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Full Project – ASSESSING THE IMPACT OF PRICING POLICIES OF AGRICULTURAL INPUTS

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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

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).

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

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,

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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