Economic Importance of Plants

Plants are extremely important in the lives of people throughout the world. People depend upon plants to satisfy such basic human needs as food, clothing, shelter, and health care. These needs are growing rapidly because of a growing world population, increasing incomes, and urbanization .

Plants provide food directly, of course, and also feed livestock that is then consumed itself. In addition, plants provide the raw materials for many types of pharmaceuticals, as well as tobacco, coffee, alcohol, and other drugs. The fiber industry depends heavily on the products of cotton, and the lumber products industry relies on wood from a wide variety of trees (wood fuel is used primarily in rural areas). Approximately 2.5 billion people in the world still rely on subsistence farming to satisfy their basic needs, while the rest are tied into increasingly complex production and distribution systems to provide food, fiber, fuel, and other plant-derived commodities . The capability of plants to satisfy these growing needs is not a new concern. The Reverend Thomas Malthus (1766-1834) in his Essay on the Principle of Population in 1798 argued that population growth would exceed nature's ability to provide subsistence. According to the U.S. Census Bureau, the world population was about one billion in 1800, doubled to two billion in 1930, doubled again to four billion in 1975, and reached six billion people in 2000. World population is expected to be nine billion by the year 2050. The challenge to satisfy human needs and wants still exists.

Income has also been increasing rapidly throughout most of the world at the same time. U.S. census estimates are that the gross national product reached $27,000 per person in 1997 and is expected to reach $69,000 in 2050 assuming a 1.8 percent annual rate of growth. Income per person in many countries of Asia, Latin America, and Africa has increased more rapidly, but continues to be less than in other areas such as Western Europe and the United States. As income grows, plants become more valuable because people want to buy more and higher-quality products to satisfy basic needs.

Increasing urbanization leads to an increase in demand for marketing services as populations relocate from rural areas to urban areas. According to the Census Bureau, the U.S. population, for example, changed from 60 percent rural in 1900 to less than 25 percent rural in 2000. This urbanization demands more marketing services to assemble, sort, transport, store, and package large quantities of foods from production centers to consumption centers.

Value of Plants

According to the United Nations Food and Agriculture Organization, the estimated export value of major plant commodities traded in world markets for 1998 was: rice ($9.9 billion dollars), maize ($9.1 billion), wheat ($15.1 billion), soybeans ($9 billion), coffee greens and roast ($13.7 billion), sugar ($5.9 billion), tobacco ($24.1 billion), cigarettes ($15.4 billion), lint cotton ($8.2 billion), forest products ($123 billion), and forest pulp for paper ($13 billion).

Markets, a place where people buy and sell goods and services, determine the economic value of plants. The value depends on the expected uses and benefits provided. The economic value of plants is measured by their prices in a market economy. Demand and supply determine the price. In most countries, markets operate freely with little direct government interference in trading. In centrally planned economies such as China, however, the government frequently controls market operations, and buys and sells through government companies. In planned economies, governments may set prices administratively at levels that do not indicate true economic value to consumers and producers. As world economies become more open and market-oriented through trade agreements such as those that come from the World Trade Organization, the value of plants will likely become more equal among countries.

Two main types of markets set the value of plants: cash markets and future markets. The most common type is a cash market. Cash markets are very popular places throughout the world where buyers and sellers meet to exchange money for goods and services. Demand and supply in the cash market set the price at which buyers will exchange money with sellers for immediate possession of goods. In the simplest case, producers take goods to the market for immediate sale, and consumers arrive with cash to buy goods for immediate possession. In more complex cases, producers sell goods to one or more other buyers who in turn sell the goods to consumers.

Cash markets operate daily, weekly, or for other intervals all over the world. Consumers and producers trade in thousands of cash markets operating in the world today. These local cash markets in rural areas are linked to larger regional trading centers that in turn are linked to cash markets in the larger cities. Cash markets operate for all the major plant products.

Futures markets, a second major market to set the economic value of plants, operate very differently from cash markets. In cash markets buyers and sellers trade the physical good, whereas in futures markets buyers and sellers trade a futures contract. Futures contracts are standardized written documents calling for future delivery of a good at a particular time and place in the month of expiration. Futures markets attempt to discover the best value today for a good tomorrow based upon expected demand and supply in some future time period.

Futures markets have become increasingly popular around the world. Important futures exchanges include the Chicago Board of Trade for grains and oilseeds; the Chicago Mercantile Exchange for livestock, dairy products, and lumber; and the New York exchanges for cocoa, coffee, cotton, orange juice, and sugar. Futures contracts are traded on exchanges in Great Britain, France, Japan, Australia, Singapore, and Canada. In addition, Brazil, China, Mexico, Italy, and Spain (to name a few) have futures exchanges.

It is interesting to note that futures markets do not trade contracts in fruits and vegetables and other highly perishable products. Futures trading is not possible for highly perishable products because of the difficulty of long-term storage.

Marketing Systems for Plants

The marketing system for most plants can be viewed as an hourglass shape that concentrates production from many farms into large quantities and fewer firms for processing and handling, followed by a distribution into smaller quantities and more firms for sale to many consumers. Marketing systems add value as the plants progress from the farmer to the consumer. The added value takes the form of marketing services that transform a raw commodity into a finished product for consumer use. Depending on the commodity, these services include cleaning, sorting, grading, packaging, storing, transporting, handling, processing, and financing until goods are sold to the consumer.

Farmers usually sell their goods at harvest time in local markets to buyers who may come from large urban or smaller regional trading centers, or farmers sell to agents of those buyers. The buyers assume the risks of ownership until they are able to sell the goods to consumers at a later time. The ownership risks include providing many valuable marketing services to assure that products will be available in the right quality, in the right place, at the right time, in the appropriate amount, and for a reasonable price.

The difference between the value paid by consumers for plants and the value received by producers is the marketing margin, which is the amount charged by the businesses for the services provided. For example, if the consumer pays one dollar for a product in the supermarket, and the producer receives forty cents, then the marketing margin is sixty cents.

Higher incomes and growing populations mean that consumers will demand more marketing services that increase convenience and reduce preparation time, such as slicing, freezing, packaging, and ready for microwaving. In addition, as per capita income increases, the composition of demand for food changes to increased consumption of higher-value products. These changes typically mean increased consumption of products such as fruits and vegetables, meat, dairy, and processed products, and decreased consumption of staples such as potatoes, cassava, and rice. More marketing services are required for high-valued products.

As consumers demand more marketing services, the marketing margin will increase, causing the farmers' share of the consumer food dollar to decline. In many countries, the farmers' share of consumer expenditures (about 40 to 50 percent) is already declining, as marketing margins increase. John Abbott in Agricultural and Food Marketing in Developing Countries indicated that margins also vary by country for the same commodity due to differences in income, geography, infrastructure , and marketing systems.

The farmers' share of consumer food expenditures has declined steadily through time in the United States to about 21 percent in 1993; ranging from 25 percent for food consumed at home to 15 percent for away-from-home consumption. This declining farmers' share can be expected to continue as income increases. A declining farmers' share does not mean that the marketing system is inefficient or that farming is unprofitable. Technical progress that increases productivity generally will result in declining real prices per unit of output.

Farmers can increase their share of the consumer food expenditures by adding value to what they sell. Some examples of added value are direct sales to consumers at farmers' markets, roadside markets, and farmer-owned marketing and processing cooperatives. Paul Eck in The American Cranberry described Ocean Spray cranberry juice as a most successful story of farmers adding value to cranberries. Cranberry growers formed a cooperative to process and market Ocean Spray cranberry juice more profitably, a product that has great brand identification with consumers.

see also Agriculture, History of; Agriculture, Modern; Alcoholic Beverage Industry; Alcoholic Beverages; Alliaceae; Cacao; Coffee; Corn; Cotton; Fiber and Fiber Products; Forestry; Fruits; Grains; Oils, Plant-Derived; Paper; Potato; Potato Blight; Rice; Sugar; Tea; Tobacco; Vegetables; Wheat.

Donald W. Larson

Bibliography

Abbott, John C. Agricultural and Food Marketing in Developing Countries: Selected Readings. Tucson, AZ: University of Arizona Press, 1993.

Catlett, Lowell B., and James D. Libbin. Investing in Futures and Options Markets. Albany, NY: Delmar Publishers, 1999.

Eck, Paul. The American Cranberry. New Brunswick, NJ: Rutgers University Press,1990.

Meyer, Richard L., and Donald W. Larson. "Issues in Providing Agricultural Services in Developing Countries." In Promoting Third-World Development and Food Security, eds. Luther G. Tweeten and Donald G. McClelland. Westport, CT: Praeger, 1997.

Rhodes, V. James, and Jan L. Dauve. The Agricultural Marketing System, 5th ed. Scottsdale, AZ: Holcomb Hathaway, 1998.