Essential Functions of Markets in the Food System

We often take it for granted that food products will be available to us when we want them, in a form that we want them, and where we want them. But these useful (some would say essential) characteristics of the food supply do not occur by magic – they are a product of the way that markets function in the food system. So what exactly are the functions that markets perform that enable everything to come together to create time, form and place utility for consumers?

Exchange functions: Markets bring buyers and sellers together so that they are able to exchange products. A market must exist through which the grain farmer can sell her/his grain to elevator companies. There must be a market through which elevator companies can sell grain to flour millers and so on. The exchange function sets prices for the ingredients that go into bread and sets the price of the loaf on the supermarket shelf. A major focus of this course is how prices are formed in the food system, in other words, how this exchange function actually works.

Physical functions: Markets perform a series of functions that are essential for ensuring that consumers are able to purchase the products that they want. The most important functions are storage (lessons 12 and 13), transportation (lessons 11 and 12) and processing (lesson 6). We examine how these functions are performed by the food system and the economic forces that drive them.

Enabling functions: There are functions that markets provide that are essential to the smooth functioning of the food system, but which are less obvious than the exchange and physical functions described above. These functions are:

• Standardization – Knowing what you are purchasing and having confidence in those purchases is a major issue for food. Standardization to ensure product quality is a major feature of markets in the food system. We examine this in lesson 10.
• Financing – There is a saying “money makes the world go round”. Finance is necessary for the food system to function. Farmers must be able to have access to credit to produce their wheat since they will receive payment for the crop several months after planting. Credit is important to other participants in the food system to enable them to finance their day-to-day operations and to help fund investments (in flour milling or baking equipment, for example). In this course we look at some important aspects of financing in the food system, for example, in determining storage decisions (lesson 13).
• Market intelligence – Markets provide information to buyers and sellers in the food system. Trends in prices are a major source of information on which the farmer can base decisions on how much wheat to produce or the baker can base decisions on how much bread to bake. The formation of prices in the food system and how price formation affects the decisions of the economic agents who are a part of the system is a major focus of this course (e.g., lessons 3 and 4).

Risk bearing – Farming is a risky business. We shall talk about the risks involved in producing food in this course. One of the functions performed by markets in the food system is to help farmers and others manage risk, particularly the risks associated with fluctuations in prices of commodities (lesson 13).