in the southern parts of Nigeria while sweet and Irish
potatoes are produced in the Southern Guin This unit describes the marketing of the
major agricultural products.

2.0 Objectives

By the end of this unit, you would be to:

 describe food grain marketing
 describe cotton seed marketing

3.0 Main Body

3.1 General Food Grain Marketing Systems

Grains are an important element of agricultural commodities. Marketing of grains is

therefore key many farmers and commodity marketing organizations. The principal
players in grain marke producers, marketing boards (where they still exist),
brokers, millers, livestock farmers, animal feed processors, other food manufacturers,
grain exchan Figure 13 shows a typical grain marketing system.

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On-farm use Imports

as livestock
feed

Farmers Household
On-farm storage consumption
for sale later

Food security Grain marketing Brokers or

reserve boards commission
agents

Exports

Grain
elevator

Consumers Animals feed Millers Millers

processors

Figure 13 : A Typical Grain Marketing System

The physical marketing system begins with the assembling and collecting points located
in the rural producers. The next stage involves the storage areas at the national grains
marketing facilities owne parastatal and/or private grain elevator, and the grain milling
companies, which in some count owned and in others are government enterprises.
Although the size and methods of operation differ to another, the local assembling and
collection points usually have grains brought to them either d producers themselves or
by rural entrepreneurs.
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Thus, in the case of grain, the assembly and storage functions are typically combined at
this m common feature of grain marketing systems is the co-existence of a government
marketing agent private marketing channel with a myriad of private traders. The second
class of actors in the commodity marketing system is private agents. These individuals
operating in the system as petty assemblers, traders, large scale merchants, mi
corporations and small rural operators), brokers and retailers of grain products.

3.2 The Nigerian Food grain Marketing Situation

The traditional marketing system for food grains in Nigeria is similar in both the
northern and sou country. Generally, this marketing system is characterized by many
buyers and sellers. The sell very small quantities for sale at a time In every grain
producing area, there are rural markets periodically either once or twice a week.
These rural markets could either be isolated or non-isola

Grains are brought by the farmers to the rural markets where the rural buyers
participate active the grains. The farmers usually carry the grains to the markets in
bags while the mode of transpo by head potterage, bicycles, donkeys or by motor
vehicles. In the rural markets, prices which through the process of higgling and
haggling may remain the ruling market price on that market da factors such as
familiarity between the seller and the buyer, the time of the day the transaction language
spoken by the buyer could influence the actual price which the seller receives.

The unit of measure is not standard. It varies from one part of the country to another.
For exampl parts of the country, the grains are sold in basins, tins or bags, whereas in
the northern parts grains tiya or bags. Even where bags are used in all the markets the
sizes vary from market to market a another. Where metal bowls called mudu and tiya are
used the actual capacities of these units of me from one seller to another. It is for this
reason that some Local Government Authorities introduce and tiya measures which all
traders must use. From the isolated rural markets, the closest markets the grains are
assembled in big lots and moved by motor vehicles to bigger rural non-isolated marke
periodically say once or twice a week. The Giwa market, Markarfi market and Soba
market in examples of rural non-isolated markets.
In the non-isolated rural markets, wholesalers and their commissioned agents buy from
the rural bu 14). Some farmers also bring their grains directly to these markets. Grains
are assembled here in b bagged. From these markets the grains are transported in motor
vehicles to urban regional market regional markets. An example of the urban regional
market is the Sabon Gari market in Zaria or th Market. The urban regional markets hold
daily. In such markets the interstate wholesalers buy in la ship them by road or rail to the
non-regional urban markets such as the Iddo market in Lagos, Ibadan and markets in
distant places like Benin City and Port-Harcourt. Agribusiness firms and ot have their
commission agents buying for them in the rural non-isolated markets. From such mark
carried to the warehouses of the firms. This is the case for the feed millers. The feed
millers, br agribusiness firms also have contract grain growers. They enter into

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agreements with such fa commencement of the production season. They agree on what
price to pay for the produce be produce. Such firms sometimes supply inputs to the
contract farmers. This is a form of futures mar.

The storage of these products takes place at various levels in the marketing system.
The farmer grains in their compounds for a few months. The period of storage which
could extend to six mont the farmers to take advantage of future rise in prices. At the
farmers' level storage of grains is don such as in a room in the living house, in a store in
a granary or rumbu. The grains are usually sun d moisture content before they are
stored. Storage chemicals such as actellic dust, lindane dust. Gam phostoxin are used to
protect the grains against rodents and insect pests while in storage so as losses.

Wholesalers store their grains for some time in granaries, warehouses and silos. The
agribu processors have modern warehouses for the storage of grains. In Nigeria,
storage facilities a adequate and many studies have reported post harvest losses of
between 20 and 30 percent du facilities. The use of elevators in the handling and storage
of grains is very rare in this country. A storage facilities, grain prices fluctuate a lot from
one production season to another or from one har

Figures 14 illustrates how much fluctuation could take place in the prices of grains
between seaso

3.3 Marketing of Seed Cotton

Cotton is a non-food cash crop which has an entirely different marketing system from
that of structure of the cotton market is that of a regulated monophony market under the
Nigerian Cotton when all the Commodity Boards were abolished by the Federal
Government of Nigeria. Cotto operates under the free market forces thus assuming the
structure of pure competition.

Cotton is produced almost entirely by small holders with an average farm size of about
0.5 h about 0.8 million farmers on a total estimated land area of 6-700,000 hectares.
The participa marketing system consist of the farmers who function as the sellers, the
cotton merchants a Cotton is supposed to be sold in a special market called gazetted
market. A few of the gazetted cot permanent physical structures while majority are made
of temporary physical structures which ar weeks before the marketing season is declared
open by the various state governments.

The farmers carry their seed cotton to the cotton market in bags and kunshin. The mode
of trans cotton to the market is mainly by donkeys and motor vehicles. In the market the
product is grade officers who are staff of the State Ministry of Agriculture. There are
two grades of seed cotton i grades NA1 and NA2. Grade NA1 includes seed cotton grown
in Nigeria which are free from imm damaged or stained seed cotton, insects and leaf trash
and is entirely free of foreign fibres, stalks, m moisture.

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170

160

150

140

130

120

110

100

90

80

70

60

50

40 Millet
100
30

Maize Sorghum Cowpea

20

10

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Fig. 14 Seasonal indices for some staple food crops: Zaria, 1985 Source: Isitor, S.U. and S.A.
Ingawa (1986)

Grade NA2 seed cotton is entirely free of foreign fibres and added moisture but does not
qualify regards freedom from other impurities. The cotton merchants were the buyers
who were registered f by each state government to operate as produce merchants. In
subsequent years they had to pay a fe their registration renewed. The produce merchants
employed the services of buying agents who boug on their behalf in the various cotton
producing villages. The buying agents were paid commission bas purchased in a year.
The state governments regulated the activities of the cotton merchants and pr criteria for
their registration. They also decided the annual registration and renewal fees.
Ginning is the separation of cotton seed from the lint. Under the new market structure
following th Nigerian Cotton Board, ginning services became commercialized. The
ginneries ginned seed merchants for prescribed fees. The fees charged depended on the
grade of the cotton and wheth was mechanically or manually picked. For example, in the
1989/90 season, the ginning fee charg Agricultural Processors Ltd. (C.A.P.) was
N1350.00, N400.00, and N450.00 per tonne of seed cotto NA2 and mechanically picked
seed cotton respectively. After ginning, both the lint and the seed we merchant who could
sell the lint to the local textile mills or export them to foreign markets. Most of th oil mills
for crushing into vegetable oil. The marketing channel for seed cotton is shown in Modu
ginneries in Nigeria were owned by C.A.P. Since the abolition of the Cotton Board, cotton
mark become very competitive. There are now many buyers who make desperate effort to
out-buy their high competition has resulted in high producer prices as shown inTable 4.

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4.0 Self Assessment Exercise

With the aid of a diagram, discuss the marketing channel for grains in Northern Nigeria.

5.0 Conclusion

In this unit you have learnt how to describe food grain marketing and seed cotton
marketing.

6.0 Summary

In this unit you have learnt that:

 The principal players in grain marketing systems are producers, marketing
boards, brokers, millers, livestock farmers, animal feed processors, other food
manufacturers, grain exchanges and exporters
 Cotton is a non-food cash crop which has an entirely different marketing system
from that of
 The structure of the cotton market is that of a regulated monophony market under
the Niger Board up to 1986 when all the Commodity Boards were abolished by
the Federal Government of
 Cotton marketing now operates under the free market forces thus assuming the
structure of competition.

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7.0 Tutor- Marked Assignment

In order to maximize profit, judging from the Figure14, when will you prefer to buy and
sell i. Cowpeas?
ii. Maize?
iii. Millet?
iv. Sorghum?

8.0 References and Further Reading

Abott, J.C. (1987). Agricultural Marketing Enterprises for the Developing World.
Cambridge University Press, Cambridge.
Kohls,, R.L. and Ulo, J.M. (1990). Marketing of Agricultural Products, 6th edition,
Macmillan Publishing, New York.

National Open University of Nigeria (2009) Agricultural Marketing and

Cooperatives, AEM 616 Course Material.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural

Marketing: Principles and Applications. Living Books Series, GU
Publications, Abuja FCT, Nigeria. Chapter 7.

Scaria, K.J. (1989): Economics of Animal By-products Utilisation. FAO Agricultural

Services Bulletin 77, Rome.

Stewart, G.F. and J.C. Abott (1961): Marketing Eggs and Poultry, FAO, Rome.

Sugiyama, M. (1990): “Innovative Approaches to Agricultural Marketing’. Selected

Case Marketing Systems for Farm Products. Tokyo.

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UNIT 3 LIVESTOCK AND LIVESTOCK PRODUCTS MARKETING

1.0 Introduction

Livestock (animals) like cattle, goats , sheep, pigs, and their products are very important
component Nigeria. Almost every household in the rural areas keep these animals and
poultry birds like chicken ducks, turkeys etc. It is therefore very important that you learn
about their marketing aspects.

2.0 Objectives

By the end of this unit you would be able to:

 describe livestock and meat marketing
 describe poultry and egg marketing
 describe fresh milk marketing
3.0 Main Body

3.1 Livestock and Meat Marketing

Livestock and meat marketing is important to both livestock farmers and meet
marketing compa livestock and meat products. Figure 4.2 lists the most important
categories of by-product and r account for almost two-thirds of the live weight of an
animal.

The recovery, processing and effective marketing of these by-products can make a
significant diffe of returns to producers and, therefore, they are worthy of note.

From the Figure, it is obvious that the meat component of an animal typically accounts
for 80 perce this context, livestock animals include cattle, sheep, goats and pigs.
Producers attempt to adjust liv keeping with demand often results in adverse market
effects. The problem for livestock farmers is the inevitable lags between changes in
deman to supply. In order to expand meat supplies in response to anticipated increases
in demand, livestoc channel animals into the breeding herd rather than the market. This
pushes up meat prices over the Conversely, when prices fall, farmers try to reduce
production levels by selling off animals. The meat supplies and further reduces prices
over the short run. Profits are further squeezed by the incre form of additional shortage
and interest charges. This practice of adjusting future production accord prices results in
marked output and price peaks and troughs. Often, livestock prices drop below pro thus
retard the industry since producers become discouraged.

Most Nigerian farmers keep animals such as sheep, goats, local chickens, guinea fowls,
ducks, turke to growing crops. Most of these animals are kept under the free-range
management system. Just as crops, the farmer brings all other farm animals except pigs and
cattle to the same market where food cro

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Local chickens are sold directly to the consumers or local assemblers who will later sell
them Modern poultry producers can sell their birds (broilers and culled layers) directly to
consumers at the assemblers also buy broilers and culled layers from different poultry
farmers and sell them to resta open markets. The local assemblers sometimes carry the
birds to the urban regional markets wher retailers in the market. Supermarkets get their
supply of broilers and culled layers directly from the birds are dressed and stored in deep
freezers until consumers exhaust them.

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The sheep and goat farmers transport their animals to the rural markets mainly on hoof or
by motor ve animals are carried to the non-isolated rural markets like the Giwa and
Zundu markets. A farm between one and three animals to the market at a time. In the
market, commission middlemen take ov selling the animals from the farmer. They usually
have a particular spot in the market grounds where congregated. Potential buyers can
make their selection from the assorted animals both by visual in At the end of the
transaction, the buyer pays the agreed price and in addition pays a fee called
commission for the selling agent.

Sometimes local assemblers come to the rural markets to assemble farm animals. They
buy from th middlemen and then transport the animal in lorries and trailers to sheep and
goat retail markets in Example of such urban sheep and goat retail markets are at
Munchia and New Kano Road in Zaria Butchers in the urban towns usually buy sheep
and goat from the urban retail markets on daily b purchased are either slaughtered there
or carried to the public abattoir.

Cattle usually have their separate market places. These are found in many urban centres
such as Zan Gusau, to mention a few. Government legislation mandates butchers to
slaughter cattle in the abattoi is inspected before it is transported to super-markets, meat
shops, cold rooms and meat stalls in urban
Cattle markets hold once weekly in some centers on a particular day of the week. The
exact number market is difficult to determine because whoever is financially capable and
interested could joi business and buy as many animals as he/she could afford on any
market day. Most of the butchers a registered but the brokers are not recognized to be
registered officially, so they operate without license.
Transportation of cattle to and from the markets is either on hoof or in haulage trucks
and ope vehicles. Transportation fares vary according to the distance, road condition,
the number and size of 5 gives some approximate distances and transport| costs between
some market locations and Yola.
The observed market channel is depicted in Figure 5. The market channel can be divided
into two: Ch State and Channel II linking terminal markets outside the state.

Pricing is done confidentially in low tones until a suitable price is arrived at and the highest
bid accepte for the animal, the buyer usually gives the brokers, who helps in the
negotiation, some unfixed comm owner pays about N500 per animal sold, of which
N200 each is revenue for Local and State Governm while N300 is commission for the
market caretaker. The buyer is then issued with a receipt as secur checking while in transit.
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While the merchants ship their animals to terminal markets, butchers tran slaughter slab
for veterinary inspection before slaughtering the following morning.

Producer

Broker
Butcher/Wholesale
Retail

Merchant

Terminal Market Retail Butcher

Butcher

Consumer

Figure 14: Beef Cattle Marketing in Gongola State of Nigeria Source: Ezekiel,
L.S. (1988).

The prices varied according to the animals' age, sex, and breed, location of the market and
the occupa An example of such variability is shown in Table 5.

3.2 Poultry and Egg Marketing

Poultry farmers have three distinct types of birds from which to select their flocks:
* Hybrid Broilers: In addition to pure chicken breeds, specialized breeders sell chickens
which are multiple crosses. The latter are known as hybrids, gaining more weight
quickly and lay more eggs and are therefore genetically used by poultry breeders. They
are only suitable for commercial having an excellent food/meat
conversion ratio.

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* Dual Purpose Birds: These give good carcasses when slaughtered but only
moderate egg prod female can be expected to weigh about 2.25kg. This type of bird has
the
advantage of rarely exhibiting cannibalism and is hardy against diseases. However, they
do tend t consequently, egg production can decline.

* Light weight Birds: These are bred for egg production. Lightweights have
excellent food con rarely go broody. However, they do need good management and,
therefore, are only recommend poultry farmers. Poultry enterprises typically pass
through distinct stages of development as outlined

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Within the developing world, poultry and egg businesses may be found at all five stages
of deve more commonly they are likely to be more at the first and second stages.
Amongst peasant far allowed to find their own food and water and roost where they can
in the family compound. Under it is not surprising that productivity is low and mortality
rates among the birds are high.
Commercial broiler and layer enterprises need to have a much higher level of
technology a However, they too have their problems. In developing countries,
commercial producers are re extent, upon expensive imports of breeding stock, i.e.
hatching eggs and/or day-old chicks, anima and vitamin and mineral additives for
compound feeds.

3.3 The Marketing of Fresh Milk

Whilst milk can be converted to a range of dairy products, such as cheese, butter,
yoghurt, dried po are not commodities. It is generally the case that the processing of
milk into these products invol product differentiation. That is, the methods, techniques
and technologies used in manufacturing d to impact unique characteristics to the
finished product.

Milk is extremely important human food. Not only is it a relatively cheap source of
protein, it is als such as calcium and vitamins A, D and B2. The quality of milk is
usually judged according to its bu addition, buyers are also concerned that it should
be free from diseases like tuberculosis. In all parts of the world, milk production is
seasonal but the are higher in the tropics. Production in the tropics peaks just after the
rains, when there is lush pas progressively declines the further into the dry
season. As in the case of beef production, milk producers have to take into account the
lengthy bio trying to match the supply and demand for liquid milk. When there is an
over-supply of milk, possible to channel some of the excess into making butter,
cheese, yoghurt and other processed dairy products. However, the market for these
products is finite dairy products can be stored longer, higher levels of capital are tied up
and interest charges are these value added products, in comparison to milk.

4.0 Self Assessment Exercise

Briefly discuss marketing system for sheep and goats originating from the northern part
of Nigeria.

5.0 Conclusion
In this unit you have learnt about the livestock and meat marketing, poultry and eggs,
and fresh milk

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6.0 Summary
In this unit you have learnt that:
 Commodity marketing relates to making available to consumers variety of
primaryagricultur
 Commodity marketing involves many market players, including farmers,
middlemen, and co
 There are key linkages in the various stages of marketing agricultural
commodities critical to farmers, middlemen and consumers.

7.0 Tutor-Marked Assignment

Describe in your own words i) fresh milk marketing ii) poultry egg marketing.

8.0 References and Further Reading

Abott, J.C. (1987). Agricultural Marketing Enterprises for the Developing World.
Cambridge University Press, Cambridge.

Kohls, R.L. and Ulo, J.M. (1990). Marketing of Agricultural Products, 6th edition,
Macmillan Publishing, New York.

National Open University of Nigeria (2009) Agricultural Marketing and

Cooperatives, AEM 616 Course Material.
Olukosi, J.O., S. U. Isitor and M. O. Ode (2012) Introduction to Agricultural
Marketing: Principles and Applications. Living Books Series, GU
Publications, Abuja FCT, Nigeria. Chapter 7.

Scaria, K.J. (1989): Economics of Animal By-products Utilisation. FAO Agricultural

Ser Rome.

Stewart, G.F. and J.C. Abott (1961): Marketing Eggs and Poultry, FAO, Rome.

Sugiyama, M. (1990): “Innovative Approaches to Agricultural Marketing’. Selected

CaseMarketing Systems for Farm Products. Tokyo.

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MODULE 8 ELEMENTARY THEORY OF DEMAND AND SUPPLY

Unit 1 Demand
Unit 2 Supply

UNIT 1 THEORY OF DEMAND

1.0 Introduction

Understanding the laws of demand and supply is very crucial for the study of
agricultural marketing. the pre-occupation in this module. Unit 1 deals with the demand
side while unit 2 deals with the sup

2.0 Objectives

By the end of this unit you would be able to:

 Explain what demand is

 Explain the factors affecting demand for agricultural products
 Determine price elasticity of demand,
 Determine Income elasticity of demand
 Determine cross price elasticity of demand
 Explain Engel’s Law

3.0 Main Body

3.1 What is Demand?

Demand has to do with the quantity of a commodity consumers are willing and able to
pay for at a gi specified time period. The demand schedule is a table that shows the
quantity of a product demanded An example is shown in Table 7

If we plot a graph of quantity demanded at different prices, the curve that is produced is
referred to a curve.

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Price of
product

0
Quantity of product

Figure 15: Demand curve for a product

The properties of the demand curve are:

1. It is negatively sloped, from left to right.
2. It is downward sloping.

These properties indicate that the quantity demanded is inversely related to the price of
the comm that as the price of the commodity falls, the quantity demanded increases.

3.2 Factors Affecting Demand for Agricultural Products

The most important factors that affect demand are:

a. Prices of the commodity
b. Prices of other commodities
c. Changes in total population and in the age distribution of the population.
d. Changes in income distribution and per capita.
e. Changes in tastes and preferences of the consumers. We shall examine each of these
factors:

a. Prices of the Commodity

Changes in the price of a commodity will cause the quantity demanded to change. This is
called the There is an inverse relationship between price and quantity demanded such
that as the price of a co quantity demanded rises and vice versa. This relationship is
illustrated in Figure 15. As price falls fro demanded rises from q1 to q2. It should be noted
that changes in the price cause movement along curve. It does not bring about a shift of
the demand curve.
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P1

P2

D
0
q1 q2 Quantity, Q

Figure 16: Demand curve showing the effect of price on quantity demanded

The reasons for the inverse relationship between price and quantity demanded can be
summarize

i.) As a consumer buys increasing amounts of an item, the marginal utility derived
from succe commodity consumed decreases and consequently he will only be
interested in buying more if th
ii.) As the price of a commodity falls, the good becomes cheaper relative to other goods,
thus a given ou could buy more.
iii.) A good proportion of the population of many countries is in the low-income bracket.
Consequently citizens on low income are able to buy more thus resulting in increases in
demand.
b. Prices of other Commodities

Commodities could be related to one another in two ways. They could either be substitutes or
complement said to be a substitute of another if the two goods satisfy the same want. That
is, one could be used in pla goods that are substitutes, the demand for that particular one will
fall when the price rises while the deman will rise. Examples of substitute goods are cassava
and yam, or sorghum and millet.

Two goods are said to be complementary if they have to be consumed together. For
example, tea kerosene and stove, bread and butter, etc. For goods that are complementary
if the price of one rises, it consequently, the demand for its complement will also fall.

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c. Changes in Population

Changes in population, all other things being equal. represent changes in the number of
mouths to b population therefore leads to increase in demand. The age distribution of
the population is also an that affects demand. If the population distribution changes in
favour of babies and children, the and services used by children will rise while the
demand for goods used by adults will be le composition of population changes only
slowly and by small amounts from year to year and can thus b a minor factor.

d. Changes in income

The relationship between income and demand for food is not very straightforward. For
some income increases the demand for such items increase. These types of goods are
usually referred to However, for some other goods as income increases the demand falls,
these are called inferior go as per capita income rises the demand for income superior
goods such as meat. eggs, milk, will rise for income inferior goods such as second hand
clothing, offal or frozen fish falls

The income distribution is also an important factor. If the income distribution changes in
favour income, the demand for goods and services generally will rise, but if income
distribution changes in fav high income bracket, the demand for manufactured goods
such as cars and electronics could rise for food generally may not rise because this
category of consumers were already consuming adequa food items.
e. Changes in Taste

Taste is an important factor that affects demand. Changes in tastes and preferences determine
whether a co particular commodity or not. For example, some people due to religious belief
or other reasons do not such people, there will be no demand for pork irrespective of whether
the price of pork is low or high.

If the taste of consumers changes in favour of a particular commodity, the demand for that
commodity w taste of consumers changes against the same commodity, the demand for that
commodity will fall.

f. Changes in Demand

Changes in all the above named factors except changes in the price of
the commodity will cause a change in demand. When we say that demand has changed, it
means that the shifted from one position to another. Those factors which are capable of shifting
the demand curve are calle

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D1

Price of
Commodity

D1

Quantity of Commodity

Figure 17: Shift in demand curve due to increases in income.

In Figure 17, changes in any of the factors discussed above such as increase in income can cause
the demand curve to shift from DD to D1D1. This means that at the same price P1 the quantity
demanded could increase from q1 to q2. The most important factors influencing the long run
demand for agricultural products are the changes in the general price level and the growth of the
population. The other factors affect specified products and may be of short run effect.

3.3 Elasticity of Demand

This is the responsiveness of demand to a unit change in price. The law of demand states that
demand will fall if prices rise. Elasticity therefore measures the amount or proportion by which
quantity demanded will change given a unit or small change in price. The formula for computing
demand elasticity is:

Ed =

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Figure 18: Determination of elasticity of demand

In Figure 18, as price changes from P1 to P2, the quantity demanded changes from Q1 to Q2.

Percentage changes in Q =

P=

Ed =

There are two types of price elasticity of demand, they are (i) point elasticity and (ii) arc elasticity
of demand. Point elasticity is the elasticity of demand at a given point on the demand curve. For
example, in Figure 18, elasticity at point A is measured by

Ed=

Arc elasticity is the elasticity between two points on the demand curve. It is the average elasticity
between two points on the demand curve. In Figure 18 arc elasticity between points AB on the
demand curve =

Ed=

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3.4 Coefficient of Elasticity

When we calculate the elasticity of demand as shown above, the value so obtained is called the coefficient
of elasticity. If elasticity of demand is greater than one, the product is said to be elastic in demand. That
means that a proportionate change in price will lead to a more than proportionate change in quantity
demanded. For example, a 1% change in price will lead to a more than 1% change in quantity demanded.
If elasticity of demand is less than one it means that demand is inelastic and a proportionate change in
price causes a less than proportionate change in quantity demanded.

When the elasticity of demand is equal to one a proportionate change in price causes equal proportionate
change in quantity demanded. In a perfectly elastic demand situation, the demand curve is horizontal and
parallel to the x-axis such that at the same price any quantity of the commodity could be purchased. The
situation is reversed in a perfectly inelastic situation when the demand curve is vertical and parallel to the
y-axis such that irrespective of the changes in the price of the commodity, the quantity demanded
would remain unchanged. Figure 19 illustrates the different categories of the demand curves.

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3.5 Cross Price Elasticity of Demand

This is the responsiveness of quantity demanded to changes in the price of another commodity. Edα=

Cross price elasticity can vary from minus (-) infinity to plus (+) infinity. Complementary goods have
negative cross elasticity of demand. The closer the relationship between two commodities
(complements and substitutes), the larger the absolute value of the cross elasticity. If the two goods
bear little or no relationship the cross price elasticity will be close to zero.

3.6 Elasticity of Demand for Food

The demand for any one food item is more elastic than the demand for all food items combined. This is
because it is easier to substitute one type of food for another but it is not easy to have a substitute for
food. Livestock products are generally more elastic than food crops.
The reason is that meat products such chicken And eggs are considered as luxuries and could be
substituted for by fish and protein rich food grains and pulses as the prices of the former rise.
Generally, agricultural products are price inelastic in demand.

3.7 Elasticity and Total Revenue

Price elasticity of demand is directly related to the total revenue realized from the sale of a commodity.
Total revenue = Price x quantity sold.
TR = P x Q
Where TR = Total revenue P = Unit price of the product Q= Quantity sold.
For a product which has inelastic demand a proportional fall in the price will lead to a less than
proportional rise in quantity demanded. On the other hand, a proportionate rise in price will lead to a
less than proportionate fall in quantity demanded. Thus, for products that have inelastic demand, like
agricultural products, a good harvest which leads to increase in supply, will not only lower the unit
price but will also lead to a lower total revenue from the total production.

For example, suppose a farmer produces 3 tonnes of maize in a certain year when the price of maize is
N1.50 per kg. his total revenue will be 3,000 x N1.50 = N4,500. If during the following year he
produces
3.5 tonnes as a result of inelastic demand the unit price could fall to N1.20 per kg for him to sell off all
the quantity produced. The total revenue will be N4,200. The example shows that increase in output
does not

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only lower the unit price, but since it is inelastic, it also lowers the total revenue received by the
farmer. If on the other hand, the demand was elastic, the price might have dropped to N1.40 per kg at
the same level of output of 3,5000 kg. The total revenue would be 3,500 x N 1.40= N4,900 which is
greater than when the price was N1.50 per kg. Figure 19 depicts the phenomenon. The more elastic
demand curve would give total revenue OP2 KQ3 which is greater than OP2MQ3 total revenue
obtainable with the inelastic demand curve.

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3.8 Income Elasticity of Demand

Income elasticity of demand is the responsiveness of demand to changes in income.

Ed =

If the quantity demanded rises as income increases, such a commodity is referred to as a normal good but
if the quantity demanded falls as income rises, such a commodity is referred to as an inferior good. A good
that is extremely inferior is referred to as Giffen good, for example, second hand clothing and offals
(intestines, animal skins, and bones). The income elasticity for normal goods is positive while the
income elasticity for inferior goods is negative (Figure 21).

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The concept of income elasticity of demand is very important to farmers as well as to manufacturers of
goods as it enables them to understand the reaction of the consumers towards the demand for their products
whenever there is change in income. Farm products, generally are income inelastic in demand.
3.9 Engel's Law

The relationship between total income and the quantity of goods purchased or the amount spent on a
particular food or group of commodities is sometimes referred to as the Engel's curve Such curves are
also called income consumption curves. Ernest Engel a German statistician, worked in Belgium and
Saxony in the middle of ire nineteenth century to determine the relationship between income and
expenditures on food. His work which is now popularly referred to as the Engel's Law shows that high
income groups spend more per capita for good than low income groups; but the high income groups spend a
smaller proportion of their income for food than the low income group. Thus the general rule from this
study is that the bigger the family income, the smaller was the proportion or percentage of income spent on
food. This is shown in Figure 22 (panels a and b).

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3.10 Empirical Determination of Demand

Consider a demand function Qd = a- bP

Where Qd = quantity demanded a = intercept or constant term

b = slope or rate of change

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If we have a demand function Qd = 200 - 25 P

200 is the intercept while the slope is -25. This means that for a unit change in price, by-25.

From such a demand function it is possible to determine the price elasticity of demand at any given
price. For example, given a demand function Qd = 600 - 25p; if p = 8.00, we can find the price elasticity
of demand. Since the price elasticity of demand is expressed as:

Ed=

But dq/dp is the slope which in this case is -25.

Therefore at the price level of 8.00, the quantity demanded at that price
= 600 - 25(8)
= 600 - 200 = 400

Price elasticity of demand = -25 x 8/400= -0.5. The demand for this product is therefore price inelastic
since the coefficient of elasticity is less than one.

4.0 Self Assessment Exercise

Distinguish between own price elasticity of demand and cross price elasticity of demand.

5.0 Conclusion
In this unit you have learnt how to define demand and the factors affecting demand for agricultural
products. You have learnt how to determine price, income and cross price elasticities of demand and
Engel’s Law.

6.0 Summary
In this unit you have learnt that:
 Demand has to do with the quantity of a commodity consumers are willing and able to pay for at a
given price
 The demand schedule is a table that shows the quantity of a product demanded at different prices.
 The most important factors that affect demand are:
 Prices of the commodity
 Prices of other commodities
 Changes in total population and in the age distribution of the population.
 Changes in income distribution and per capita.
 Changes in tastes and preferences of the consumers.
 Elasticity of demand is the responsiveness of demand to a unit change in price.
 The law of demand states that demand will fall if prices rise.

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• If elasticity of demand is greater than one, the product is said to be elastic in demand.
 If elasticity of demand is less than one it means that demand is inelastic and a proportionate change
in price causes a less than proportionate change in quantity demanded
 When the elasticity of demand is equal to one a proportionate change in price causes equal
proportionate change in quantity demanded.
 Cross Price Elasticity of Demand is the responsiveness of quantity demanded to changes in the
price of another commodity.
 The demand for any one food item is more elastic than the demand for all food items combined.
 Price elasticity of demand is directly related to the total revenue realized from the sale of a
commodity.
 Income elasticity of demand is the responsiveness of demand to changes in income.
 Thus the general rule from this study is that the bigger the family income, the smaller was the
proportion or percentage of income spent on food.

7.0 Tutor - Marked Assignment

1. What factors would determine the demand for a named agricultural product?
2. Using diagrams show cases of elastic, inelastic, unitary, and infinity price elasticities of demand.

8.0 References and Further Reading

Dahl, C. D. and J.W. Hammond (1977). Marketing and Price Analysis: The Agricultural Industry.
McGraw-Hill Book Co. New York, Chapter4.
Kohls, R.L. and J.N. Uhl (1980) Marketing of Agricultural Products. Macmillan Publishing Company,
New York, Chapters 8

Lipsey, R.G. (1976). An Introduction to Positive Economics 4th Ed BAS Printers Limited, Wallop, G.
Britain. Chapters 7 to 10.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria. Chapter 8.
Shepherd, G. S. and O.A. Futrell (1979). Marketing Farm Products -Economic Analysis: Iowa State
University Press, Ames, Iowa, pp 30-89.

Shepherd, G. S. (1963). Agricultural Price Analysis, Iowa State University, Press Ames, 5th ed.,
Chapters 4 to 6.

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UNIT 2 ELEMENTARY THEORY OF SUPPLY

1.0 Introduction

In the previous unit you learnt about the theory of demand. The other side of the coin is the theory of
supply, the understanding of what is needed to determine the equilibrium quantity and price of the
agricultural commodity.

2.0 Objectives
By the end of this unit you will be able to:
 Explain what supply is
 Explain the factors affecting supply of agricultural products
 Determine price elasticity of supply
 Explain interrelationships between supply and demand
 Explain resultant effects of shifts in demand and supply curves

3.0 Main Body

3.1 What Is Supply?

Supply is defined as the quantity of a commodity that producers are willing and able to offer for sale at a
given price and time. The supply schedule is a table that shows the quantity of a commodity supplied at
different prices.

Table 8: Supply schedule for cowpea (Hypothetical Dada).

Price per kilogram (N) Quantity supplied (tones/week)

2.00 5000
2.50 6000
3.00 6500
3.50 6900
4.00 7300
4.50 8000

Table 8 shows that the quantity supplied increases as price increases. If we plot a graph of quantity supplied
against the respective prices, the resulting curve is referred to as the supply curve as depicted in Figure
24.

The supply curve is positively sloped indicating that producers are to supply more as price rises. This is
related to the profit maximum objective of the rational producer.

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Price per Unit of S

Commodity

S
0
Quantity of commodity

Figure 24: Supply Curve for a commodity.

3.2 Factors Affecting Supply of Agricultural Commodities

The following factors affect the supply of an agricultural commodity:

a. Prices of the commodity

b. Prices of other competing products (relative prices);
c. Changes in prices of factors of production or inputs;

d. Changes in the number of firms or producers;

e. Goal of the producer;
f. Changes in technology.
Changes in the price of a commodity will cause the quantity supplied to change. This is called the
own price effect. There is a direct relationship between price and quantity supplied such that as
the price of a commodity increases the quantity supplied rises and vice versa. This relationship is
illustrated in Figure 25. As price rises from P1 to P2 quantity supplied rises from q1 to q2. It should
be noted that changes in the price cause movement along the same supply curve. It does not bring
about a shift of the supply curve.

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Price per Unit of Commodity

B
P2

Quantity of commodity
P1 A

S
0 q1 q2

Figure 25: Movement along the supply curve

Change in all other factors b to f will cause a shift in the position of the supply curve. For example assuming
there is an increase in the prices of some or all the factors of production, such as fertilizer, insecticides,
labour and herbicides, the supply curve will shift from SS to S1S1. At the same product price P1 the quantity
supplied falls from q1 to q2. This is shown in Figure 26.

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S1 S
Price per Unit
of Commodity

P1

S1
S

0 q2 q1
Shift in supply curve
Figure 26: Movement along the supply curve

3.3 Elasticity of Supply

Price elasticity of supply is the responsiveness of supply to change in price. It is measured as: Es=

If Es is greater than 1 the supply curve is said to be elastic. If Es is less than 1, the supply curve is said to be
inelastic. If Es is equal to 1 the supply curve has unitary elasticity.

Agricultural products generally are inelastic in supply in the short-run. This means that a proportionate
change in price will cause a less than proportionate change in quantity supplied. Agricultural products are
generally inelastic in supply because time lag is required for production to adjust to changes in price. For
example, if prices of food grains increase in March, the quantity supplied cannot increase much in the
short run, because farmers can only supply from the quantity produced in the previous year. The necessary
adjustment can only be made against the next production season. The response is much more delayed in
case of tree crops.

3.4 Interrelationships between Supply and Demand

The theory of demand and supply provides the key to the market process as the prime determinant of
prices. Price theory holds that all things being equal, as prices increase so demand falls and supplies
increase.

Figure 27 depicts the demand and supply schedules for a given commodity. For the purposes of
illustration, assume that the product is rice. These schedules indicate the quantity of the product
demanded and supplied at various prices within a given time period. At the intersection of these two
curves is the point of equilibrium, the price at which the quantity supplied by sellers equates the quantity

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demanded by buyers. In this example, the equilibrium price is P1 per kg of rice. And the quantity at the
point of equilibrium is Q1.
The interrelationship is established between the demand and the supply curves. This is needed to
establish the price and quantity at which both demand and supply sides agree.

3.5 Resultant Effects of Shifts in Demand and Supply Curves

3.5.1 Shift in supply curve (demand curve constant)

The equilibrium situation at point E 1 in Figure 27 remains potent only when the assumption of “all
things being equal” holds. If however, the producers were to cut back supply because factors of
production have become more expensive, the supply curve SS now shifts to the left (i.e. decreases) to
S1S1. A new equilibrium price P2 and a new equilibrium quantity Q2will now be established. The
resultant effect of this change is a lower quantity of the product and a higher equilibrium price while the
demand curve remains unchanged.

D
S1

S
P2 E2

Price per kg S1
of rice
E1
P1

D
S

0
Q2 Q1
Quantity of price

Figure 27: Upward shift in demand curve

3.5.2 Shift in demand curve (supply curve constant)

It is also possible that the supply curve remains constant but if, for example, the incomes of the consumers
increase and favour consumption of more rice, the demand curve can shift to the right (i.e. increase). The
equilibrium point before the shift in demand curve is E1 (Figure 28) and the new equilibrium point is E2. The
equilibrium price increases from P1 to P2 while the equilibrium quantity increases from Q1 to Q2.

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D1

P2 E2

Price per
kg of rice D1
P1 E1

S
D

0
Q1 Q2
Quantity of price

Figure 28: Upward shift in demand curve

It is also possible to have shifts in both supply and demand curves simultaneously. The resultant effects will
depend on which one shifts more than the other.

4.0 Self Assessment Exercise

Graphically show what happens to equilibrium price and quantity when both supply and demand curves shift to
(i) the right (ii) the left.

5.0 Conclusion
In this unit you have learnt how to define supply and the factors affecting supply of agricultural products.
You have learnt how to determine price elasticities of supply, explain interrelationships between supply
and demand and explain resultant effects of shifts in demand and supply curves.

6.0 Summary
In this unit you have learnt that:
 Supply has to do with the quantity of a commodity producers are willing and able to sell at a given price
 The supply schedule is a table that shows the quantity of a product supplied at different prices.
 The most important factors that affect supply are:
 Prices of the commodity
 Prices of other competing commodities

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 Changes in prices of factors of production or inputs;

 Changes in the number of firms or producers
 Goal of the producer

1. Changes in technology
2. Elasticity of supply is the responsiveness of quantity supplied to a unit change in price.
3. The law of supply states that supply will rise if prices rise.
4. If elasticity of supply is greater than one, the product is said to be elastic in supply.
5. If elasticity of supply is less than one it means that supply is inelastic and a proportionate change in
price causes a less than proportionate change in quantity supplied
 When the elasticity of supply is equal to one a proportionate change in price causes equal
proportionate change in quantity supplied and said to have unitary elasticity.
 At the intersection of these two curves is the point of equilibrium, the price at which the quantity
supplied by sellers equates the quantity demanded by buyers.
 When supply curve shifts to the left, demand curve held constant, the resultant effect of this
change is a lower equilibrium quantity of product and a higher equilibrium price.
 When the demand curve shifts to the right, supply curve remaining constant, the equilibrium
price and quantity both increase.

7.0 Tutor – Marked Assignment

1. What factors are responsible for shifts in the supply curve?
2. What does it mean if the elasticity of supply is:
i) greater than one?
ii) less thanone?
iii) equal to one?

8.0 References an Further Reading

Dahl, C. D. and J.W. Hammond (1977). Marketing and Price Analysis: The Agricultural Industry.
McGraw-Hill Book Co. New York, Chapter4.
Kohls, R.L. and J.N. Uhl (1980) Marketing of Agricultural Products. Macmillan Publishing Company,
New York, Chapter 8

Lipsey, R.G. (1976). An Introduction to Positive Economics 4th Ed BAS Printers Limited, Wallop, G.
Britain. Chapters 7 to 10.

Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria. Chapter 8.
Shepherd, G. S. and O.A. Futrell (1979). Marketing Farm Products -Economic Analysis: Iowa State
University Press, Ames, Iowa, pp 30-89.
Shepherd, G. S. (1963). Agricultural Price Analysis, Iowa State University, Press Ames, 5th ed.,
Chapters 4 to 6.

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MODULE 9 AGRICULTURAL PRICES

Unit 1 Causes and Types of Price Fluctuations

Unit 2 Measures of Reducing Price and Income Variations
Unit 3 Empirical Price Analysis

UNIT 1 CAUSES AND TYPES OF PRICE FLUCTUATIONS

1.0 Introduction

In this unit we shall explain the persistent patterns of price behaviour through time. Such behaviour
includes seasonal patterns of change, yearly variation, trends and cycles
2.0 Objectives

By the end of this unit you will be able to:

 Explain how price behave over time
 Enumerate causes of price variations
 Enumerate types of price variations
3.0 Main Body

3.1 Price Behaviour

Prices that are observed over time are the result of a complex mixture of changes associated with
seasonal, cyclical, trend and irregular or random factors. The most common feature observed in
agricultural prices is a clearly marked seasonal pattern of change. Usually prices of storable products
such as cereals and leguminous grams are depressed to the lowest level at harvest time and then rise
as the season progresses, reaching a peak just before the next harvest. These price variations are
caused by a number of factors.

3.2 Causes of Price Fluctuations

a. Divergence between planned output and realized output

Agricultural products especially crops depend very much on weather conditions. Depending on the
climatic and ecological conditions, actual output may be greater or less than what was planned. Such a
divergence in output is not applicable to industrial products because they are not directly affected by the
vagaries of weather and the destructive activities of pest and diseases. The biological nature of the
agricultural industry makes this divergence inevitable and thus results in price fluctuations.

b. Speculative activities of the middlemen

The activities of speculative middlemen can bring about seasonal price fluctuations in that they buy
agricultural commodities at harvest time when they are cheap, store them and release them to the market
when prices rise. This activity could result in artificial scarcity, which forces food prices up.

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c. Seasonally in production and marketing

Most agricultural products are characterized by some seasonality in production and marketing patterns. Most
crops which are produced under rain fed conditions have clearly defined production seasons and off seasons.
They are harvested once in year and depending on perishability, they may be stored for sale during the off-
season. For livestock products seasonality in production is mainly due to seasonal variation in climatic
conditions, seasonality of feed supplies and the biological nature of the particular livestock concerned. For
example, chickens do better in the dry season than during the rainy season. The reason is that birds are more
susceptible to diseases during the rainy season than in the dry season. This type of seasonality in production
gives rise to seasonality in supply, which in turn leads to seasonal price variation.

d. Changes in Demand and Supply

The economy is in a dynamic state moving up and down over time and producing variations in income and
purchasing power. This factor affects the demand for farm products causing the demand curve to shift either to the
left or to the right. With agricultural production dependent upon factors, outside man's control, the supply curve
for the individual commodities also shifts. These changes in demand and supply produce fluctuations in prices.
The extent of these price fluctuations will, however, depend upon the magnitude of the shifts in demand and
supply and also on the elasticities of demand and supply.
It is expected that both demand and supply will be increasing over time. Supply could decrease due to
improvement in technology while demand could rise due to increase in population and income resulting from
economic growth. In view of the inelastic nature of both the demand and supply curves for agricultural products,
such shifts will give rise to wide variations in agricultural prices.

3.3 Types of Price Fluctuations

We shall limit our discussion to seasonal and cyclical price variations which are the most common types of price
variations.
(a) Seasonal price variation.

These are regular patterns of price fluctuations that occur within a year. Owing to the dependence of
agricultural production on climatic factors. there are definite periods of high and low production for
different commodities and the prices vary accordingly depending on the season

The prices of most farm products do not remain constant throughout the season; they follow some regular
seasonal patterns. Seasonal prices reach their lowest level at harvest time and their peak a few weeks to the
new harvest. Figure 29 and Tables 29-32 show seasonal price variation for cereal grains in Zana, Kaduna
State of Nigeria.

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From the figure and tables it can be seen that seasonal prices for cereal grains in Zaria reach their lowest level
around January when all grains must have been harvested from the farm. The prices incrase
progressively through the preceding months and reach a peak around September just before the new harvest
sets in.

Livestock and many other perishable agricultural products such as fruits and vegetables are produced all the
year round. In spite of this feature, however, the level of production varies seasonally due to the biological
nature of the product, weather patterns, seasonally in demand and seasonal difference in production
costs. As market supplies vary within the year due to one or a combination of the above factors, prices
also show seasonal patterns that are often fairly consistent from year to year. For example, during the
Christmas and Sallah celebrations, the prices of rams, chickens and beef rise and fall shortly after these
seasonal events.

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(b) Cyclical price variation

A. cycle is a pattern that repeats itself regularly with the passage of time. A true cycle is self-sustaining and not
the result of chance factor. There is controversy in the literature as to whether such cycles exist in
economics. Perhaps the most commonly accepted causes of agricultural cycles
are exogenous factors such as drought and diseases.

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Certain farm prices fluctuate in a rather regular manner through a period of time in addition to
fluctuating erratically from year to year. Livestock production and prices more or less have a regular
cycle. The price cycle runs opposite to the production cycle, that is, when production increases, it
depresses prices and this movement is reversed after sometime.
Cyclical movement in prices is more irregular than that of production. For example, the price of broilers
increases if demand is increasing faster than supply. Eventually the supply rises to keep pace with the
increase in demand. With time, supply may overtake demand and finally depressing prices at the peak
level of supply. Figure 30 shows the cyclical movement in prices and production.

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Price in time

Peak
Peak
One Cycle

Price
Cycle

Production
Trough Cycle
Quantity in time

Figure 30: Cyclical price movement.

Generally, cyclical price variations can be explained by the tendency of the producers to base future
production plans on prices and profits of current and recent past operations. Such cycles are more
applicable to commodities over which the farmer has considerable control in its production such as cattle,
eggs, broilers and hogs. The length of a cyele (called the period) is the time from one peak to the next or
from one trough to the next and it is usually related to the time required to produce a new generation, thus it
depends on the biological nature of the products. The hog cycle is approximately four years long, for
poultry (layers) it is approximately two years and for cattle about ten years. The height of a cycle is called
the amplitude. The length and amplitude of a cycle over time varies.

Cyclic movement in the prices of certain farm products is an evidence of imperfection in the functioning of
the marketing system over a period of time. They cause alternate periods of shortage and glut. They partly
result from imperfect forecasting of prices on the part of producers.
4.0 Self Assessment Exercise
Discuss two important ways in which agricultural price fluctuations could be minimized.

5.0 Conclusion
In this unit you have learnt about how prices vary, the causes and the types of price fluctuations.
6.0 Summary
In this unit you have learnt that:
 Prices that are observed over time are the result of a complex mixture of changes associated
with seasonal, cyclical, trend and irregular or random factors.

 Causes of Price Fluctuations are

 Divergence between planned output and realized output

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 Speculative activities of the middlemen

 Seasonally in production and marketing
 Changes in Demand and Supply

 Types of Price Fluctuations discussed here are seasonal and cyclical price variations which are the most common
types of price variations.

7.0 Tutor- Marked Assignments

1. Mention and discuss the two important types of agricultural price variations.
2. Discuss the major causes of agricultural price fluctuations.

8.0 References and Further Reading

Dahl, C.D. and T.W. Hammond (1977). Marketing and Prce Analysis: The Agricultural Industry.
McGraw- Hills Book Co. New York, Chapters.
Jones. W.O. (1968). "The Structure of Staple Food Marketing in Nigeria as Revealed by Price Analysis". A
Publication of the Food Research Institute, Stanford University.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:Principles and
Applications. Living Books Series, GU Publications, Abuja FCT Nigeria. Chapter 9
Shepherd, O.S. and O.A. Futrell (1970). Marketing Farm Products Economic Analysis. Iowa State
University Press, 5th ed. pp. 116-145.
Tomek, W.O. and K.L., Robinson (1972). Agricultural Product Prices. Cornell University Press, pp. 168-
193.
Todaro, M. and Smith, S. (2003). Economic Development. Pearson Education Ltd, India.
Ukaoha, B. (2007). "World Trade Organization (WTO) and Agriculture in Developing Countries". Thisday
Newspaper, Wednesday, March 21,2007. p. 61.

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UNIT 2 MEASURES OF REDUCING PRICE AND INCOME VARIATIONS

1.0 Introduction

You learnt in the previous unit that variations in prices of agricultural products are inevitable as a result of
many factors outside the control of the farmer. In this unit you will learn the measures that farmers and the
government can take to reduce the variations.
2.0 Objectives

By the end of this unit you would be able to explain the measures that can be used to reduce price and
income variations
3.0 Main Body

3.1 Measures to reduce price and income variations

There are a number of measures which both the government and farmers can adopt to reduce price
variability which in turn affect farmers' income and consumers' purchasing power. These measures are:
a. Price control
b. Output control
c. Future or contact sale

3.2 Price Control

This is a measure which the government could adopt to regulate prices. There are two types of price control
namely:
 Maximum price control or price ceiling and
 Minimum price control.
i. Maximum price control

The aim of fixing maximum price for a commodity is basically to increase consumers' purchasing power.
This is usually done when the government feels that the prices of commodities are too high probably above
the reach of the average consumer. Successive governments in Nigeria have at one time or the other
attempted to fix prices of commodities with little success. Usually a maximum price is fixed below the
equilibrium or market price.

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Price

Pe Pc

Excess
Demand
0
qs qd
Quantity

Figure 31: Maximum price control.

In Figure 31, Pe is the market price which the government considers high and therefore fixes Pc as the
control price. The control price. PC, is lower than the market price, therefore it gives rise to excess demand.
Since demand is in excess of supply at that price, there will be an upward pressure on price which tends
to render the control price ineffective. It encourages hoarding and preferential sales. Under such a situation the
commodity could disappear from the regular market into a black market where sellers will charge prices higher
than the control price.

For the control price to be effective the following should be done:

(a)Rationing of the commodity should be done to ensure that every consumer has access to some quantity of the
scarce commodity no matter how small.
(b)Price control inspectors should be posted to strategic markets to ensure that sellers keep to the control price.
This is, however, a costly exercise.
(c)The authority controlling the price should be in a position to supply the excess demand. If this is done, the
supply curve appears to have shifted to S'S' (Fig. 32) making the control price appear as a new equilibrium price.

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Quantity of Commodity

Price per D S
Unit of
Commodity S1

Pc
S D

S1
0
qc Quantity of Commodity

Figure 32: A new equilibrium price as a result of shift in supply curve.

If the government is not able to do any or all of the issues discussed above, price control will not be effective,
instead it would worsen the situation..
ii. Minimum price control
In this case the price is usually fixed above the market price. The objective of this policy is to help farmers get
a good price for their produce in the face of low demand.

Table 32: Minimum price control.

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In Figure 9.5, Pc is the controlled price which is above the market price, Pe. At the control price, supply is
greater than demand. This type of price control can only be effective if the price control authority is able to
buy off the excess supply, otherwise there will be a downward pressure on price and price will fall back to
Pe. This was the situation with the cotton marketing system in Nigeria where various state governments
recommended a minimum price at the beginning of the 1990 season but they were not in a position to buy the
excess supply at that price.
3.3 Output Control
Output control is achieved in the following two ways:
i. Quota system and

ii. Buffer stock mechanism.

i. Quota System
Under this system each farmer is assigned a certain quota to produce and he is penalized if he exceeds
his quota. This is usually done in respect of export crops e.g. cotton, cocoa, coffee etc. which are usually
sold in quota markets at certain prices higher than what obtains in non-quota markets. The aim is to ensure
that there is no glut or excess supply in the world market which could bring down the price of the
commodity. Under some international arrangement, each coffee member country is assigned a certain
quota of the product which can be sold m the quota market. In such a case, each country specifies to its
farmers the amount they should produce. Any farmer who produces more than the quota allocated to him
has to sell the excess outside the quota market where he is likely to receive lower prices.

ii. Buffer Stock

The producers through cooperative or group effort could adjust supply

according to the demand situation in the local market by storing the excess and releasing stocks as the need
arises. By so doing they are
able to stabilize agricultural prices which imply stability in farmers' income.

Suppose in a certain year output is OQo at equilibrium price OPo as shown in Figure 34 .If output in another
year is OQ1, excess produce supply will cause farm price to fall to OP1. In order to stabilize prices and income,
the farmers will store the excess Q1 - Qo and the price will remain stable at OPo, the equilibrium price. If,
on the other hand, output in the next year is OQ2, demand will exceed supply that year, and the price will tend
to rise to OP2. Since the association has some quantity in stock, they will release an amount equal to Qo-Q2,
which will equalize demand and supply and restore price to the original level Op0.

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iii. Contract or Futures Sale

This is another method by which farmers can guard against the uncertainty of price fluctuations. This
involves an agreement between a manufacturer, processor or contractor and a farmer or farmer's group to
produce and deliver a specified grade and quantity of farm produce at an agreed price to the agribusiness
firm at a stipulated future date. A contract of this nature has a number of advantages. Apart from helping
to reduce variability in prices, the buyer could give precise information about his needs, thus the producer
could more efficiently organize his resources to meet up the supply which assures him a guaranteed
market. Secondly, the assurance of a market enables the producer take advantage of economies of scale in
production which leads to lower unit cost of production and consequently of the product to the consumers.
The contract price varies according to the terms of the contract. It could be the ruling market price at the
time of delivery or a price agreed at the time of signing the contract which may be fixed for a period of
time, In recent times, selling by contract is becoming very important in Nigeria as manufacturers and
processors look more towards the domestic agricultural base for the sourcing of their raw materials.
4.0 Self Assessment Exercise
Explain how the buffer stock works by using a diagram.

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5.0 Conclusion
In this unit you have learnt the measures for reducing price and income variations.

6.0 Summary
In this unit you have learnt that the measures for reducing price variations are price control, output control and future
or contact sales.

7.0 Tutor- Marked Assignments

Discuss two ways in which agricultural price fluctuation could be minimized.

What is the advantage of contract and future sale? .

8.0 References and Further Reading

Dahl, C.D. and T.W. Hammond (1977). Marketing and Prce Analysis: The Agricultural Industry.
McGraw- Hills Book Co. New York, Chapters.
Jones. W.O. (1968). "The Structure of Staple Food Marketing in Nigeria as Revealed by Price Analysis". A
Publication of the Food Research Institute, Stanford University.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria. Chapter 9
Shepherd, O.S. and O.A. Futrell (1970). Marketing Farm Products Economic Analysis. Iowa State
University Press, 5th ed. pp. 116-145.
Tomek, W.O. and K.L., Robinson (1972). Agricultural Product Prices. Cornell University Press, pp. 168-
193.
Todaro, M. and Smith, S. (2003). Economic Development. Pearson Education Ltd, India.
Ukaoha, B. (2007). "World Trade Organization (WTO) and Agriculture in Developing Countries". Thisday
Newspaper, Wednesday, March 21,2007. p. 61.

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UNIT 3 EMPIRICAL PRICE ANALYSIS.

1.0 Introduction

Empirical price analysis deals with the calculation of index numbers and parity prices. These indices are
useful for assessing how much the price of a certain good has changed over the years whether it is better or
worse off.

2.0 Objectives

By the end of this unit you will be able to calculate index numbers.
3.0 Main Body

3.1 Index Numbers

These are ratios or weighted averages used to measure changes in agricultural product prices over time.
There are two types of index numbers namely (A) Price relatives sometimes called simple index number
and (B) Ordinary index number.
3.2 Price relatives
Price Relatives is used in the analysis of a single product, while the index number is used to measure
changes for a group of products.

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relative is given by:

P=

Where P = price relative P1 = price in a given year Po = price in the base year.
The price relative gives an indication of how much the price of a commodity in a given year has changed over
that of the base year. In Table 14, the nominal price of the commodity in 1987 was 12300 per tonne; the price
relative was 223, which means that the price of the commodity in 1987 was 123% higher than its price in the
base year (1983). If the price relative is less than 100, it means that the price of the commodity has fallen in the given
year compared to the price in the base year.
3.3 Ordinary index number
This is used to compare prices of a group of related products. For example, if we want to know how prices of
farm products as a group have changed over a number of years, we first of all have to add up or average the prices
of the different products into a single figure for each year.
This single figure is called an index number. The two related approaches used in computing index numbers
are:

i. The ratio of aggregates

ii. The average of relatives.
3.3.1 Ratio of aggregates
In using this method to calculate index number, prices of different products are added up each year and the sum is
divided by the sum of the prices in the base year.

P=

Where P = Price index

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P1 = Prices of products in a given year

P0 = Prices of the products in the base year

∑ = Summation symbol.

This simple formula gives all products equal weight but in reality it is important to give each product its
proper weight commensurate with its importance. In doing this the product price has to be multiplied by
the quantity sold. Two formulae that are commonly used in computing index numbers are:

i. Laspeyres formula and

ii. Paashe formula

(i) Laspeyres formula makes use of the quantity sold in the base year. It is given by: P=

Where
P = index number
P0 = Price in the base year P1 = Price in a given year

q0 = quantity sold in the base year.

(ii) Paashe formula makes use of the quantity sold in the given year for weightage. It is given by:

P=

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Using Laspyres formula we have:

P=

The above example implies that the general prices of these products increased in the given year by 26.42%
over those of the base year. Using Paashe formula we have:

P=

This means that in general, prices of the products increased by 25.47% over the base year.

3.3.2 Average of Relative

This approach relates changes in the prices of the commodities between the base year and the given year.
For example, in Table 15 the relative change in the price of wheat is

and for rice it is The formula is given by:

P=

3.4 Uses of Index Numbers

Index numbers are used for a number of purposes.

a. It enables comparison of welfare for two different periods of time for individuals or groups. This is done
by looking at whether prices have increased or fallen over the period of time under comparison.

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b. It makes it possible for prices and quantities of commodities sold to be compared over time for a group of
commodities.
c. It is used in computing appropriate prices for commodities in a situation where price is fixed or where
price control or price support is practiced.

3.5 Parity Price

Parity price is a concept that is more popular in the developed countries especially U.S.A. where the
government shows a lot of concern about the purchasing power of the farmers. It is the price which is
necessary to give farm products the same purchasing power per unit for goods and services used in both
production and family consumption relative to prices that prevailed in the base year. In other words, parity
prices are prices computed for agricultural commodities that farmers sell which would give them the same
purchasing power that prevailed in the base year.

The aim of parity price is to come up with a price such that the purchasing power and standard of living of
farmers do not fall relative to prices received in the base year.

PP =

4.0 Self Assessment Exercise

Given the table under tutor-marked assignment below calculate 1)Price relative 2) Ratio of aggregates 3)
Average relative
5.0 Conclusion
In this unit you have learnt how to calculate index numbers.
6.0 Summary
In this unit you have learnt how to calculate index numbers such as:
 Price relatives
 Ratio aggregates
 Laspeyres index
 Paashe index
 Average relatives
 Parity price

7.0 Tutor- Marked Assignments

1. If you are told that the price index for a certain farm product is 85 and 120 in1980 and 1986 respectively,
how would you interpret that?
2. Given the following data calculate the index using (I) Paashe formula and (L) Laspeyres formula.

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8.0 References and Further Reading

Dahl, C.D. and T.W. Hammond (1977). Marketing and Prce Analysis: The Agricultural Industry.
McGraw- Hills Book Co. New York, Chapters.
Jones. W.O. (1968). "The Structure of Staple Food Marketing in Nigeria as Revealed by Price Analysis". A
Publication of the Food Research Institute, Stanford University.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria. Chapter 9
Shepherd, O.S. and O.A. Futrell (1970). Marketing Farm Products Economic Analysis. Iowa State
University Press, 5th ed. pp. 116-145.
Tomek, W.O. and K.L., Robinson (1972). Agricultural Product Prices. Cornell University Press, pp. 168-
193.
Todaro, M. and Smith, S. (2003). Economic Development. Pearson Education Ltd, India.
Ukaoha, B. (2007). "World Trade Organization (WTO) and Agriculture in Developing Countries". Thisday
Newspaper, Wednesday, March 21,2007. p. 61.

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Module 10 International Trade

Unit 1 Basis for International Trade

Unit 2 Free Trade versus Protection
Unit 3 Commodity Exchange Market4
Unit 4 Nigerian Organizations and International Marketing

UNIT 1 BASIS FOR INTERNATIONAL TRADE

1.0 introduction

It is often said that no country can live in isolation as one country depends on another for certain reasons.
International trading is one of the ways nations meet the needs of their citizens. In this module you will learn
what forms the basis for international trade.
2.0 Objectives
By the end of this unit you have learnt about:
 Basis for international trade
 Advantages of international trade
 Terms of trade and exchange
 Assumptions of international trade

3.0 Main Body

3.1Basis for International Trade

The Nigerian agricultural sector has played a leading role in foreign trade for a long time. Nigeria has been
a major exporter of agricultural products such as cocoa beans, rubber, groundnut and cotton since the
colonial period. The country has also been importing such commodities as wheat, rice, maize, cars and
electronics from the United States of America, Western European countries and some Asian countries. The
structure of our imports has changed since 1986 following the ban imposed on the importation of food
grains such as wheat, rice and maize. Tables 16 and 17 show the share of the various components of our
imports and exports from 1986 to 1988.

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Table 16: Imports of major commodities by sector (N millions)

Source: Central Bank of Nigeria Annual Report and Statement of Account, 1988

International trade is defined as trade between different countries of the world. Where it is between two
countries, it is called bilateral trade and where more than two countries are involved, it is called
multilateral trade.
International trade came about as a result of differences in the structure of demand and resource endowment
of different countries. On the demand side, a country may be able to produce a particular good but not in the
quantity it requires. For example, Nigeria is able to produce some quantities of wheat but definitely not enough
to meet the demand for the produce. In the same manner U.S.A. is a net importer of oil, even though U.S.A. has
oil deposits.
On the supply side, some countries are better at producing some particular goods and services than others.
The advantages they possess for the production of these goods and services cannot be easily transferred.

Factors of production are not evenly distributed throughout the world. For example, a country may have
abundance of fertile land, while another is blessed with skilled manpower. Various resources of capital,
mineral deposits, skilled and unskilled labour, tropical and temperate climate are factors possessed by
different countries at different levels. Therefore there is the need for different countries to specialize in the
production of those goods and services for which they have the greatest comparative advantage. For
example, European countries lack the tropical climate needed for the production of spices, tea, banana,
plantain, cocoa, oil palm produce etc. Therefore they have to rely on tropical countries of Africa and Asia
to supply them these items while they in turn specialize in the production of manufactured goods such as
automobiles, aircrafts, electronics etc which the other counties do not have the skilled labour and capital
to produce.
Since it is difficult to transfer these factors of production from one country to another the alternative is
to move the goods and services produced by these factors. Provided the terms of trade are appropriate,
this results in countries specializing in the production of these goods and services for which they have the
greatest comparative advantage and exchange them for the goods of other countries. Thus international
trade gives rise to international specialization.

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Table 17: Export of major commodities by economic sector

3.2 The Advantages of International Trade

1. It enhances International specialization

Specialization leads to increase in output and reduces the unit cost of production. Therefore specialization
by countries has the potential of improving the standard of living for all the countries,

2. Widens scope of product consumption

International trade gives a country the opportunity to enjoy trig goods and services which she is unable
to produce or which she can not produce in sufficient quantities. For example, we are able to ride cars, use
aero planes, trains, telephones, and computer services in Nigeria. as a result of international trade.
Similarly, countries like Ghana and Niger Republic for instance, are able to buy petroleum products for
their automobiles as a result of international trade.

3. Widens the scope of the market

As a result of international trade, there is a wider scope of market for every product. Thus international
trade enables the benefits of large scale production to be fully exploited.
4. Increases competition
International trade increases competition and thereby promotes efficiency in production. Where there is
free trade, a monopolistic market structure cannot exist as goods have to flow in from other countries to
compete with local firms that would have enjoyed monopoly power.

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5. It promotes international relations.

International trade fosters friendship and cooperation between countries. For example, the EEC countries are
more united and enjoy a greater degree of cooperation because of the common market they share. Likewise the
ECOWAS countries have more political and economic cooperation as a result of the common market in which
they participate.

3.3 The Terms of Trade and Exchange Rate

The term of trade is the rate at which a country exchanges its exports for imports. It is therefore the ratio of a
country's export to imports. The terms of trade is determined by the conditions of demand and supply (that is
real market forces) and the currency exchange rate.

When we export cocoa, rubber or palm produce, it is ultimately paid for in naira and not in U.S. dollar or pound
sterling. Thus the exchange rate (the price of a country's currency in terms of another's) is important to enable us
understand the price paid by the importer and received by the exporters. Basically the exchange rate reflects the
relative demand for exports and imports. Thus the fall in the exchange rate of the naira in the late 1980s is partly a
reflection of Nigeria's over dependence on imports. If a country's imports rise relative to her exports, the
exchange rate of her currency tends to fall. Conversely, if a country's exports rise relative to her imports, the
exchange rate of the country's currency tends to rise.

The rise in exports in Nigeria between 1986 and 1988 shown in Table 17 is due largely to the fall in the exchange
rate of the naira. Thus our products were cheaper in the currencies of the importing countries than they otherwise
would have been.

3.4 Assumptions of International Trade

The following are the basic assumptions which are necessary for the gains of international trade to be fully
realized.
i. The existence of perfect competition
ii. There should be full employment in ail the countries.
iii. The absence of currency restrictions.
iv. Trade should be free from artificial restrictions such as tariffs and quotas,
v. That no cost of transportation is involved.

4.0 Self Assessment Exercise

Explain what you understand by “Terms of Trade and Exchange”.
5.0 Conclusion
In this unit you have learnt about basis for international trade, its advantages, terms of trade and exchange and
the assumptions of international trade.

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6.0 Summary
In this unit you have learnt that:
 International trade is defined as trade between different countries of the world.
 Factors of production are not evenly distributed throughout the world and since it is difficult to transfer
these factors of production from one country to another the alternative is to move the goods and services
produced by these factors.
 It therefore makes countries to specialize in the production of these goods and services for which they
have the greatest comparative advantage and exchange them for the goods of other countries. Thus
international trade gives rise to international specialization
 The advantages of international trade are:
 enhancement of international specialization

 Widening of scope of product consumption

 Widens the scope of the market

 Increasing competition

 promoting international relations.

 The term of trade is the rate at which a country exchanges its exports for imports
 The existence of perfect competition demands that:
 There should be full employment in ail the countries.
 There should be absence of currency restrictions.
 There should be trade should be free from artificial restrictions such as tariffs and quotas and
 There should be no cost of transportation involved.

7.0 Tutor- Marked Assignment

1. Why is it necessary for a country to engage in international trade?

2. Discuss the basic assumptions underlying international trade.

8.0 References and Further Reading

Baker, M.J.(1975). Marketing: An Introductory Text. 2nd Edition The Macmillan Press Ltd London, Chapter 15.
Harvey. J. (1973) Intermediate Economics. 4th Edition, Macmillan Education Ltd., London, Chapter20.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing:

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Principles and Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Rhodes. V. J. (1978) The Agricultural Marketing System. Grid Publishing Inc.
Columbus, Ohio. Chapter 6

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UNIT 2 FREE TRADE VERSUS PROTECTION

1.0 Introduction

In the previous unit you learnt about the advantages of unrestricted international trade. However, despite
these advantages all countries use various means to protect their economies. In this unit you will learn why
countries protect their economies.

2.0 Objectives

By the end of this unit you would be able to:

 Explain economic justifications for countries protect their economies

 Explain non- economic justifications for countries protect their economies

 Explain the methods used by countries to protect their economies

3.0 Main Body

3.1 Justifications for protection of economies

There are both economic and non-economic reasons for protecting an economy against free trade. In general,
trade is controlled because governments think and act nationally rather than internationally. Although
people of the world as a whole lose when trade is restricted, those of a particular country may gain.

3.1.1 Economic Justification

(a) To improve the terms of trade:

A country could impose heavy tax on imports to discourage consumption of imported goods. If the demand
for such goods is elastic, imposition of tax will cause the demand to fall consequently leading to
improvement in the balance of trade.

(b) To protect an infant industry:

It is important to protect an industry in its infancy to enable it survive excessive competition from well
established competitors which are already producing on a large scale. The argument often advanced is that
the guaranteed home market will enable it to overcome its teething problems and with time the industry will
be strong enough to compete on the same terms with the rest of the world. The disadvantage of this is that an
industry once protected will like to continue to enjoy protection. This could lead to inefficient use of
resources and the production of inferior goods. For example, the automobile tyre industry in Nigeria has
enjoyed protection for many years and still enjoys protection, but the quality of their product for a long
time could not compete with the imported tyres.

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(c) To enable an industry to overcome shock:

Fundamental changes in the demand for goods produced by an industry could adversely affect the life of
the industry. If such an industry is protected, it will have more time to overcome the shock. For example,
the demand for Nigerian made shoes declined in the early 1980s. If these industries were not protected they
could have collapsed. Protection gave them more time to adjust.

(d) To pre vent dumping:

Goods may be sold abroad at a lower price than on the home market. This may be possible in the following
cases:
Where producers are given export subsidies. Where discriminating monopoly is possible, and
Where the producers are able to take advantage of economies of scale.

(e) To stimulate domestic employment:

During periods of global economic recession, national governments often place restrictions on imported
goods in order to ensure that the available income is spent on home-made goods, thus creating more
employment at home.

(f) To regulate consumption of harmful goods:

The government often places restrictions on the importation of goods considered to be harmful to the health
of her citizens. For example most government place heavy tariffs on tobacco, alcohol and spirits. The aim of
the high tariff is to discourage the consumption of those goods.
3.1.2 Non-Economic Arguments

(a) To encourage the production of goods of strategic importance

Certain goods are of strategic importance and need to be produce n a country at all cost. Production of
defense weapons such as arms and ammunitions need to be done locally because reliance on other
countries to supply these goods is a security risk, This is probably one of the reasons why the Nigerian Air
Force went into the assembly of Air Beetle Aircraft for the training of its personnel, Staple food products come
under these strategic goods. A country should strive to be self-sufficient in the production of its staple food
items. Over reliance on imports as a source of supply of basic food items is risky as it could be used as a
weapon against that country during periods of war.

(b) To foster closer political ties:

In 1932, the United Kingdom imposed tariffs on many imports in order to give preferential rates to the
Commonwealth countries, ECOWAS countries could impose tariffs on goods produced outside the sub-
region in order to promote trade between the ECOWAS countries and to strengthen the ties between them.

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(c) To prosecute political objectives:

Trade has been used as a weapon of foreign policy. For example, the USA withheld wheat exports to the
USSR after the occupation of Afghanistan. The economic sanctions imposed on South Africa have gone a
long way towards dismantling apartheid in that country.

(d) To promote social policies:

Subsidies enjoyed in the agricultural sector are not only for the strategic production of food but also to
redistribute income and to assist the rural poor whose occupation is mainly agriculture.
3.2 Methods of Controlling International Trade

A number of measures are adopted by different countries to regulate the flow of free trade, the most common
ones are discussed below:

1. Customs duties:

This is a form of tax paid on imported goods as it arrives in a port or approved station. Customs duties may
be imposed to raise revenue. They are easy to collect and since they are usually levied on goods they do not
distort trade deal.

Under the Structural Adjustment Programme (SAP) in Nigeria, customs duties were used to discourage the
consumption of foreign made goods. This was done by adjusting the rate of tariff on the affected goods
from time to time as the need arose.

2. Subsidies:

The government sometimes gives subsidy to producers of export goods. The aim is to lower the cost of
production and to make a country's exports cheaper in the world market. A country that does this may most
likely increase its exports leading to improvement in its balance of trade.

3. Quotas:

This involves pegging the quantity of imports to be allowed into a country over a period of time. In essence
it implies limiting the supply of imports. Usually import license is used to stipulate the amount of goods to be
imported into a country at a given time. The main problems with quota are:

i. As a result of the artificial shortage of supply, the price may be increased by the foreign supplier or by the
importer. Hence unless the government also introduces price control, it is the importers who capture the gains
and not the public.

ii. Quota leads to corruption as many importers play have to bribe their way to be issued with import
licenses. When quotas were being used in Nigeria prior to 1986, it was grossly abused as some who
claimed to be importers got the licenses but turned around to sell them to genuine importers at exorbitant
prices. The imported goons were therefore much more expensive for consumers than otherwise.

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4. Exchange control:

In this case the government regulates the foreign exchange that is made available for the importation of
goods. All earnings of foreign currency have to be handed over to the government or its agent (the Central
Bank of Nigeria), who alone can authorize withdrawals from this fund for the purpose of paying for
imports, foreign travels, and capital movements. Nigeria has in the past used quota and exchange control to
regulate the flow of foreign trade. Exchange control is effective in controlling the amount of foreign
exchange made available for the purchase of foreign goods. The main disadvantage of this is that it
encourages illegal trade in foreign currency as it creates scarcity of foreign exchange in the country.

5. Physical Control:

This involves placing an outright ban or embargo on the importation of certain goods. For example in 1986
there was a ban on the importation of food grains such as wheat, rice and maize into Nigeria. Therefore the
country was forced to produce these grains at all cost in order to fill the gap. Similarly, strict regulations
regarding the importation of live animals such as sheep, cattle, etc., imposes constraints on international
trade.

6. Export Control:

This involves limiting the quantities or placing embargoes on export of certain goods in order to bring
down domestic prices or as part of an agreement to prevent shipment to certain enemy countries.
7. International Commodity Agreements:

This is an undertaking between two or more countries involving both the exporting and importing sides, to do a
variety of things. Usually there is some attempt to give longer term stability to a commodity market by
specifying minimum and maximum quantities traded and minimum and maximum prices to be charged within the
countries involved in the agreement.

4.0 Self Assessment Exercise

Do you support your country protecting its economy? Why or why not?

5.0 Conclusion
In this unit you have learnt about economic and non -economic reasons why countries protect their economies and
the methods used to control international trade.

6.0 Summary

In this unit you have learnt that:

 A country will protect its economy for these economic reasons:

 To improve the terms of trade

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 To protect an infant industry

 To enable an industry to overcome shock

 To pre vent dumping

 To stimulate domestic employment

 To regulate consumption of harmful goods

 A country will protect its economy for these non-economic reasons:

 To encourage the production of goods of strategic importance

 To foster closer political ties

 To prosecute political objectives

 To promote social policies

 Methods of controlling international trade are:

 Customs duties

 Subsidies

 Quotas

 Exchange control

 Physical Control

 Export Control

 International Commodity Agreements:

5.0 Self Assessment Exercise

Do you support your country protecting its economy? Why or why not?

6.0 Conclusion
In this unit you have learnt about economic and non -economic reasons why countries protect their economies and
the methods used to control international

7.0 Tutor- Marked Assignment

1. Why should a country protect its economy?.
2. What are the methods used for restricting free trade?

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8.0 References and Further Reading

Baker, M.J.(1975). Marketing: An Introductory Text. 2nd Edition The Macmillan Press Ltd ; London, Chapter
15.
Harvey. J. (1973) Intermediate Economics. 4th Edition, fvlacmillan Education Ltd., London, Chapter20.
Olukosi, J.O., S.U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.

Rhodes. V. J. (1978) The Agricultural Marketing System. Grid Publishing Inc.

Columbus, Ohio. Chapter 6

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Unit 3 COMMODITY EXCHANGE MARKET IN NIGERIA

1.0 Introduction

One important and interesting trend in international marketing is the commodity exchange market. This
unit describes what it is and its history. Another aspect you will learn is about the World Trade
Organization (WTOT).

2.0 Objectives

By the end of this unit you will be to explain what the commodity exchange is, state its history and narrate
what the World Trade Organization is all about.

3.0 Main Body

3.1 History of Commodity Exchange in Nigeria

Early attempts to formalize produce marketing in Nigeria can be traced to the 1930s when companies such as
United Africa Company. Peterson Zochonis (PZ) and John Holt were involved in direct purchases and
export of Nigeria's major agricultural commodities considered as essential raw materials for overseas
industries.

However, government's involvement in organized commodity marketing dates back to the Second World
War when the West African Produce Control Board was established to stabilize commodity prices, Produce
marketing in Nigeria falls into two broad categories, domestic trade in food items that has always been
handled mainly by private operators, and the marketing of cash crops, which until 1986 was handled by
Commodity Boards, which were monopoly public institutions.

The conversion of the Abuja Stock Exchange to Commodity Exchange was expected to give impetus to the
promotion of non-oil exports.

The Commodity Exchange was meant to assist the Federal Government in its drive to expand the horizon
and contribution of Nigeria's non-oil exports to the national coffers. This was to be made possible through
the internationalization and standardization of Nigeria's tradable commodities such as cocoa, sugar, cereals,
rubber and cotton including non-ferrous metals.

3.2 What is commodity exchange market?

A commodity exchange can be defined as a place where buyers and sellers can trade (market) their
commodities. Anyone who deals in commodities can make use of the exchange. Some of these
commodities are agricultural commodities like coffee groundnuts cocoa or maize while minerals like
silver, gold and other precious stones, gas and currency can also be traded.

A commodity exchange market is similar to stock exchange; therefore a farmer or trader cannot go directly
to the commodity exchange to transact business. Such business is usually transacted through a specialist
called a Commodity Broker. He will inform the broker whether he wants to buy or sell and the quality and
quantity involved, then the broker will go to the exchange to find him either a seller or a buyer for his
commodity. The remuneration that is paid to the broker is a commission on the transaction. In Nigeria, the
Abuja Securities and Commodity Exchange is the first to be established and it operates under the
supervision of the Federal Ministry of Commerce.

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3.3 Spot Market

This is where commodities are sold on spot and prices change by the minute. There are, however, two ways
through which trading takes place on the spot market. One is through remote negotiation; which implies
that one needs not travel to the exchange market to trade, Trading can be done through the telephone, e-
mail, telex or even fax. One is only required to phone the exchange to inform them what one wants to sell or
buy, the quantity and quality, the commodity package and where the delivery will be done. The exchange
will then contact other members by putting the information on the website, so that whosoever sees it and is
interested will contact the exchange.

The second way of trading is called floor based trading, This method requires that one goes to the
exchange to buy or sell his/her commodities. And to avoid cheating, the practice in the Nigerian
commodity exchange is for both the seller and buyer to deposit 5% of the money of the goods before the
commencement of trading. The 5% is refundable when the transaction has been effected.

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3.3.1 How the Farmers Trade on the Spot Market

The farmers and Agricultural Co-operatives who desire to transact business on the exchange must register
with a commodity broker, who will trade on their behalf. Where there are compelling reasons for the farmer
or the co-operatives to trade directly the exchange can grant access provided some strict conditions of the
exchange are met,

3.3.2 Policy Auction

This is a system by which government assists farmers and commodity merchants to sell food crops to
government so that these groups can make reasonable money when crops are surplus in the market and the
price of crops is low.

3.4 World Trade Organization and Agriculture in Developing Countries

The Uruguay Round agreement that was signed in April 1994 and became effective in 1995, established
the World Trade Organization (WTO) to replace the 47 year old General Agreement on Tariffs and Trade
(GATT). It is intended to oversee the trade agreements and settle trade disputes. The three major provisions
of the accord, from the perspectives of developing nations were:

* Developed countries will cut tariffs on manufacturers by an average of 40% in five equal annual
reductions.
* Trade in agricultural products will come under the authority of the WTO and be progressively liberalized.

* For textiles and wearing apparels, tariffs on textile imports will be reduced only to an average of 12% -
three times the average level of tariffs on other UDC imports.

Agriculture is the main stay of most people in developing countries. Some accounts put the number at

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about 80% of the entire population in these developing countries. Agriculture is therefore centered on
poverty reduction in sub-Saharan Africa, Bangladesh, China, India, etc
Most of the poor people are concentrated in rural areas and depend on agriculture. The experience of
developing countries with trade liberalization has, however, been very disappointing, Adequate tariff
justification especially in the agricultural sector is justified for a number of reasons.
(1) The means and capacity to deal with issues of price instability though common to all WTO
members, is grossly inadequate in developing countries.
(2) Majority of these developing countries do not have access to market based, complex mechanisms
to deal with risks associated with agricultural production particularly prices which can be very volatile.
(3) Some of these countries lack the financial capacity to provide adequate subsidy to farmers.

Since these developing countries harbour a large population that is dependent on agricultural production for
their livelihood, the only means of improving their living standards is to devise strategies that will protect
them from the various shocks such as volatile prices and natural disasters that can further limit production
expansion.

4.0 Self Assessment Exercise

Explain the following:

a. Spot market
b. Policy auction

5.0 Conclusion
In this unit you have learnt about what the commodity exchange is and its history. You have also learnt
about the World Trade Organization.

6.0 Summary

In this unit you have learnt the history of commodity exchange in Nigeria that:
 Early attempts to formalize produce marketing in Nigeria can be traced to the 1930s when United Africa
Company. Peterson Zochonis (PZ) and John Holt were involved in direct purchases and export of
Nigeria's major agricultural commodities as raw materials for overseas industries.

 Government's involvement in organized commodity marketing dates back to the Second World War
when the West African Produce Control Board was established to stabilize commodity prices,

 The conversion of the Abuja Stock Exchange to Commodity Exchange was expected to give impetus to
the promotion of non-oil exports.

You have also learnt that:

 A commodity exchange can be defined as a place where buyers and sellers can trade (market) their
commodities.

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 A commodity exchange market is similar to stock exchange; therefore a farmer or trader cannot go
directly to the commodity exchange to transact business. Such business is usually transacted through a
specialist called a Commodity Broker

You have also learnt about Spot Market that:

 It is where commodities are sold on spot and prices change by the minute. There are, however, two ways
through which trading takes place on the spot market.

 The second way of trading is called floor based trading,

 The farmers and agricultural co-operatives who desire to transact business on the spot market must
register with a commodity broker, who will trade on their behalf.

 There exists a system by which government assists farmers and commodity merchants to sell food crops
to government so that these groups can make reasonable money when crops are surplus in the market and the
price of crops is low.

You have also learnt that the World Trade Organization (WTO) born out of the Uruguay Round agreement
which became effective in 1995 oversees the trade agreements and settles trade disputes.

7.0 Tutor-Marked Assignment

Write short notes on;
a. Commodity Exchange Market
b. World Trade Organization (WTO)

8.0 References and Further Reading

Baker, M.J.(1975). Marketing: An Introductory Text. 2nd Edition The Macmillan Press Ltd London, Chapter 15.
Harvey. J. (1973) Intermediate Economics. 4th Edition, fvlacmillan Education Ltd., London, Chapter20.
Olukosi, J.O., S. U. Isitor and M. O. Ode (2012) Introduction to Agricultural Marketing: Principles and
Applications. Living Books Series, GU Publications, Abuja FCT, Nigeria.
Rhodes. V. J. (1978) The Agricultural Marketing System. Grid Publishing Inc.
Columbus, Ohio.Chapter 6.

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UNIT 4 NIGERIAN ORGANIZATIONS AND INTERNATIONAL MARKETING

1.0 Introduction

Nigerian government has always encouraged Nigerians to go international because of this; they have set
up agencies to encourage such activities There are so many agencies in Nigeria regulating export and
import activities and equally on how foreigners will set up business in Nigeria. In this unit we examine
these organizations that aid international business. Some of these agencies include Central Bank, Export-
import Bank, Nigerian Export Promotion, Nigeria investment promotion council, among others.
2.0 Objectives
By the end of this unit you should be able to:

 Explain what Nigerian investment promotion council is and its contribution to international
business.
 Explain the contribution of Nigeria export promotion council to boost export in Nigeria.
 Explain how Nigeria export processing zone scheme has been able to facilitate export and
 Explain the supervisory role of central bank in facilitating international business.

3.0 Main Body

3.1 Nigeria Organizations

There are so many organizations involved in regulating international business in Nigeria. NAFDAC, SON
and other agencies assists in moderating business in Nigeria. Specifically, the organizations examined in
this unit include:
 Nigeria investment promotion commission
 Nigeria export promotion council
 Nigeria export import bank.
 Nigeria export processing zone scheme
 Central bank of Nigeria

3.2 Nigeria Investment Promotion Commission (NIPC)

Deciding to invest in a country is never an easy task. It requires crucial information, research and planning.
This led to the formation of the Nigerian Investment Promotion Commission (NIPC) in July 1995. The
NIPC is an indispensable ally of potential foreign investors. The NIPC is tasked with overcoming the
bureaucratic and institutional red tape that had previously discouraged foreign investors especially from
taking advantage on Nigeria’s wealth of opportunities.

Located in Nigeria’s capital, Abuja, the NIPC building is open, modern and efficient-looking. A one- stop
necessity for potential investors, it serves as a central investment approval agency, streamlining the
activities of ministries, government departments and agencies involved with investment promotion. It
helps in matters such as registration or incorporation of foreign enterprises, obtain expatriate quotas or find
out specifics about the different tax regimes for sectors like cargo, oil or mining. It also serves as a catalyst

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for injecting the much-desired foreign capital into Nigerian economy through investments. It allows
foreigners and local investors alike wishing to own up to 100% shares in investments in the country. It also
encourages and promotes competition in the economy.

Functions: The NIPC performs the following functions:

• Advises government on policy issues related to investment.
• Guarantees the protection of foreign interests in Nigeria against expropriation.
• Administers appropriate incentives packages available to investors.
• Guarantees transferability of profits and other funds by investors.
• Initiates, organizes and participates in promotional activities such as trade fairs, exhibitions, workshops,
conferences and seminars to simulate and attract investment.
• Identifies difficulties and problems encountered by investors, proffer solutions and render assistance to
them.

Services
 Provides up-to-date information on investment opportunities available in the country.
 -Links foreign investors with local partner
 -Issues business permits to foreign investors.
 Coordinates the issuance of expatriate quota.
 -Negotiates in consultation with appropriate government agencies, specific incentive packages for
investors.
 -Enters directly into bilateral agreement with investors for proposes of investment.
 Identifies specific project and invites interested investors to per take in them and more

3.3 Nigerian Export Promotion Council NEPC)

The Nigeria Export Promotion Council (NEPC) was established through the promulgation of the Nigerian
Export Promotion Council Act No. 26 of 1976 and formally inaugurated in March 1977. This Act was
amended by decree no. 72 of 1979 and further amended by the Nigeria Export Promotions) Decree no 41
of 1988 and complemented by the Export Promotion Miscellaneous Provisions Decree No. 18 of 1986.
Furthermore, the Nigerian Export Promotion Council Amendment Decree No 64 of 1992 was promulgated
to enhance the performance of the Council by minimizing bureaucratic bottlenecks and increasing
autonomy in dealing with members of the Organizing bureaucratic bottlenecks and increasing autonomy in
dealing with members of the Organized Private Sector. The vision of NEPC is to make the non-oil export
sector a significant contributor to Nigeria’s GDP, while their vision is to facilitate opportunities for
exporters to promote sustainable economic development.
The Nigerian Export promotion council (NEPC) is the federal Agency charged with the responsibility of
developing, diversifying and promoting non- oil export product in foreign markets. Alder has been engaged
to oversee and implement the marketing of the Council local and internationally. Preliminary research
indicated that the entity had no brand standards and there was little awareness of its role in the market.
Furthermore, information about NEPC and the export sector in Nigeria was not easily accessible.

Export for Beginners: An exporter is someone who sells goods or services in a foreign market in order to
make profit. Exporters can be classified into the following categories. Export Merchant: - An exporter who

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buys goods or products for export from manufacturers and producers within the country. Manufacturing
Exporter: - A company which apart from manufacturing certain products is also exporting the product.
Getting Started: Registration with NEPC: The firm which wishes to export has to be registered either as a
corporate body or a cooperative society with the Nigerian Export Promotion Council. The NEPC is the
Federal Agency charged with the responsibility of promoting export of made- in-Nigeria goods. NEPC is
also responsible for the registration of new entrants into the exporting business. The relevant application
forms which can be contained at zonal offices is to be duly completed and returned to NEPC offices
accompanied with the following documents.
- Copy of certificate of incorporation/Evidence of registration (applicable to co-operative societies)
- Memorandum and articles of association
- Certified true copy of Form C.O.7 (particulars f directors of the Company)
- Copy of current tax clearance certificate.

Registration takes approximately two weeks after submission of all required documents. The exporter is
then issued with a certificate inscribed with a code number. Renewal of registration with NEPC as an
exporter is compulsory every two years. It can be done by submitting the following documents:
- Current company tax clearance certificate
- Evidence of export performance within the two years
- Certified true copy of Form C.O.7.

It regulate regulates goods to be exported out of the country and these goods have to be duly registered by
the National Agency for Drug Administration and Control (NAFDAC) and the Standards Organization of
Nigeria (.S.O.N). In order to register a regulated product at NAFDAC, the prospective exporter writes to
the Director General of NAFDAC, an application accompanied with the stipulated fees per consignment of
intended export attaching the following documents:
- Evidence of registration of the regulated product with NAFDAC
- Registration certificate granted by NEPC
The following details of the goods should also be provided:
- Batch Numbers
- Date of Manufacture
- Expiry date or best before date
- Destination of intended export
- Certificate of analysis of the product batch by batch
- Name and full address of the Manufacturer.

The Agency issues an export certificate if:

- Establishment maintains the standard requirements of goods manufacturing practice
- The regulated product passes NAFDAC laboratory tests.
Exporters of regulated products also have to contact the nearest Standards Organization of Nigeria (S.O.N)
office and submit the following documents.
- Request for product certification
- Test report.
A product which falls into more than one regulated category will need application for each category. A

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product certificate is then issued which has a validity of three years from the date of issue. A list of
regulated products can be obtained from the S.O.N website.

3.4 Nigerian Export Import Bank

The Nigerian Export-Import Bank (NEXIM) was established by Act 38 of 1991 as an Export Credit
Agency (ECA) with a share capital of N500,000,000 (Five Hundred Million Naira) held equally by the
Federal Government of Nigeria and the Central Bank of Nigeria. The Bank which replaced the Nigerian
Export Credit Guarantee and Insurance Corporation earlier set up under Act 15 of 1988 has the following
main statutory functions.
- Provision of export credit guarantee and export credit insurance facilities to its clients.
- Provision of credit in local currency of its clients in supports.
- Establishment and management of funds connected with exports.
- Maintenance of a foreign exchange revolving fund for lending to exports who need to import foreign
inputs foreign to facilitate export production.
- Maintenance of a trade information system in support of export business.
- Provision of domestic credit insurance where such a facility is likely to assist exports.

The Bank presently provides short and medium term loans to Nigerian exporters. It also provides short-
term guarantees for loans granted by Nigeria Banks to exporters as well as credit insurance against political
and commercial risks in the event of non-payment by foreign buyers. The Bank is also the government’s
National Guarantor under the ECOWAS Inter-state Road Transit Programme. The Bank’s authorized
capital as at December 31 2006 was N50 billion with a fully paid-up portion amounting to N11 billion.

3.4.1 Products/Services of NEXIM Direct Lending Facility (DLF)

NEXIM lends money directly to Nigerian exporters to fund their purchase of capital goods, raw materials,
packaging materials, and spare parts through the Direct Loans facility. The facility also covers the
provision of infrastructure as well as revitalization and modernization of plants/machinery. Providers of
export services in the areas of consultancy, tourism, oil and gas etc are also eligible for support. It is
provided in both local and foreign currency. Typically, NEXIM advances the funds directly to the Nigerian
exporter, and these funds are repaid within a maximum period of seven (7) years including a maximum
period of two (2) years.

3.4.2 ECOWAS Intrastate Road Scheme ISRT)

The scheme is designed to promote free flow of goods among member states; free of duties; taxes and
restrictions while in wasting escort system and check the diversion of goods consigned for a specific
destination. NEXIM is the National guarantor for Nigeria under this scheme and is responsible to vary the
risks. The risks covered include the diversion of goods within a country other than the country of
destination, which would result in a loss of import duties/charges that could have been paid to the Customs
authorities in the country the diversion occurs. This implies that the risk to be covered by NEXIM in
Nigeria is the import duty accruable to the Nigeria Customs Service based on the invoice value of the
transiting goods only and not on damage or loss of consignment.

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3.4.3 Export Credit Grantee Facility (ECGF)

NEXIM’s export credit guarantee facility is designed to protect Nigerian Banks against the risks of non-
payment for loans or advances granted to exporters to meet short-term export contracts. Pre-and post –
shipment guarantees are available under the facility for a period of 180 days. This facility does not cover
the risks of non-payment resulting from any fraudulent act of the exporter or his agents and risk of non-
payment resulting from the failure of the exporter to fulfill the terms of the export contract or negligence
on his part. Other risks excluded include non-payment as a result of default of the exporter’s agent or
collecting banks as well as non-payment resulting from physical damage, which should normally be
insured with commercial insurance companies.

3.4.4 Export Credit Insurance Facility (ECIF)

One of the major problems facing exporters is the non-payment for goods exported. Non-payment may
result from the buyer’s insolvency or other events outside the control of the exporters and the buyers.
NEXIM’s export credit insurance facility is designed to protect Nigerian exporters against the risks of non-
payment for goods and services exported on credit terms as a result of commercial/political events. The
facility covers both pre-and post-shipment risks for maximum period of 180 days. However the facility
excludes the risks normally insured by commercial insurance companies or other government governments
departments, foreign risks, insolvency or default of exporter’s agent or collecting back and failure of the
exporter to fulfill the terms of the contract or negligence on his part.

3.4.5 Export Trade Support Facility (ETSF)

Foreign Input Facility (FIF) This provides manufacturers of export products foreign currency loans to
import capital equipment, packaging and raw materials to produce finished products for export. The
facility has a maximum tenor of seven (7) years inclusive of a moratorium period of not more than two
(2) years. It is repayable in foreign currency. Local Input Facility (LIF) This is a medium to long-term
facility and is provided in local currency to enable exporters finance capital purchases and other activities
that would require more than one year to repay. The facility has a maximum tenor of seven (70 years
inclusive of the moratorium period of not more than two (2) years. NDE Facility (NDEF) This facility is
designed to provide direct financial assistance to qualified Nigerian Graduates (The participants) to enable
them undergo tutelage with established exporters under the Start-Your-Own- Business (SYOB)
Programme, prior to their exporting eligible goods and services themselves. The objective being to create
the required linkage for registered companies/cooperatives owned by jobless graduates to go through
practical trainings and guidance with reputable exporters, who may in turn assist them in securing export
contracts from overseas and/or outsource some aspects of their businesses to them.

3.4.6 National SESAME SEEDS Credit Facility (NSSEP)

This is available to provide necessary financial assistance to qualified registered companies under a special
credit scheme for the exportation of Sesame seeds and to assist the target companies to directly access
short-term pre-and post-shipment finance in support of export of Sesame seeds with a view to increasing
the quantity as well as quality of Sesame Seeds exported from Nigeria annually.

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3.4.7 Rediscounting and Refinancing Facility (RRF)

This helps banks to provide pre and post-shipment finance in local currency to support non-oil exports. The
RRF gives exporters access to the Bank’s export portfolios at preferential rates. The refinancing scheme
provides a bank with credit of up to one year. Short-term pre-shipment credit of up to 120 days and post
shipment credit of up to 60 days is provided under the rediscounting scheme.

3.4.8 Special Cassava Export Credit Facility (SCECF)

Following the establishment of the Presidential Initiative on Cassava Export Promotion by Mr. President
in February 2004, NEXIM was selected as a key member of the Sub-Committee on Finance & Export
Proceeds Repatriation and specifically requested to support the initiative. To this end, the Management of
NEXIM considered and consented to the establishment of a Special Cassava Export Credit Facility to allow
for direct disbursement of approved loans to qualified exporters of Cassava Products

3.4.9 Stocking Facility (SF)

This is provided in local currency and it enables manufacturers of exportable goods to procure adequate
stocks of raw materials to keep their production at optimal levels. The Stocking Facility is available for up
to one year and is granted at rates capable of enhancing the competitiveness of manufactured export.

3.4.10 Textile Revolving Fund (TRF)

This is provided in local currency and it enables manufacturers of exportable goods to procure adequate
stocks of raw materials to keep their production at optimal levels. The Stocking Facility is available for up
to one year and is granted at rates capable of enhancing the competitiveness of manufactured export.

3.5 Nigerian Export Processing Free Zone Scheme (EPFZS)

Since the inception of the new democratic administration led by President Olusegun Obasanjo in May 29
1999, a number of efforts have been made to attract both local and foreign investors to the country to boost
Nigeria’s economy. To point the country towards the path to industrialization will involve discipline, focus
and hard work from all sectors to the economy. In this light, the diversification of the economy has led to
de-emphasizing the role of oil production and exports within the country’s economy. Much needed focus
has thus been devoted to other sectors like solid minerals, tourism, telecommunication, commerce and
industry. All these efforts toward economic development led in November 1991 to the establishment of the
Export Processing Free Zone Scheme (EPFSZ). This scheme allows for interested persons to set up
industries and business within demarcated zones known as Export Processing Zones, (EPZs) principally
with the objective of exporting the goods and services manufactured or produced within the zones .But this
novel scheme was slowed down by he political shenanigans in power then. It thus took another decade
before it saw the light of the day with the inauguration by President Obasanjo of the multi-billion naira
Calabar Export Processing Zone (CSPZ) very recently. In a nutshell, the scheme is targeted to promote the
diversification of the export base of the nation through the acceleration of export business with attendant
loaded incentives, this it is perceived will include industrial production, offshore banking, insurance and
reinsurance, international stock, commodities and mercantile exchanges, commercial industrial research,

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agriculture and agro- allied industry, mineral processing, as well as international tourist resort development
and operation. The Calabar zone has been designated as the primary EPZ territory and a total of 80
serviced plots have been reserved for prospective investors for self-built factories.

3.5.1 Tax and other Incentives The incentives that come to inventors in the designated EPZ
territories include:
- Tax holiday relief, legislative provisions pertaining to taxes
- Levies, duties and foreign exchange would not apply within EPZs repatriation of foreign capital
investment in EPZs at any time capital appreciation of the investment.
- Unrestricted remittance of profits and dividends earned by foreign investors in EPZs.
- No import or export licenses required rent-free land during construction of premises.
- Up to 100% foreign ownership of enterprises in EPZs, sale of up to 25% of production permitted in
domestic market.
- No quotas on products from Nigeria exported to the European Union, (EU) and the United States of
America.
- Made-in Nigeria goods are entitled to preferential tariffs in the EU.

3.5.2 Grants Available for Exporter

The provision of the Industrial Development (Income Tax Relief) Act with respect to Pioneer
Status qualifies for a tax holiday of 3-5 years to any manufacturing exporter who exports at least
50% of his annual production. Additional concessions are also available in the local raw material
development, local value-added, labour-intensive or export-oriented activities that involve
significant training.
Tax Relief on Interest Income Interest accruing form loans granted by banks in aid of export activities
enjoys favorable tax treatment.
Capital Assets Depreciation Allowance The law in Nigeria provides an additional annual depreciation
allowance of 5% on plants and machinery to manufacturing exporters who export at least 50% of their
annual turnover provided that he product has at least 40% local raw material content or 35% value added.
Investment Protection Protection of property is provided by Section 31 of 1999 Nigeria’s constitution.
The section states: “No property or other rights will be taken over or compulsorily acquired except under a
law which provides for adequate compensation and for a right of access for any claimant to the High Court
of the relevant part of Nigeria for the determination of interest in the property and compensation amount.”
Expropriation The Nigeria Investment Protection Commission Decree guarantees against nationalization,
expropriation and compulsory purchase.
Disputes Settlement
Disputes between an investor and any government of the Nigerian Federation in this regard which cannot
be amicably settled, may be submitted by an aggrieved party to arbitration in accordance with Nigeria’s
Arbitration and Conciliation Decree 1988 or within the framework of any bilateral or multilateral
agreement on investment protection to which the Federal government and the investor’s country are parties
or in accordance with any other national or international machinery for the settlement of investment
disputes as agreed to by the parties. Nigeria’s general legal environmental, which is based on English
common law, further upholds the sanctity of contracts and the rule of law. The scheme operates in a
fashion that cuts off the bureaucratic delay that is synonymous with government agencies by allowing the
Nigerian Export Processing Zones Authority (NEPZA) to administer, manage, control and coordinate the

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quick approvals for participating foreign investors while its supporting agencies handle almost all phrases
of operations in the zone independent of government. These include issuing application forms and
approval, company registration and construction licensing among others. To facilitate the operation of the
Calabar EPZ, the Calabar seaport has been declared as a free port to complement the status of the free trade
zone. Among the numerous facilities sited at the 152 hectare Calabar EPZ site, is a new port less than two
kilometers away with fully buoyed river channel and an estimated capacity of about 1.5 metric tons of
cargo excluding crude oil. Many investors are already eager to set base in Calabar and the Government has
assured of the existence of several pre-built standard factories. Presently, only three companies are
operating in the Calabar zone so there is plenty of room for new companies. It has been promised that the
entire necessary infrastructure will be in place- the plots; roads, street lighting, perimeter fencing,
electricity and water facilities and factory begin exporting. With a vast population that is rich in human
potentials and abundant mineral resources, the success of the EPZs is almost certain from day one, though
the elimination of the “Nigerian factor” must be a priority concern for the eventual growth of the scheme.
Also, the establishment of other zones around the country is being considered in order for wider coverage
and developmental impact. Kano and Lagos are veritable locations for such a project with the former
catering the Trans-Sahara trade and latter focusing on export of manufacturing products. The prioritization
of quality should not be sacrificed on the altar of quantity and strict monitoring regulations must be
formulated to guide participating firms.

3.5.3 The Nigerian Export Processing Zones Scheme

The enabling law for the establishment and management of the Export Processing Zones (EPZ) scheme in
Nigeria is the Nigerian Export Processing Zones Authority Decree No. 63 of 1992. By this decree,
administration of the Nigerian EPZ programme is vested on the Nigerian Export Processing Zones
Authority (NEPZA). NEPZA is thus, empowered to grant all requisite permits and approvals for operators
in EPZs to the exclusion of all other government agencies and bodies. The regulatory regime for EPZs in
Nigeria is liberal and provided a conducive environment for profitable operations. The incentives available
to operators in Nigeria’s EPZs compare favourably with the most attractive elsewhere in the world and are
the best in the region. They include one hundred percent foreign ownership of investments, “one stop”
approvals, no import or export licenses, duty free import of raw materials, unrestricted remittance of
capital profits and dividends, tax holidays and no strikes. The country’s pioneer EPZ is the Calabar
Processing Zone.

3.5.4 Calabar Export processing Zone

The Calabar EPZ provides investors with one of the most suitable sites for export manufacture in Africa.
The zone provides serviced industrial and administrative facilities at the most competitive rates obtainable
for facilities of such standards in Africa. In addition to public supplies of such utilities as power, water and
telecommunications, the zone has its won private back-up supply of these essential utilities and services.
Calabar, the city in which the EPZ is sited, is an ancient and historic city with an enviable past, having
served as the capital of the Southern Protectorate of Nigeria before the amalgamation of the Northern and
Southern Protectorates in 1914. The serene and beautiful city served as the center of operations for the
Royal Niger Company during the days of the oil palm trade as well as being an age – long center of
leaning. It is presently the capital of Cross River State in south – east Nigeria and is fondly referred to as
the ‘Canaan City, the biblical land flowing with milk and honey.’

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Although one is not likely to actually find milk and honey flowing on the streets of the streets of this clean,
enchanting and alluring city, one will definitely discover the warmth and hospitality of the people of
Calabar in abundance. There are other attributes, which make the choice of Calabar as the site of Nigeria’s
pioneer EPZ an excellent one. The city has good road links with other part of the country and is traversed
by the Trans – African Highway, major gateway to republic Cameroon and other countries of Central
Africa. Its modern seaport adjoining the EPZ is of special advantage and will result in significant savings
for shipping and haulage services to investors in the Zone. The city’s international airport less than twenty
minutes drives from site of the Calabar EPZ.
Several airlines provide Calabar with international and local air travel services. ADC airlines is the major
operator from Calabar Airport – operates daily domestic flights to and from Lagos and Harcourt, with
connecting international flights to destinations in Africa. The airline also operates flights to Ghana, Liberia,
Sierra Leon and Guinea. Nigeria Airways flies to Calabar en route to Equatorial Guinea and Cameroon.
SkylineAirline offers daily service to and from Lagos and Enugu. Calabar and its environs have a pool of
skilled and trainable manpower with significant industrial experience. Such manpower is available at very
competitive rates, which rank among the lowest in the world. There is several institution of higher leaning
in Calabar and its environs which provide university, Technical and Vocational education. If the need
arises, these institutions can provide any special training needs and supports services that producers in the
Zone may need industrial activity in Calabar is largely in natural resource- based industries such as oil
Palm, Wood, Limestone, Rubber, Cocoa and Coffee. However activities in the oil and gas industry,
especially the aluminum Smelting plant on near by ikot Abasi and the activities of Mobil producing
Nigeria Unlimited, based in near
by Eket offer the prospect for linkages between manufactures in the Calabar EPZ and these industries.
Moreover, the disposition of its people, its rich history, culture and several natural attractions make
Calabar an idea tourist location. Attractions in Calabar and within surround Cross River state include the
Abokim Water Falls, Qua Falls, and the Gorilla Sanctuary in the Kanyang National.

3.5.5 Facilities Within the Zone Facilities available under the Calabar EPZ are as follows: (a) Service
plot; (b) Uninterrupted power and water supply; (c) Modern and efficient telecommunications system
(d) Excellent internal road network; (e) Built-up Factory space (f) Modern catering and recreational
facilities; (f) Banking services; and (g) Custom.

3.5.6 Industries Permitted Within the Zone Industries permitted within the Calabar EPZ are the
following:
(a) Electrical and Electronic Product; (b) Textile Product; (c) Garments Production (d) Product and
Handicrafts; (e) Leader Product; (f) Petroleum Product;(g) Rubber and plastic Products (h) Cosmetic and
other chemical product; (i) Metal Product and Machinery (j) Educational Materials and Sport Equipment;
(k) Printing Materials, Communication and office Equipment; (l) Medical Kits, Optical instruments and
Appliances; (m) Biscuits, Confectionaries and other foods processing; and, (n) Pharmaceutical products.
Proposals for industries outside the above listings will be considered on their individual merit.

3.5.7 Summary of Investment Procedure The following is a summary of procedures 7, which an

investor will normally follow in establishing an industry under the Calabar EPZ. 1. Inquiries and obtaining
Investment application g form. 2. Inspection of built-up factory space and serviced industrial plots 3.
Submission of investment application form 4. Processing of application form 5. here application

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is approved apply for company registration. 6. (a) Outright purchase of built-up standard factory: Payment
purchase shall be made as follows:
- 10 percent of the purchase price within 3 months of execution of purchase agreement balance of 90
percent, 5 months after.

(b) Rent of built-up factory space: Rent shall be paid as follows:

- One year rent upon execution of rental agreement. Thereafter, rent shall be payable annually.

(c) Lease of built-up standard factory: Rent for the lease shall be paid in 3 payments as follows: - 40
percent of the rent payable for the lease on or before execution of lease thirty percent rent for the lease on
or before the end of the 5th year of the lease 30% of the rent payable for the lease on or before the end of
the 10th year of the lease (d) Lease of service plots: Rent from the lease shall be paid as follows: - 40
percent of the rent payable for the lease on or before approval of factory construction 30% cent of rent
payable for the lease at the end of the 5th year of the lease.–30% of rent payable for the lease at the end of
the 10th year of the lease. 7. Remittance of Investment Capital. 8) Assessment of Investment outlay. 9.
Pre-production inspection of factory building, plant and machineries before commencement of production.
10) Obtain certificate to sell 25 percent of production in the domestic market. Conclusion of addition to all
the above, Nigeria’s continues commitment of the implementation of liberal economic policies that will
enhance the development and growth of the export sector coupled with the Naira’s favourable exchange
rate for exports provided an excellent opportunity for profitable export production from the Calabar EPZ.

3.6 Central Bank of Nigeria

Central Banks worldwide simply refer to a central monetary authority or an apex financial institution
within the entire financial structure promoting monetary stability and a sound financial system. The world
Central Banking is one of a variety of structures, functions and powers, which are in them by- product of
the economic, political and other realities prevailing in a society. Historically, prior to the establishment of
Central Bank of Nigeria by the CBN Act of 1958, there existed a body known as the West African
Currency Board (WACB). This Board, which was established by the then British Colonial Government,
was intended to serve as a Central Bank for the Anglophone West African countries. Thus, the board was
charged with the primary responsibility of issuing the West African Pound, which served as the legal
tender currency in Ghana, Nigeria, Sierra-Leone and Gambia. Another function performed by WACB was
the management of the reserves held in trust for these colonies. Such reserves were invested by the board
on behalf of the West African countries as instruments in the London Money Market. The weakness of the
board for which it was criticized is as follows:

ies were considered discriminatory against indigenous West African industrialist;

trade.

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3.6.1 Objectives

The principal objectives of the Bank as stipulated in the CBN Act 1958 are as follow:
a. The insurance of legal tender currency in Nigeria:
b. To maintain the external reserve and value of the legal tender in order to safeguard the international
value of the currency.
c. To promote monetary stability and a sound financial system.
d. They serve as the banker and financial adviser the Federal Government.
e. Bankers to other banks within Nigeria and Abroad.

3.6.2 Functions

To achieve the above objectives, CBN undertakes the following functions as stated in the Act. The basic
functions performed by CBN can be broadly categorized into three.
a. Traditional functions
b. Regulatory functions and
c. Development functions.

3.6.3 Traditional Functions

i. It issues the legal tender (currencies) Naira and Kobo.

ii. It acts as the Banker and financial adviser to the Federal Government.
iii. CBN act as the banker to other banks and finance institution. • Cheque Clearing
• Lender of last resort.

iv. It manages the accounts and debt of the country.

v. CBN act in banking supervision and examination.

3.6.4 Regulatory Functions

The regulatory functions of the CBN are mainly directed at the objective of promoting and maintaining the
monetary and price stability in the economy. To perform this regulatory function CBN formulates policies
to control the amount of money in circulation, control other banks and major players in the financial
market, control rates of banks credits and therefore the supply of money in the economy. The instruments
used by CBN to achieve these functions are:
a. Open Market Operation (O.M.O)
b. Bank Rate
c. Rediscount Rate
d. Direct Control of Bank’s Liquidity
e. Direct Control of Bank Credit
f. Special Deposits

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g. Moral Persuasion
h. Minimum Cash Ratio.

3.6.5 Developing Functions

The establishment of CBN in 1959 was premised on the need to promote and accelerate the much needed
economic growth and development in Nigeria, which would invariably promote the growth of the financial
market. This financial market comprises the Money and Capital market, assistance to development banks
and institutions and the formulation and execution government economic policies. The Money Market is
the market for mobilizing short-term funds with instruments such as Treasury Bills, Treasury Certificates,
Commercial Papers, Certificate of Deposit (CDs), Eligible Development Stock (EDS) and Bankers’
Acceptances. The CBN plays a major role in the Capital Market, which deals with long-term funds by
fostering its growth through the annual subvention granted to them. The CBN also helps to promote and
assist the development banks and institutions. These include Nigerian Industrial Development Bank
(NIDB), the Nigerian Banks for Commerce and Industry (NBCI), the Nigerian Agricultural Insurance
Company (NAIC), the Federal Mortgage Bank of Nigeria FMBN), the Nigerian Deposit Insurance
Corporation (NDIC), the Nigerian Export-Import Bank (NEXIN) and the Securities and Exchange
Commission. (SEC). In addition, the CBN is involved in the formulation and executive of viable economic
polities and measures for the government. Also since 1970, the Bank has been instrumental in the
promotion of wholly owned Nigerian enterprises. Thus, the recent directive to banks to set aside 10% of
their profits before tax to finance Small and Medium Scale Enterprises can be viewed in this context.

3.6.6 Problems

The CBN is faced with a number of the problems in the Nigerian financial sector, among these problems
are follows:
a. One of the failings of the CBN is their inability to guide against unethical actions of Commercial Banks
in the areas of money laundering, inter bank forex exchange.
b. The CBN’s inability to curb the current rising inflationary rates in the country.
c. Its lack of effective regulatory measures has led to high lending rates imposed by commercial banks on
their customers.
d. It also lacks the capacity to effectively execute Government economic policies.
e. It fails to promote and encourage Nigerians to invest in Small and Medium-Scale Enterprises y not
giving enough incentives.
f. Another problem faced by CBN is its inability to monitor the skyrocketing foreign exchange rate in the
country.
g. CBN has been unable to promote the needed saving culture among Nigerians, which could have helped
the nation’s capital base.
h. Finally, the CBN has been unable to tap into the Information Technology super highway of e- banking
and e-commerce, which is a major prerequisite for the country to partake in the globalization.

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3.6.7 Achievements, Vision & Mission of CBN

The Central Bank of Nigeria in its bid to curb banks unethical actions have periodically increased their
capital base and have instituted the Inter-bank foreign exchange market to check capital flight and to
regulate foreign exchange rates. CBN has also achieve a level of autonomy since the advent of the
democratic dispensation in Nigeria, the is reflected in her aggressive execution of Government economic
policies in the areas of orientating the Nigerian populace to embrace the saving culture, the encouragement
of foreign investors by creating an enabling environment/policies for ensuring macroeconomic stability
and stable governance.
We must also acknowledge the recent moves by the Central bank to tap into the limitless opportunity
derivable in the Information Technology World. This is reflected in the massive promotion of Universal
Banking in the country. The CBN took the bull by the horn by first starting a restructuring and
reengineering project which is perceived to tackle the business processes in its structural and instructional
deficiencies to enhance its effectiveness, efficiency and productivity. The Central Bank of Nigeria’s
restructuring and reengineering involves improve reorganization of the Bank’s business processes with a
view to making it more efficient and proactive. It also involves restructuring the assets and liabilities of the
bank to promote efficiency, restore integrity and achieve cost effectiveness. To achieve this all important
restricting & reengineering CBN embarked on a project code named “Project EAGLES”. Project EAGLES
is the approach CBN has adopted, recognizing the need to gear up its organisation and systems to address
strategic issues, achieve a sharper focus on core functions and be an efficient regulator in the 21st century.
Consequently, the vision of the CBN in the third millennium are summarized below: “To be one of the
most efficient and effective among the world’s central banks in promoting and sustaining economic
development”. Arising from the vision the restructuring/reengineering code named EAGLES stands for the
following: Ø E = Efficiency Ø A = Accountability Ø G = Goal oriented Ø L= Leadership Ø E =
Effectiveness Ø S = Staff oriented The mission of Central Bank of Nigeria arising from the vision ahs been
captured as follows: To be proactive in providing a stable frame work for the economic development of
Nigeria through transparent implementation of monetary policy an achievements efficient and effective
price stability for a sound management of the financial system”. The restructuring/reengineering
framework adopted for Project EAGLES is the Performance Driven Change mythology (PDC). This
method defines and review the performance measurement set for each business processes to be sure that
process performance is appropriately measured. According to Chief Joseph Sanusi the Governor of CBN,
the project, which kicked off two years ago, has completed its first phases. The governing board of CBN is
satisfied so far. The second phase has also been launched. This project was embarked upon due to the need
to change the entire structure of the CBN with a focus towards imbibing a strong culture change using
modern information technology (IT) as a springboard.
The reengineering exercise according to the Governor is intended to radically alter the way things are
presently done, that is work communication and relationship both within and 138
outside and bank, which means making significant technological changes that will pervade the whole
CBN.

4.0 Self Assessment Exercise

1. Discuss five services available to international business man in EPZ.

2. Discuss the contributions of CBN to international business in Nigeria.

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5.0 Conclusion

These organizations in no doubt have been able to encourage foreign business between Nigeria and other
countries. It shows the contribution of Nigerian government in encouraging international business with
incentive like tax holidays expropriation, investment protection and a lot of other incentives.

6.0 Summary

This unit discusses various types of Nigeria organizations. These include among others Nigerian
Investment Promotion Commission; Nigerian Export Promotion Council; Nigerian Export Import Bank,;
Nigerian Export Processing Zone scheme, the Central Bank of Nigeria,. Their contributions and functions
to international marketing were discussed.

7.0 Tutor Marked Assignment

1. Discuss those services provided by NEXIM in assisting sesame and cassava exporters.. 2 .Discuss the

functions and services provided by NIPC to international business .

3. Enumerate the i) objectives ii) functions of CBN

80. References/Further Reading

National Open University of Nigeria (2009) International Marketing MKT 725 Course Material. Adapted.

www. Nipc – Nigeria. Org. www nepc – Nigeria .Org www – NEXIM – nigeria – Org 2000 – 2001
Nigeria business infor.com www. Cen bank Org/welcome.htm.

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