NCEA Level 3 Agricultural and Horticultural Science (90651) 2011 — page 1 of 6
Assessment Schedule – 2011
Subject: Explain how market forces affect supply and demand of primary products (90651)
Evidence Statement
Q
/Evidence
/Achievement
/Achievement with Merit
ONE / Market forces affecting the supply of primary products(a) / Exchange rate
The explanation for changes to recent supply could include:
- increased/decreased returns
- increasing production to maintain level of income
- costs of production
- main export market and the currency involved.
A / States the change in exchange rate (indicates actual data) in NZ$ that has occurred, and explainsin detail how the supply of the product (timing, quantity, etc) has been affected by the rise and/or fall.
M
(b) / Price Trends
The prices received by the producer are a key driver of changing levels or patterns of supply. The explanation of changes to supply could include:
- the stability or volatility of price trends over the long term (3 years)
- the historical short-term variation in price.
- the product
- the ability and willingness of producers to change to alternative forms of production
- price trends for alternative forms of production
- long lead-time required for any changes (increase or decrease) in production.
Explains how the price trends illustrated impact on supply in broad or general terms.
A / Illustrates on the graph a specific price trend (values included).
Explains in detailhow the price trends illustrated impact on supply in specific terms.
M
(c) / Political intervention
An explanation of how governments manipulate the quantity of supply and/or timing.Must include reference to current tariffs, quotas, subsidies or phytosanitary restrictions, free trade agreements, etc, being enforced by named governments. / Explains how political intervention strategies impact on supply in broad or general terms.
A / Explains, in detail, (with accurate values), how political intervention strategies impact on supply.
M
Evidence /
Achievement with Excellence
(c) / The relative importance of market forces affecting the supply. / The justification of one market force over another must provide evidence of the merits of each market force as they impact on the supply of the product to the stated specific market.Actual data must be stated (trends in prices, exchange rates, interventions, etc).
E
Q
/Evidence
/Achievement
/Achievement with Merit
TWO / Market forces affecting the demand for primary products(a)
(b)
(c) / Price
Explanation will discuss what price change has occurred and what effect there has been on the demand for the product, if any. / Explains how a price change affects demand in broad / general terms.
A / Explainsin detail, using some form of data, how the price change has affected demand.
M
Consumer preference
Explanation should state the actual trend(s) in consumer preference that have occurred, and how they have affected the demand for the product. The preferences could be within the single product, or between competing/substitute products.
Changes in demand could be reflected in the price, quantity or timing of the demand. / Explains how consumer preference has affected demand in broad or general terms.
(May express consumer preference as quality requirements.)
A / Explainsin detail how consumer preference has affected demand, using some form of data – eg the trend(s) in consumer preference, and why they have occurred.
M
Quantity
Explanation may cover a factor that will affect the quantity of a product supplied, and its implications for the quantity available. / Explains how the quantity available has affected demand in broad or general terms.
A / Explainsin detail, using some form of data, how the quantity available has affected demand.
M
Product quality
Explanations must refer to a named quality assurance programme operated on-farm or by processors of the product. In most cases “quality” will refer to product attributes and packaging (ie fitness for purpose of described user/consumer). It could also refer to the source of the product via traceability programmes. / Explains how an aspect of an identified quality assurance programme ensures that product is “fit for purpose” in terms of customer/consumer requirements, thereby maintaining or increasing demand.
A / Explains, in detail, (using data or supplementary information) how an identified quality assurance programme ensures that product is “fit for purpose” in terms of customer/consumer requirements, thereby maintaining or increasing demand.
M
Reliability of supply
Explanation should state how a reliable supply from producers is achieved, and how consumer demand is maintained or increased as a result of either the quantity, quality or timing of supply. Reference could be made to consumer loyalty, processing requirements, etc. / Explains the effect of reliability of supply on demand in broad or general terms.
A / Explainsin detail the effect of reliability of supply on demand.
M
Promotion
Explanation should include actual examples from a relevant promotional campaign, including how the key message is conveyed and how demand for the product has increased. / Explains how relevant promotion method(s) have affected demand in broad or general terms.
A / Explainsin detail, using some form of data, how promotion methods have affected demand.
M
Market trends
Market trends must relate to an aspect of marketing influencing supply over the last three years. The trends explained could be price-based, quantities, attributes, consumer preferences, etc. Trends may or may not be highly significant – a stable trend is a common occurrence.
The candidate is expected to state actual figures to support their answer/explanation. / Explains how a market trend is able to influence the quantity supplied.
A / Explainsin detail, using data or supplementary information, how a market trend is able to influence the quantity supplied.
M
Evidence /
Achievement with Excellence
(c) / The relative importance of market forces affecting demand.Example: Lamb
(1)Price
(2)Promotion
(3)Consumer preference. / The justification of one market force over another must provide evidence of the merits of each market force as they impact on the demand (price or quantity) for the product.
When discussing price, actual prices must be stated.
E
Judgement Statement
Achievement
/Achievement with Merit
/Achievement with Excellence
4 A / 4 M / 4 M1 E
Appendix: Examples of possible answers
Note: Underlined text signifies examples of “detail” for the award of Merit.
Question One – Market forces affecting the supply of primary products
Example answers for parts (a), (b), and(c)
Exchange rate: Wool
The high New Zealand dollar was a significant contributor to a fall in crossbred wool prices in 2009/2010, with international prices for crossbred wool actually improving on the previous year, but returns to wool growers dropping to $2.50/kg crossbred wool. The volume of wool produced has continued to decrease, with a further 5% fall in 2009 to 148,000tonnes, as the profitability of wool and sheep farming in general has fallen, and producers of sheepmeat convert to more profitable ventures such as dairying, where there are still profits to be made, even with an unfavourable exchange rate.In 2010/2011, the international wool price has increased rapidly, as has the exchange rate, which in April 2011 was sitting at around US0.80.
Price: Wool
Wool prices have moved from being at historic lows – $3.20/kg for crossbred wool, or just 6.2 percent of the comparative price prevailing at the peak of the Korean War wool boom – to over $6.00/kg in the space of 18 months. The price of crossbreed wool has some influence on supply, as these farmers have tended to see wool as a by-product (or even as a cost) of producing sheep meat. Consequently, their focus has changed to specialist meat breeds and ram selection, rather than dual-purpose meat and wool genetics. Wool supply has fallen and exports dropped another 5% in 2009 to 148,000tonnes,due to the profitability of wool and sheep farming in general falling over recent years.
Political intervention: Potato exports to South Korea
South Korea operates a range of tariffs and quotas on potato imports. Currently an import quota of 18,810tonnes is allocated to New Zealand. However, a tariff of 30% in-quota and 304% out of quota, along with very particular biosecurity regulations, has resulted in only 44tonnes of processed potatoes being supplied to this market in 2008/9.The supply of imported potatoes(both fresh and processed) has been reduced as growers/exporters choose more profitable and accessible markets.
Example answer for Question One (d)
Milk
(1) Price.
(2) Exchange rate.
(3) Political intervention.
Recent trends in the price paid to farmers for milksolids have had a greater effect on the supply of milk than either the exchange rate or political intervention.
Farmers are very responsive to farm gate prices. Dairy farmers have a number of options to quickly increase their level of production if the outlook appears favourable. The increase in payout over the past few years (Fonterra’s payout in 2010/2011 was $7.90/kg milksolids) has resulted in large-scale conversions from sheep, beef and forestry operations. The feeling that this trend will either continue or at least stabilise has resulted in the large capital investment required for these conversions. This has been a major factor in determining the supply of milk. Despite the increase in the NZ$, a factor that would normally reduce returns, the rise in price received to $7.90/kg milksolids has negated the downside of the exchange rate, encouraging more dairy farm conversions and higher production volumes.
While the exchange ratecan play a large role in determining the payout farmers receive, we have seen in recent years that despite a strengthening NZ$ (up to $0.80 against the $US in April 2011) the payout received by farmers has remained favourable. They would not be looking to change their production, as they have committed financially and physically to this product, and any other product produced would need to be exported and would face the same unfavourable exchange rate.
Political intervention does impact on the returns for milk products in some markets, eg Taiwan has a tariff of 23% on all milk powder imports. However, with the development of free trade agreements with many Asian countries, including China, and the fact that our milk products are exported to more than 70 countries, the effect of political interventions on the quantity being able to be supplied or the price received by the producer is minimised.
Thus, market trends, in terms of the price paid to farmers for milksolids, remain the most significant factor in determining the supply of milk on an annual basis and into the medium to long term.
Question Two– Market forces affecting the demand for primary products
Example answers for parts (a), (b), and(c)
Consumer preference: Apples
Changing consumer tastes and expectations regarding keeping qualities have seen consumers change their preferred choice of apple varieties in recent years. The emergence of new varieties such as Jazz, with its deep red colour, crisp texture, dense flesh, medium size and “strong” flavour have seen consumers shift their demand to them,and away from previous favourites such as Braeburn and Royal Gala. Quantities sold have increased significantly, and in 2010just under 20,000 tonnes was sold – up from 7,500tonnes in 2007.
Promotion: Kiwifruit promotion in Vietnam
Fresh Studio's marketing team, under the guidance of marketing director MrsSigrid Wertheim-Heck, has launched an extensive in-store sampling promotional campaign to build awareness of kiwifruit, grow sales, and generate ZESPRI brand preference. During the 2009 kiwifruit season, the volume of sales to the Vietnamese market has increased to 212 tonnes – up from 42 tonnes in 2007.
Reliability of supply: Kiwifruit
Zespri wishes to supply its major markets with kiwifruit for 12 months of the year, enabling customers to find Zespri kiwifruit on the shelves whenever they go to the supermarket. They are able to do this by contracting growers in northern hemisphere countries such as Italy and France to supply kiwifruit under the Zespri label. Customers will be more willing to buy Zespri kiwifruit if they are able to purchase fresh fruit year-round, rather than being restricted to a short season. Volumes purchased have consequently grown steadily from 65 million trays in 2002 to 92 million trays in 2008.
Product quality: Wool (Wool Testing Authority accreditation)
Less than half of New Zealand's 115,000 tonnes of shorn wool is now sold at auction. All this wool is tested prior to sale at an accredited testing facility, which provides objective measurements of commercially important characteristics. This gives New Zealand wool exporters a key competitive advantage, as they can supply wool that meets buyers' specifications, hence increasing the demand for NZ wool over non-specified competitors’ wool. The characteristics tested include yield, condition (moisture content), fibre diameter, colour, length, strength, and bulk.
Quantity available: Mandarins
The volume of mandarins exported to Japan is around 7,000tonnes in April/May. This fluctuates with seasonal factors, eg a poor spring can lead to late production and the window being missed.There has been a move by the NZ Citrus Association in recent years to maintain the quantity at the upper limit of 7,000 tonnes of high-quality fruit. This maintains the level of demand for NZ-grown fruit in this market, with growers continuing to receive premium prices.
Price: Kiwifruit
A 10% increase in price for kiwifruit in the Japanese market will have no affect on the quantity consumers will buy. Kiwifruit are a niche product in Japan, where producers receive as much as $2.50 each for large-sized fruit. The quantity of fruit demanded in Japan has increased in 2009 to 65,000 tonnes, even though this market pays the highest price per tonne ($3,360 – almost twice what is received in the European market).
Example answer for Question Two (d)
Lamb
(1) Price.
(2) Promotion.
(3) Consumer preference.
Price is the key market force that determines the demand for lamb. While promotion and consumer preferences have some effect, they are not as significant as price.
Lamb is often priced towards the top of the range of meat options available to consumers. From $10–$15/kg for chops and up to $20/kg for a leg for roasting ($30–$45 per leg), it represents expensive meat when the fat/bone content is considered. Consumers are very sensitive to the price of meat, and when lamb prices are high (at times of high export lamb prices) there is a noticeable drop-off in lamb meat sales as consumers switch to alternative meats, eg chicken at around $15/kg (skin off breast). TV promotion by sportswomen has, according to Meat and Wool New Zealand, increased demand for lamb by 5%. However, when the price for lamb rose in 2004, demand dropped in favour of cheaper meats such as pork and chicken.
Promotion, such as campaigns like the TV ads featuring the Evers-Swindell sisters and Sarah Ulmer, attempts to target the female/sporty sectors of society and increase demand from those sectors. However, campaigns tend to be neutralised by high prices.
Consumer preference for lamb as a popular barbeque meat – quick and safe to cook (unlike pork and chicken that must be cooked fully) – remains, and there are still some traditional roasts being sold.However, these are often bought as a special once-a-week/month meal, rather than for common day-to-day consumption, due to its cost, and to its cooking time not fitting into many people’s busy schedules. Even so, it can still often have a higher fat/bone content than many other meat options.
Price variations have been shown to produce significant shifts in consumer demand, with high prices for lamb reducing demand, while demand for pork has increased. The promotional activities of Meat and Wool NZ has at best maintained market share in the meat trade, and while a minor 5% increase in NZ consumption is desirable, it must be remembered that 90% of lamb is exported. So to greatly influence demand overall, an increased demand from overseas consumers is vital. Price is the most significant market force in the major export markets, except during times of major animal disease outbreaks, when consumer preference has had a significant impact on demand for NZ lamb.