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ASSESSING
THE IMPACT OF PRICING POLICIES OF AGRICULTURAL INPUTS
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The
disappointing performance of the agricultural sector in many developing
countries of the world is receiving increasing attention of the monetary and
exchange rate policy makers. This intervention in agricultural markets is
widespread and is practiced in rich and poor countries alike. The policies on
money supply, nominal exchange rates, interest rates income, international
capital flows, fiscal and trade directed at macroeconomics sector of the
economy are of utmost importance to agriculture. Monetary policy uses the
monetary authority to control the supply of money in the economy.
Every
agricultural business entity is set up with the primary objective of making
profits and several considerations underlying their profit motive come to bear
in determining the pricing of their goods between associated parties. A
business, whether small or big, simple or complex, private or public is created
to provide competitive prices. Most Agricultural
13
companies
lack the knowledge and skills of basic marketing ingredients, such as marketing
research, market segmentation and market planning and control which thereafter
leads to poor quality inputs, unawareness of competition, poor distribution,
and poor pricing methods (Asaolu, 2007)
The poor
pricing methods thereafter lead to poor input pricing, which will eventually
affect sales (demand) and finally the profit of the business. In a developing
country like Nigeria, with low income and high level of poverty, a company that
wants to succeed should offer its input at the price the consumers can bear.
But often, small manufacturers set prices of their inputs arbitrarily without
regard to consumer characteristics in the environment (Ayozie 2008)
Pricing
decision is a crucial decision every agricultural organization has to make,
because this will eventually affect their corporate objectives, either directly
or indirectly (Monroe 2003). For every business entity, irrespective of their
line of business and objective, cost minimization and profit maximization are
the general factors to be considered and for non-profit making agricultural
organizations, there will always be the need to reduce cost at all means and to
maximize output. A business whether small or big, simple or complex, private or
public, is created to provide competitive prices (Ayozie 2008).
14
According to
Hilton (2005), setting the price for an agricultural organization’s input is
one of the most crucial decisions a manager faces, and one of the most
difficult, due to the number of factors that must be considered. Some of the
factors that influence pricing decision are demand, competitors, cost,
political, environmental, legal and image-related issues. Horngren, (2006),
buttresses this point by stating that managers are frequently faced with
decisions on pricing and profitability of their inputs.
Some of the
objectives of agricultural companies vary from maximization of profit,
minimization of cost, maximization of shareholders fund, to becoming a market
leader. From the various objectives of agricultural companies, the primary
objective of any business enterprise is to maximize profit and minimize cost,
except for charity agricultural organizations that are set up primarily not to
make profit, but there will be need to minimize cost by all means, therefore the
need to set prices, which therefore connotes that pricing decision arises in
virtually all types of agricultural organizations, approach to an effective
pricing strategy is to manage revenues in ways that support the firms’
profitability objectives, which leads to the question; how well can we
complement the various
15
factors that
influence pricing decision, to achieve our overall objective, which is
maximization of profit (Ayozie 2008).
For any
agricultural organization that is involved in the inpution of goods and
rendering of services, after answering the question what to produce, and who to
produce for, there is need to answer the question how much will our potential
customers be willing to pay for the good? This difficulty of price fixture and
the effect changes in the price of inputs has on the profitability, has posed a
sense of concern to most agricultural companies in Nigeria. Pricing decision is
a crucial decision every agricultural organization has to make, because this
will eventually affect their corporate objectives, either directly or
indirectly (Monroe 2003). For every business entity, irrespective of their line
of business and objective, cost minimization and profit maximization is a
general factor to be considered and for non-profit making agricultural
organizations, there will always be the need to reduce cost at all means and to
maximize output. A business whether small or big, simple or complex, private or
public, is created to provide competitive prices (Ayozie 2008).
According to
Hilton (2005), setting the price for an agricultural organization’s input is
one of the most crucial decisions a manager faces,
16
and one of
the most difficult, due to the number of factors that must be considered.
Horngren, et al (2006), buttresses this point by stating that managers are
frequently faced with decisions on pricing and profitability of their inputs
1.2.
Statement of the Research Problem
Currently,
price instability is the most serious problem in the Nigerian agricultural
sector. One of the important factors causing instability in price is the
movement of agricultural prices. This price instability leads to very low
inputivity of the private sector and the lack of diversification of the
economy; which makes Nigeria to be basically a mono-economy that depends mainly
on the oil sector. This is caused mainly by the inhospitable agricultural
business environment which includes: infrastructural deficiencies, poor
security of lives and property, competition and rank seeking, low access to and
the high cost of finance, weak financial institution and poorly defined
property rights and the enforcement of contract coupled with unstable
macroeconomics policies.
The stage of
the input in its life cycle will determine the pricing decision for the input
at hand. For new inputs, the target costing approach is used, in which the
company estimates what they think consumers will pay for a new input, and then
back out the cost that is in excess of it in order to sell
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