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Agricultural economics and marketing

Marketing channels, price spread and marketing efficiency

How farm produce reaches consumers, what intermediaries do, how to calculate price spread and producer's share, and how marketing efficiency is measured.

Exam essential6 min readUpdated
On this page
  1. What marketing does
  2. Marketing channels
  3. Price spread and producer's share
  4. Measuring marketing efficiency
  5. Improving marketing for farmers
  6. Key points
  7. What the exams ask
  8. Questions people ask
  9. Sources
  10. Related on Laisha
  11. Discussion

Between the farm gate and the plate, produce is collected, graded, stored, transported, processed, packed, financed and sold, often several times. Each step adds cost and, usually, someone's margin. The difference between what the consumer pays and what the farmer receives is the price spread, and the farmer's portion of the consumer's price is the producer's share.

These measures are at the heart of agricultural marketing as a subject and of marketing policy debates in every country. Exam questions usually ask for marketing functions, channels, and a price spread and efficiency calculation from given figures.

What marketing does

Agricultural marketing is all the activities involved in moving a product from producer to consumer. A widely used classification, from the economist Fred Clark in the 1920s, groups them into three kinds of function:

GroupFunctionsWhat they add
Exchange functionsbuying, assembling, sellingchange of ownership
Physical functionsstorage, transport, processing, packagingtime, place and form value
Facilitating functionsstandardisation and grading, financing, risk bearing, market informationmake exchange easier and cheaper

Marketing creates utility: form (wheat becomes flour), place (grain moves from a surplus region to a city), time (stored grain is available after harvest) and possession (the buyer gets it). This is why a price spread is not, in itself, evidence of exploitation: much of it pays for real services.

Marketing channels

A marketing channel is the route a product takes through intermediaries. Typical intermediaries include:

  • assemblers and aggregators (village traders, collection centres, farmer producer organisations) who bulk small lots;
  • commission agents and brokers, who arrange sales for a fee without owning the produce;
  • wholesalers, who buy in bulk and sell to retailers or processors;
  • processors, who change the product's form;
  • retailers, from street vendors to supermarkets, and exporters.

Channels range from direct (farmer to consumer, through farm shops, farmers' markets, box schemes and online sales) to long chains with four or five intermediaries. Short channels usually give the farmer a larger share, but they also move the costs of transport, storage, grading and selling onto the farmer.

Price spread and producer's share

A marketing channel with the price at each stage: the farmer sells at 20 currency units per kilogram, the aggregator at 23, the wholesaler at 28 and the retailer at 36; the price spread of 16 is made up of 6 in marketing costs and 10 in margins, and the producer's share is 56 per cent Farmersells at 20 Aggregatorsells at 23 Wholesalersells at 28 Retailersells at 36 Consumerpays 36 cost 1 · margin 2 cost 2 · margin 3 cost 3 · margin 5 Where the consumer's 36 goes Farmer 20 (56%) Costs 6 Margins 10 Price spread = 36 − 20 = 16 Producer's share = 20 ÷ 36 × 100 = 55.6% Shepherd's efficiency = consumer price ÷ total marketing cost − 1 = 36 ÷ 6 − 1 = 5.0 Acharya's modified efficiency = farmer's price ÷ (costs + margins) = 20 ÷ 16 = 1.25 Prices in currency units per kg, illustrative. Costs: transport, storage, handling, losses, fees. Margins: the intermediaries' net returns.
A four-stage marketing channel with illustrative prices. The price spread is the gap between the consumer's price and the farmer's; it is made up of marketing costs and intermediaries' margins.Diagram: Laisha, original.
Price spread and producer's share
Price spread = consumer price − farmer's net price = marketing costs + marketing margins
Producer's share (%) = farmer's net price ⁄ consumer price × 100
  • Marketing costs are the expenses of performing the functions: transport, loading and unloading, packing, storage, market fees and taxes, commission, losses and wastage, interest on capital tied up.
  • Marketing margins are what each intermediary keeps after its costs: the return to its capital, labour, risk and enterprise.

The farmer's net price should be measured after the farmer's own marketing costs (transport to market, fees paid by the seller).

Worked example

Price spread in a vegetable channel

A farmer sells tomatoes to an aggregator at 20 currency units per kg. The aggregator spends 1 unit per kg on collection and transport and sells to a wholesaler at 23. The wholesaler spends 2 on handling, storage and losses and sells to a retailer at 28. The retailer spends 3 on rent, wastage and labour and sells to consumers at 36.

  • Price spread = 36 − 20 = 16 per kg.
  • Marketing costs = 1 + 2 + 3 = 6. Margins = (23 − 20 − 1) + (28 − 23 − 2) + (36 − 28 − 3) = 2 + 3 + 5 = 10. Check: 6 + 10 = 16.
  • Producer's share = 20 ÷ 36 × 100 = 55.6 per cent.

If the same farmer joined a producer group that sold directly to the retailer at 30, after paying 2 for group transport and grading, the farmer's net price would be 28 and the share 28 ÷ 36 = 78 per cent, provided the retailer still sold at 36.

Reading the producer's share carefully

A low producer's share is not always bad, and a high one not always good. It depends on the product:

  • Products sold fresh and unprocessed close to where they are grown, such as eggs or grain sold locally, usually have high producer's shares.
  • Products that need processing, packaging, cold chains or long transport, such as frozen vegetables, bread or exported fruit, have low shares because consumers are paying for those services.
  • Perishable produce has high marketing costs because of losses.

A rising consumer price with a falling producer's share is the warning sign: it may point to weak competition, poor infrastructure, information gaps or excessive charges.

Measuring marketing efficiency

Marketing efficiency asks whether goods move from producer to consumer at the lowest cost consistent with the services consumers want. Two aspects are distinguished:

  • Operational (technical) efficiency: performing the functions at minimum cost, for example by better roads, larger lots, less waste.
  • Pricing (economic) efficiency: prices that accurately reflect costs and consumer demand, with competition keeping margins reasonable.

Several indices are used in exams and in studies:

Common efficiency measures
Shepherd's index = V ⁄ I − 1, where V is the value of goods sold (consumer price) and I is total marketing cost
Acharya's modified marketing efficiency = FP ⁄ (MC + MM), where FP is the farmer's price, MC the marketing costs and MM the margins

In the tomato example: Shepherd's index = 36 ⁄ 6 − 1 = 5.0; Acharya's index = 20 ⁄ (6 + 10) = 1.25. Higher values indicate greater efficiency. Shepherd's index ignores margins and Acharya's captures them, so the two can rank channels differently; studies usually compare channels for the same product in the same region using both.

Improving marketing for farmers

  • Collective marketing through cooperatives and farmer producer organisations, to bulk produce, grade it, negotiate and bypass some intermediaries.
  • Infrastructure: roads, rural markets, storage, cold chains, packhouses.
  • Grading and standards, so that quality is paid for.
  • Market information: published prices, mobile and online price services, electronic trading platforms.
  • Contract farming and direct supply to processors and retailers.
  • Fair, transparent market rules: open auctions, accurate weighing, prompt payment, competition among buyers.

Key points

  • Marketing functions: exchange (buying, selling), physical (storage, transport, processing) and facilitating (grading, finance, risk, information).
  • Marketing creates form, place, time and possession utility; the price spread pays partly for these services.
  • Price spread = consumer price − farmer's net price = marketing costs + margins.
  • Producer's share = farmer's net price ÷ consumer price × 100; it is naturally lower for processed and perishable products.
  • Shepherd's index = V ⁄ I − 1; Acharya's index = FP ⁄ (MC + MM).
  • Collective marketing, infrastructure, grading, information and fair market rules raise farmers' share and efficiency.

What the exams ask

  • School-leaving and entrance papers: definitions of marketing, marketing functions and intermediaries, and examples of channels.
  • Degree and research-fellowship entrances: calculating price spread, producer's share and marketing efficiency indices; the difference between costs and margins; operational versus pricing efficiency.
  • Civil-service and professional examinations: essays on marketing reforms, producer organisations, market infrastructure, and the role of intermediaries.

Described in general terms: the kind of examination, not a past paper. Laisha never reproduces exam questions.

Questions people ask

Are intermediaries always bad for farmers?

No. Many perform real services, such as collecting small lots, financing, storing and transporting, that farmers would otherwise have to perform themselves, often at higher cost. Problems arise when competition is weak or information is one-sided.

Why do consumer prices sometimes rise while farm prices fall?

Marketing costs (fuel, labour, packaging, rent) can rise independently of farm prices, and margins may widen when buyers are few. Retail prices also tend to adjust more slowly than farm prices.

What is the difference between a marketing channel and a value chain?

A channel describes who handles the product on its route. A value chain looks at the same route as a sequence of value-adding activities, and asks how value, power and rewards are distributed along it.

Sources

  1. Kohls, R. L. and Uhl, J. N. Marketing of Agricultural Products, 9th edition. Prentice Hall, 2002.
  2. Shepherd, G. S. Marketing Farm Products: Economic Analysis. Iowa State University Press, 1965.
  3. Acharya, S. S. and Agarwal, N. L. Agricultural Marketing in India, 6th edition. Oxford and IBH, 2016 (chapters on marketing efficiency measures).
  4. Clark, F. E. Principles of Marketing. Macmillan, 1922.
  5. FAO. Agricultural marketing extension and value chain guides. Food and Agriculture Organization of the United Nations, various.

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