Agribusiness Management and Trade

Lesson 16 Nature and Characteristics of Agribusiness

16.2 MEANING  OF AGRIBUSINESS

Several definitions of the term “agribusiness” exist in the literature. Encyclopedia Britannica defines agribusiness broadly as “agriculture operated by business; specifically, a part of a modern economy devoted to the production, processing and distribution of food, fibre products and by-products including the financial institutions that fund these activities” (Encyclopedia Britannica Inc., 2011)

Agro-industry refers to the establishment of linkages between enterprises and supply chains for developing, transforming and distributing specific inputs and products in the agriculture sector. Consequently, agro-industries are a subset of the agribusiness sector. Agribusiness and agro-industry both involve commercialization and value addition of agricultural and post-production enterprises, and the building of linkages among agricultural enterprises (FAO, 2007b). The terms agribusiness and agro-industries are often associated with large-scale farming enterprises or enterprises involved in large-scale food production, processing, distribution and quality control of agricultural products. Smaller agriculture-related entities (farms, processors, etc.) are less often thought of as agribusinesses or agro-industries, but strictly they should also be part of the definition, as considered in this report.

A simplistic definition states that agribusiness refers to any business related to agriculture, including farming, processing, exporting, input suppliers, trading and retailing (USAID, 2008). The term agribusiness is often used to convey an aggregate view of agriculture and business-related activities, covering the multiple functions and processes involved in modern food production and distribution. For the purposes of this study, agribusiness denotes the collective business activities that are performed from farm to table. It covers agricultural input suppliers, producers, agro-processors, distributors, traders, exporters, retailers and consumers.

Agri-business as a concept was born in Harvard University in 1957 with the publication of a book “A concept of Agri-business”, written by John David and A. Gold Berg. It was introduced in Philippines in early 1966, when the University of the Philippines offered an Agri-business

Management (ABM) programme at the under-graduate level. In 1969, the first Advanced Agribusiness Management seminar was held in Manila.While agribusiness once was not even a word, there are many agribusiness programs offered presently around the globe.

Goldberg and Davis defined the term ‘agribusiness as: “Agribusiness is a concept of economics which includes the sum total of all operations involved in the manufacturing and distribution of farm supplies; production operation on the farm; and the storage, processing and distribution of farm commodities and items made from them.”

Agri-business involves three sectors:

1. Input sector: It deals with the supply of inputs required by the farmers for raising crops, livestock and other allied enterprises. These include seeds, fertilizers, chemicals, machinery and fuel.

2. Farm sector: It aims at producing crops, livestock and other products.

3. Product sector: It deals with various aspects like storage, processing and marketing the finished products so as to meet the dynamic needs of consumers.

Therefore, Agribusiness is sum total of all operations or activities involved in the business of production and marketing of farm supplies and farm products for achieving the targeted objectives.

16.3 DIMENSIONS OF AGRI-BUSINESS

1. It deals with different components of both agricultural and industrial sector, their interdependence and influence of one sector on other.

2. It deals with decision making process of farm either private or government in relation to production and selling aspects.

3. It deals with strengths and weaknesses of a project and thereby their viability in competing enterprises.

4. Agri-business is always market oriented.

5. Structure of Agri-business is generally vertical and it comprises the following

   1. Govt. policies and programmes regarding raising of crops or taking enterprises etc.,

   2. Research and extension programmes of the Govt.

   3. Farm supplies or inputs

   4. Agricultural production

   5. Processing

   6.  Marketing of agricultural products

16.4 AGRIBUSINESS VIS-À-VIS OTHER INDUSTRIES

Management approach in any other industries differs with that of management in agribusiness. There are certain peculiarities of agribusiness which greatly distinguishes itself with the industries.

1. Agriculture is gamble with monsoon: Nature of production in agriculture is such that it largely depends on weather conditions. Since agriculture deals with living beings which are prone to health hazards, the production becomes risky. As around 60 per cent of the agricultural land in India is under rainfed farming, it heavily depends on timely rain therefore, the production becomes even uncertain. Thus agriculture is subjected to both higher risk and uncertainty which is not the case for other industries.

2. Small size of land holdings: Average area operated per holding in 2002-03 was 1.06 hectares compared to 1.34 hectares during 1991-92 and 1.67 hectares in 1981-82. (NSSO, 2002-03). The data reveals that due to division and fragmentation of land, the operating land holdings is decreasing over the years. This results into increase in number of marginal holdings. The data shows that, marginal holdings (of size 1 hectare or less) in 2002-03 constituted 70% of all operational holdings, small holdings (size 1 to 2 hectares) constituted 16%, semi-medium holdings (2 to 4 hectares), 9%, medium holdings (4 to 10 hectares), 4%, and large holdings (over 10 hectares), less than 1%. The share of marginal holdings in total operated area climbed by 6-7 percentage points since 1991-92 to reach 22-23%, drawing level with the shares of the semi-medium and medium holdings, which had the largest shares in 1991-92. Therefore, it is no wonder, agriculture in India is characterised by resource poor farmers.

3. Price fluctuations: Majority of agricultural products are seasonal while the demand for them is almost continuous. Consider for instance the perishable products like, tomato, potato, onion, milk etc, their production is seasonal while demand for them is continuous. This leads to lower prices during higher overall production and higher prices during lower production. Even for less perishable crops like wheat, maize, paddy etc. the prices will be lower during harvesting season and higher during sowing season. Therefore, the price fluctuations affect the decision of various agencies involved in agribusiness regarding when and where to sell or buy. This nature of large price fluctuation is seldom seen in other industries.

4. Bulkiness: Compared to most other products, agricultural products are bulkier. It affects the marketing functions concerned with physical handling as bulkiness requires large storage capacities. Products that occupy a lot of space in relation to their value are expensive to transport and store.

5. Perishable Products: Perishability influences the marketing of food products. The highly perishable products like fruits and vegetables must move to the consumer very quickly otherwise they completely lose their value. These product characteristics have their effect on the facilities necessary to market farm products. Perishable products require speedy handling and well-oiled cold chain infrastructure.

6. Grading and standardization: Another important characteristic of the agricultural products which hugely affects the marketing decisions is the lack of homogeneity unlike products of other industry. There exists large variation in size, shape, colour, flavor etc. of a single product. Consider any vegetables in surrounding market you will find the variation in above said characteristics. The quality of the agricultural products also varies from year to year and from season to season.  Therefore, grading and standardization of agricultural products becomes increasingly difficult and costly.

7. Financing: As pointed out earlier, agriculture involves higher risk and uncertainty. This apart, this business largely handled by the resource poor farmers. Therefore, financing in the farm sector is a problem. In India,

8. Irregular Supply of Agricultural Products: The supply of agricultural products is uncertain and irregular because of the dependence of agricultural production on natural conditions. With the varying supply, the demand remaining almost constant, the prices of agricultural products fluctuate substantially.

9. Processing: Most of the farm products have to be processed before their consumption by the ultimate consumers. This processing function increases the price spread of agricultural commodities. Processing firms enjoy the advantage of monopsony, oligopsony or duopsony in the market. This situation creates disincentives for the producers and may have an adverse effect on production in the next year.

10. Law of diminishing returns: It states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns. Unlike in other industries, law of diminishing returns sets early in agriculture. For example, the use of fertilizer improves crop production on farms and in gardens; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield.

11. Low elasticity of demand and supply: Farmers do not have control over their output to the same degree as in other industries. The nature of production is also such that the gestation period is too long. Therefore, it is not possible for farmers to adjust their production immediately according to the market signals. Even in case of demand also it is true. Most of the agricultural commodities come under necessary goods. Therefore, consumers will not reduce or increase their consumption significantly in response to the sale prices of agricultural commodities.

16.5 SCOPE OF AGRI-BUSINESS

1. Our daily requirements of food and fiber products at desired place at required form and time come from efficient and hard working of many business personnel in input, farm and food production and also in marketing them. The entire system in brief is called Agribusiness.

2. Agribusiness, of late, is combining the diverse commercial enterprises, using heterogeneous combination of labour, materials, capital and technology.

3. It is a dynamic sector and continuously meets current demands of consumers in domestic and world markets.

4. Agri-business establishment leads to strengthening of infrastructural facilities in that area, expansion of credit, raw materials supply agencies, adoption of modern technology in production and marketing of agricultural products.

5.  Agri-business provides crucial forward and backward linkages. (Backward linkage include supply of inputs, credit, production technologies, farm services etc., A forward linkage includes storage, processing, transportation and marketing aspects.)

6.  Agri-business generates potential employment opportunities.

7.  It adds value to products and thereby increases the net profits.

16.6 STRUCTURE OF AGRI-BUSINESS

As mentioned earlier agri-business sector provides crucial backward and forward linkages. It involves two important sectors.

• Farm input sector: It deals with agro-based industries providing seeds, fertilizers, feed, chemicals etc. The industries supplying machinery or equipment, implements and petroleum etc are also important in this regard.

• Farm product sector: It deals with production and distribution of farm commodities. Large cooperative bodies also exist in Agri-business, but they are few in number, whereas small scaled agroindustries are large in number. The vertical integration of a farm is very common in poultry, fruit and vegetable farms.

References:

Acharya, S. S. and Agarwal, N. L. 2011. Agricultural Marketing in India. Oxford & IBH Publishing Co. Pvt. Ltd. New Delhi

http://www.fao.org/ag/ags/agribusiness-development/agribusiness-management/en/?no_cache=1 visited as on 1^st June, 2013

Vijaya Kumari. R and Raghunatha Reddy G. Lecture notes, Acharya N.G. Ranga Agricultural University, visited on web site http://www.angrau.ac.in/media/1639/AECO%20342.pdf as on 20^th may 2013

Suggested Readings:

Mukesh Pandey and Deepali Tewari. 2010. Agribusiness Book: A Marketing & Value-Chain Perspective: Analysing South Asia Textbook Student Edition. International Book Distributing Company