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CHAPTER SIX MARKETING OF FOREST PRODUCTS AND SERVICES

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022

6. TChapter

MARKETING OF FOREST PRODUCTS AND

SERVICES

Expected Learning Outcome

Upon completion of this chapter students should be able to;

i. Classify markets based on specific factors of interest
ii. What marketing planning is and why it is needed.
iii. Explain the meaning and characteristics of marketing and the various roles it plays in
an organization.
iv. Describe how and why marketing has evolved over time.
v. Define environmental marketing and explain its basic differences with traditional
marketing.
vi. The value of models in marketing planning.
vii. The Integrated Model of Marketing Planning (IMMP), its central role, logic, and use.

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022

6.0 Introduction

The economic process of “I buy, you sell” In a street market is very simple one since you
hand the money, you get the merchandise. However, things somewhat more complicated
when looking at an art auction. There it is starting to look like the model for exchanges albeit
that there is one seller and a whole audience of buyers 1. The pricing mechanism is loud and
clear. Another phenomenon is the flower auction, which differs from the art one in that
pricing is different. For art the bidding goes up and for flowers the bidding goes down.
Reason is that the mechanism is much faster. From thereon we see the securities markets
going through a development process from call markets, toward continuous markets, with an
evolution of determining prices, such as matching, market making, quote driven markets and
open order books. This chapter combines the demand, cost of production, and marginal
analysis concepts to explain how competitive markets determine prices, output, and profits 2.

From the street market to today’s sophisticated markets has been a long and expensive way.
The securities markets have developed areas called pre-trade and after-trade having included
all kinds of processes that became referred to as “value chain” The new wisdom is that one
cannot efficiently operate a securities market without being able to control the value chain.
Mastering the value chain is creating shareholder value3. The latter notion is making strong
inroads in exchange land as a result of the demutualisation and subsequent going public of
market operators. In free market economies, marketing is a tool for satisfying the needs of
society. It provides the link between the production taking place in a company and the
demand of the individual consumer4. Marketing integrates the company’s various functions
to target specific markets in order to best meet the needs of customers. Marketing also helps
to create relationships with those customers and other stakeholders.

Marketing clearly is more integral than most people think. It is more than advertising or
personal selling, two of the most visible tools of marketing. It has also changed over time,
and will continue to evolve and adapt to changes in the business environment. Many of these
developments are documented in the pages and chapters that follow. We feel that
understanding marketing is best accomplished by a planning and modelling approach. This
chapter explores models of marketing and develops the concept of the Integrated Model of
Marketing Planning, which serves as the structure of this textbook. The concepts of social

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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
responsibility and environmental marketing are also explored in the context of the forest
industry. We discuss the future of marketing and end the chapter with an explanation of how
the remainder of the chapters are structured according to the Integrated Model of Marketing
Planning.

6.1 Definition of Market

The word market comes from the latin word “marcatus” which means merchandise or trade
or a place where business is conducted. Word “market” has been widely and variedly used to
mean5;

(a) a place or a building where commodities are bought and sold, e.g., super market;
(b) potential buyers and sellers of a product, e.g., wheat market and cotton market;

Some of the definitions of market are given as follows:

a. A market is the sphere within which price determining forces operate.

b. A market is area within which the forces of demand and supply converge to establish
a single price.
c. The term market means not a particular market place in which things are bought and
sold but the whole of any region in which buyers and sellers are in such a free
intercourse with one another that the prices of the same goods tend to equality, easily
and quickly.
d. Market means a social institution which performs activities and provides facilities for
exchanging commodities between buyers and sellers.
e. Economically interpreted, the term market refers, not to a place but to a commodity or
commodities and buyers and sellers who are in free intercourse with one another.

A market is that contact place/location where people converge for the purpose of buying and
selling. It can also be defined as that point where transactions of goods and services takes
place6. However, for whatever point or location that has been designated as market, its
concerned with the promotion, selling and trading of goods/products and services. However,
the meaning and definitions of market varies from one disciple to another. However, we shall
be considering the perceptions of the definitions of three different disciples.

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
To geographers, their perception on the definition of the concept of market is on that spatial
location of the earth surface where contacts and transactions take place. These groups of
scholars are more concerned about the ideal space on which transaction and trading (buying,
selling, services) activities take place. b) To marketers, their perception of the definition of
the concept of market is on any transaction that centered purely on buying and selling of
goods and services. These groups of scholars went further to say that a market is that contact
place or a total system where business activities are designed to plan, price, promote and
distribute want-satisfying goods and services to present and potential customers. c) To
economist, their perception of the definition of the concept of market is purely on profit
making. These groups of scholars believed that a market is that place where trading activities
take place for the purpose of profit making. They are of the opinion that for buying and
selling to take place, there must be some elements of profit making and profit sharing.

For a market to exist, certain conditions must be satisfied. These conditions should be both
necessary and sufficient. They may also be termed as the components of a market 7.

1. The existence of a good or commodity for transactions (physical existence is,

however, not necessary)
2. The existence of buyers and sellers;
3. Business relationship or intercourse between buyers and sellers; and
4. Demarcation of area such as place, region, country or the whole world. The existence
of perfect competition or a uniform price is not necessary.

6.2 The Concept of Marketing

For marketing to take place the drive for supply (production) must meet with the drive for
demand (consumption)8.

6.2.1 Definition of marketing

The term 'marketing' has been defined in many ways by different authorities. Agri-forestry
market transactions involves change of ownership of Agri-forestry and food products. Agri-
forestry marketing provide a link between Agri-forestry production and food consumption.
Three aspects of market transactions are worth noting 9:

 Spatial -transactions occur across space

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
 Temporal -transactions occur across time
 Form -transactions occur in a certain form

It is useful for us to pause for a while and consult some of these definitions 10:

i. The management function that organizes and directs all business activities involved in
assessing and converting consumer purchasing power into effective demand for a
specific product or service, and in moving it to the final consumer or user so as to
achieve the profit target or other objectives set up by the company (British Institute of
Marketing).
ii. Marketing consists of the performance of business activities that direct the flow of
goods and services from producer to consumer or user. (American Marketing
Association).
iii. Marketing is the business process by which products are matched with markets and
through which transfer of ownership are affected 11.
iv. Marketing is a total system of business activities designed to plan, price, promote, and
distribute want-satisfying goods and services to present and potential customers 12.
v. Marketing is human activity directed at satisfying needs and wants through exchange
process, while also aspiring to achieve the market's objectives 13.
vi. Marketing is social process by which individuals and groups obtain what they need
and want through creating and exchanging products and value with other. 14.
vii. Marketing is the function that assesses consumer needs and then satisfies them by
creating an effective demand for, and providing, the goods and services at a profit.
viii. Marketing is the business function that identifies customers’ needs and wants,
determines which target markets the organisation can serve best, and designs
appropriate products, services, and programs to serve, these markets.

It is very clear from these definitions that the term 'marketing' is open to varying definitions
as each authority thinks fit, hence no particular one has universal acceptance. However, the
common theme is that marketing is more than selling; it is the whole process that occurs
between the production of any surplus goods or services and their consumption or use, and it
is consumer- oriented. In actual fact, the most important need of the student is not an exact
definition, but to acquire sound understanding of what marketing means. Perhaps as a way of

10
http://www.nou.edu.ng/NOUN_OCL/pdf/SMS/MKT%20305.pdf
11
Richard R. Cundiff, Edward W. And Still (1964) Basic Marketing: Concepts, Environment and
Decisions Prentice-hall; First Edition
12
Stanton, W. J. (1964). Fundamentals of Marketing. USA: McGraw-Hill
13

https://ir.oauife.edu.ng/bitstream/handle/123456789/4074/Banwo%20Olufokunbi.pdf?sequence=1&isAllowed=
y
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Kotler, P., & Bloom, P. H. (1984). Marketing professional services. Engelwood Cliffs, NJ: Prentice-Hall.

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
getting a better understanding of the term, we may re- examine the definition given by
Stanton (1964)15:

“Marketing is a total system of business activities designed to plan, price, promote

and distribute want-satisfying goods and services to present and potential customers".

This definition given by Stanton has some significant implications; Firstly, it connotes that
the entire system of business action should be market – or customer-oriented. That is,
customers' wants must be recognized and satisfied effectively. Secondly, it suggests that
marketing is a dynamic business process - a total, integrated process-rather than a fragmented
assortment of institutions and functions. Thus, marketing is not any one activity, nor is
exactly the sum of several; rather it is the result of the interaction of many activities. Thirdly,
the marketing program starts with a product idea and does not end until the customer's wants
are completely satisfied, which may be some time after the sale is made. Fourthly, the
definition implies that to be successful, marketing must maximize profitable sales over the
long run. Thus, customers must be satisfied in order for a company to get the repeat
purchase, which ordinarily is so vital to success.

Evidently, it should be clear to us that marketing is much more than just an isolated business
function. As Kotler and Armstrong put it 16,

"it is a philosophy that guides the whole organization, its goal is to create customer
satisfaction profitably by building value-laden relationships with customers".

We can also reason that the marketing department cannot accomplish this goal by itself.
Consequently, it necessarily needs to work closely with other departments in the company, as
well as forge some working relationship with other organisations throughout its entire value-
delivery system to provide superior values to customers.

From the systems view therefore, marketing involves the whole company, since everyone in
the organisation should be seen to be involved in selling and satisfying customers. Everyone
should also be seen to be making the highest profit for the enterprise, and using the resources
of the company as efficiently as possible. It is thus important to stress that no section of the
company should arrogate this marketing responsibility to itself. This is because the concept
of marketing is a corporate affair, and management at all levels must understand the
philosophy behind it. To this end therefore, marketing may be said to involve finance,

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
production, research, development, merchandising, and advertising, promotion, distribution
and selling procedures17.

i. Marketing is the performance of all activities involved in the flow of goods and
services from the point of initial production until they are in the hands of the ultimate
consumers.
ii. It is the process of satisfying human needs by bringing precuts to people in the proper
form, at the proper time and place they need the products.
iii. Marketing however has several other meanings from the perspective of product,
business firms and the society as a whole. While the consumers are interested in
getting what they want at the lowest possible cost, the produces are interested in
obtaining the highest possible returns from the sale of their products. The various
firms engaged in doing the various marketing tasks are interested in the profitability
of their particular business operation. The overall ruler of marketing activities in a
society organized in a private enterprise framework is the consumer. The consumer is
king.
iv. Marketing is the process through which producers and consumers are brought into
contact formally or informally for the exchange of goods and services involving the
performance of marketing activities. It is a management function that organized and
directs all business activities involved in assessing and converting consumer
purchasing power into effective demand for a specific product or service and in
moving it to the final consumer or user so as to achieve the profit target or other
objectives set by the producer.

Based on the above discussion three facets of marketing can be deduced 18:

 the first is coordination and process of exchange. This entails how does the supply of
food become available to those who demand it? And both suppliers and consumers
are part of markets and marketing.
 The second is geographical aspects where by locations where buyers and sellers meet
(Billings wheat market) and broader context of marketing such as: TZ. wheat market;
World wheat market can be analysed.
 The last is value-adding activities involving transformation, transportation and
storage.

Similarly, there are various dimensions of any specified market. These dimensions are:
Location; Area or coverage; Time span; Volume of transactions; Nature of transactions;

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
Number of commodities; Degree of competition; Nature of commodities; Stage of marketing;
Extent of public intervention; Type of population served; and Accrual of marketing
margins19.

6.2.2 The evolution of marketing

How marketing is executed and the role it plays in an organization depends on the marketing
philosophy and culture of a company. An inappropriate or obsolete marketing philosophy
often means inappropriate or obsolete marketing actions and weak performance for the
company20. When marketing is purely a selling function, the company is probably
production-oriented. Marketing as an integrator or relationship-builder implies a
sophisticated market orientation. Marketing philosophies have changed in response to
historical developments in society. During the early years of modern industries and mass
production, demand for products was typically high and it was unnecessary to invest
resources into developing demand. Marketing philosophy developed accordingly and was
largely production-oriented. Recent developments in the marketplace have forced companies
to increase their marketing sophistication by shifting from a production orientation to market
orientation (Figure 6.1). With this shift comes a series of more sophisticated approaches to
marketing, such as an emphasis on social – rather than just economic – responsibility. Today,
a focus on the future bioeconomy has heightened interest in options to fossil fuel-based
products. Accordingly, forest industry must respond to this customer interest through its
production and marketing, thus potentially leading to an “environmental” orientation.

Figure 6:1 The development of marketing philosophies21

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marketing/
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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
6.2.3 Production and sales orientation
Production-oriented companies concentrate on producing large volumes of commodities at
low costs and rely on the sales department to move product into the marketplace. This
approach to business works well when demand is high, needs of customers are simple, and
competition is limited. The following aspects characterize a production, or sales, orientation:

 Technology and raw materials dominate business thinking

 Product development is concentrated on technological possibilities or better
utilization of raw materials
 Planning engineers think they know best what customers need
 Products are commodities
 There are few marketing personnel
 Products are marketed through intermediaries
 Little is known about end-users and consumers
 The cure for demand problems is harder selling
 Salespeople are to blame if the product is not selling

A production-oriented company feels that a marketing department is only a cost-creator

between the mill and the market. Under this model, low costs (and thus, low prices) are
necessary for success. Some argue that the marketing philosophy of an industry sector is tied
to its particular characteristics (e.g., raw material, production, product). An old saw miller
may say, for instance, “only lumber can be sawn out of a log and this can’t be helped by any
kind of marketing planning.” However, industry experience suggests that instead of being
dependent upon the characteristics of the sector, an appropriate marketing philosophy is more
dependent on the dynamics of the industry, the marketing environment, and the
innovativeness of the marketers’ attitudes. As the marketplace changes over time (especially
with respect to customer needs and competitors) companies must become more sophisticated
in their approach to marketing. A market orientation is seen as a response to ever increasing
demands from the marketplace.

6.2.4 Market Orientation

The terms customer orientation and market orientation are similar, but not synonymous. A
truly market-oriented business uses marketing as a leading, integrative function which drives
all other activities in the organization toward the goal of creating customer satisfaction and
value. In a market-oriented company, the customer is raised to a higher status – the
“customer is king.” This change in status comes from a realization that profits are created
through customers’ needs and buying behaviour. In a market-oriented company, relationships

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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
with end-users are strong and marketing research is conducted continuously. Product
development is based on research and marketing operations are planned according to
customers’ reactions. A market orientation must be present on all levels of the company and
in all marketing planning decisions. In addition, markets and marketing strategies direct
business planning, on all levels – investments, production, raw material procurement, etc.
The following list overviews how the various aspects of marketing are impacted by a market
orientation22.

 Products – Adopting a market orientation means moving from commodities to special

and custom-made products. A paper mill is not producing paper, but rather solutions
for different printing tasks and problems. A sawmill is not producing sawn wood, but
components for industrial customers.
 Customers – A market orientation means selectivity in choosing customers. This
means choosing the right customer for the company’s product, or choosing the right
product for the company’s customer.
 Market Areas – Understanding markets and customers is a vital capability for a
market-oriented company. Because resources are limited, the necessary level of
understanding can often be reached only for a limited number of market areas.
 Core competencies – A market-oriented company should pay special attention to
market intelligence, customer relationships and marketing skills. It should overcome
its competitors when creating attractive solutions to the needs of the customers.
 Organization – Every person in a market-oriented company realizes that the company
exists for its customers. The “voice” of the customer must be heard throughout the
organization.
 Information Systems – Systems for gathering and analyzing information must be able
to produce dedicated customer and market information. For example, each customer’s
level of profitability to the company can be assessed using the right information
system, and this knowledge can be valuable in allocating marketing resources.
 Planning Systems – An appropriate planning system is able to use market information
in planning of marketing strategies and functions as well as in planning of production
and raw material procurement.
 Marketing Channels – The marketing channels of a market-oriented company must
form connections to the customer, and information and influence should move freely
in both directions. Although the forest industry has made great strides toward market
orientation, research shows that there is considerable opportunity for increased
marketing sophistication (Box 4.1).

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
Box 6.1 Marketing Sophistication in the Forest Sector23

A study of hardwood and softwood sawmills in the US found that many companies are still
tied to a production or sales orientation and that managers generally viewed marketing in the
context of sales rather than the holistic concept outlined in this textbook. When asked to define
marketing, most respondents tended to focus on sales or promotion revealing a narrow view of
marketing. Some respondents referred to a customer or market focus suggesting a more
sophisticated understanding of marketing. Respondents often relied heavily on distributors and
brokers in order to move large product volumes and receive fast payment, a customer strategy
that fits best with a commodity product strategy. The thinking regarding organization and
implementation of marketing was also assessed to be underdeveloped. Still, the overall
evaluation of the situation with sawmills identified movement toward more of a customer and
market orientation, a more sophisticated approach to marketing.

The key to customer relationships is the creation of value. To attract customers, the company
must provide superior value, and marketing measures are designed to create customer value.
The market-oriented company is successful by helping its customers to grow, to create value
for their respective customer, and to be successful. Maintaining a market orientation is
clearly a challenge. Nowadays customers often have higher expectations of their suppliers.
Demands may include24:

 Cost savings
 Superior knowledge
 High product quality
 High levels of customer support
 Supply security

Being market orientated is a continuous improvement process. For example, information

technology (IT) has become a critical tool for maintaining customer relationships, and
companies must be prepared to invest in the solutions necessary to meet customer demands.
Generally, research has shown that a market orientation is positively associated with
profitability, so companies that coordinate all their functions in a concerted effort to
understand customers and competitors will likely be the most successful 25.

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
6.2.5 Responsible marketing in forest products
The traditional responsibility of a firm is to maximize profits for the owners while operating
within the laws of society. The opposing view is that companies have much wider
responsibilities. Modern society expects companies to hold three kinds of responsibilities:

 Economic responsibility
 Social responsibility
 Environmental responsibility

It is often said that companies have a responsibility to satisfy a range of stakeholders. An

example of internal stakeholders is company employees, while external stakeholders include
the company’s surrounding community. The World Business Council for Sustainable
Development has developed the following list of stakeholders and the company’s
responsibility toward each.26

 Owners and investors – high profits

 Employees – consistent, fairly compensated employment
 Customers – high quality products and service
 Business partners – fair, ethical treatment as partners
 Suppliers – consistent customer upon which to base the supplier’s business
 Competitors – maintain industry image
 Government regulators – meeting or exceeding regulations
 Non-governmental organizations – meeting or exceeding their expectations
 Communities – stable employment for community members

Meeting the myriad demands of multiple stakeholders can be an overwhelming task,

especially for companies that operate in several regions or countries since stakeholder
demands tend to vary based on geography, culture, and level of economic development and
education. Even in one location the views on responsibility can differ significantly.
Companies must adapt to meet the expectations and needs of stakeholders in each location,
while also meeting the highest standards of any location across all operations 27.

Despite differing views on the extent of corporate responsibility, it is clear that businesses
exist as a subsystem of society, and therefore have both an economic and social role in the

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Ardhi University
@ 2021/2022
community. Ultimately, society dictates the extent of this role and the level of responsibility
expected of corporations. In the early 1900s, these expectations largely reflected the view of
classical economics—that companies need only obey the law and provide profit—but the
values of society have changed over time. Consequently, expectations of companies are
changing as well. Often it is corporate actions negatively impacting the community or the
environment that drive the public to become involved and to increase their demands of
companies. Noteworthy environmental disasters such as the Exxon Valdez in Alaska and the
BP oil spill in the Gulf of Mexico are good examples. In the early 2000s, factory conditions
and human rights, especially in the apparel industry, were especially topical. At present,
global warming is an issue highest on the radar screen for many companies. With a majority
of countries in the world agreeing upon reducing the levels of carbon emissions for
combating global warming and climate change, companies are expected to change their
business operations and strategies in order to help meet emission targets.

In the forest industry, societal demands have primarily cantered on sensitivity toward
environmental impacts. These demands, and the way they’ve changed over time, can
generally be summarized in the following manner 28:

 1970s – emissions to water and air

 1980s – recycling and chlorine bleaching
 1990s – forest management and forest certification
 21st Century – global climate change and the role of forests

An important aspect of society’s changing values is the impact of globalization and the
consolidation of industries. Companies are becoming so large and multi-national that it is
increasingly difficult for any single government to enforce legislation to regulate their
actions. The resulting shift in power from government to corporations leads society to
demand greater responsibility from corporations. Society ultimately grants a company a
“social license to operate,” but if a company does not operate within society’s values, it risks
losing this license and ceasing to be competitive (Box 4.2).

Box 6.2 MacMillan Bloedel Ltd. And the Social License to Operate29

MacMillan Bloedel Limited (MB) was a large western British Columbia company with significant
operations on Vancouver Island, a place where ENGOs took an international stand against clear cutting and
harvest of old-growth timber. ENGOs protested at harvest sites and at the sites of key customers, hoping to

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 LM 435 Forest Economics
by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
Box 6.2 MacMillan Bloedel Ltd. And the Social License to Operate29

eliminate the company’s markets. In part because of this “war” with ENGOs, MB was in poor shape by
1997 and had nearly lost its license to operate. The company had a terrible in-woods safety record, was
losing money each time it harvested, and was constrained in its markets because of the protests by ENGOs.
In 1997, the company undertook a study with the following objectives:

 No compromise of employee safety

 Achieve “outrageous” financial success
 Make MB the most respected forest company in North America

The company essentially chose to meet some of the demands of the ENGOs, making changes in order to
maintain its license to operate. In an interesting twist, the company began to use the ENGO’s as advisors,
including them in the corporate decision-making process, rather than fighting against them. In 1998, the
company announced three main commitments:

 Replace clear cutting with variable retention

 Increase old growth conservation above status quo rate
 Certify forest operations to meet market demand
 According to MB the challenge was two-fold:

To move from simplistic, adversarial relationships with ENGO’s into more complex relationships capable
of simultaneously involving cooperation and competition. To pursue environmental enterprise with the
same level of creativity and passion previously devoted to battle, and frequently still devoted to competition.

Corporate social responsibility (often referred to simply as “corporate responsibility”) can be

defined as “the commitment of business to contribute to sustainable economic development
[economic responsibility], working with employees, their families, the local community and
society at large to improve quality of life.” Social responsibility means going beyond the
legal, technical, and economic requirements of the company.

Society’s view of responsibility is clearly changing. Fears about globalization and the
growing power of multinational companies have resulted in a backlash against big business
such as the protests surrounding the 1999 World Trade Organization meeting in Seattle,
Washington and the Occupy Wall Street movement. It is important to acknowledge the
differences in perspective regarding social responsibility among various cultures. People in
different countries have different views of responsibility based on their history, religious
views, and other values. Accordingly, companies in different regions can have different
approaches to managing responsibility30.

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Ardhi University
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Environmental responsibility

Environmental issues are a strong part of the forest industry’s market context. Much of the
concentration on environmental issues is centred on the concept of sustainable development.
In the late 1980s, the World Commission on Environment and Development defined
sustainable development as

“development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.”

Since that time a series of international meetings, including the landmark 1992 UNCED
meeting in Rio de Janeiro have increased the global focus on sustainable development. Most
recently, the United Nations General Assembly adopted a resolution titled, “Transforming
our world: the 2030 Agenda for Sustainable Development.” The agenda includes 17
Sustainable Development Goals and 169 targets. Multiple Sustainable Development Goals
have direct connection to the forest industry. For example, the forest industry has a clear role
in supporting the developing of sustainable cities and communities.

Few debate the merits of the concept of sustainable development or the desired outcomes of
the Sustainable Development Goals. But how do companies find their role in moving in this
direction? Environmental management systems help companies focus on these issues.
Developing environmental management systems begins with instituting corporate
environmental policies and embracing the concept of continuous improvement. A
complementary tool to environmental management is lifecycle assessment. Lifecycle
assessment is a way to quantify the overall life-cycle environmental burden of products.
Producing companies can use lifecycle assessment to design products that minimize impact
on the environment. Consuming industries and final consumers can use it as a decision aid
when selecting among potential products to fulfil a particular need.

Since wood is a renewable raw material, the forest industry has long claimed environmental
superiority over substitute products such as plastics and steel. Data regarding energy used in
the manufacture of wood versus substitutes has been used to back this claim. With respect to
the energy used in manufacturing, wood clearly has an advantage over its competition.
However, manufacturing is just one of the many stages of the total lifecycle of a product.
More holistic comparisons among various materials will become easier over time. Lifecycle
assessment and the ability to quantify environmental impacts will be an important tool for
increasing environmental responsibility among producers and consumers and communicating
this with customers via environmental product declarations (EPD). These declarations are

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Ardhi University
@ 2021/2022
based on life cycle assessment data and are a mechanism to give customers systematic and
consistent information about the environmental impact of a product 31.

Environmental marketing in the forest industry

Ethically sound marketing which integrates environmental principles is called

“environmental,” “green,” or “ecological” marketing. Such marketing recognizes the broader
environmental responsibility of a company and helps the company adapt to new
circumstances. The environmental marketing concept has received considerable attention in
academic circles. Most authors consider it an extension of marketing to include the concept
of minimizing damage to the environment while satisfying the wants and needs of
consumers. According to Peattie, environmental marketing is made up of social
responsibility, the pursuit of sustainability, and a holistic approach, which assumes that
everything is inter-connected. Some go further to suggest that with environmental marketing
companies should redirect consumer demand to environmentally preferable products and
services. Sustainable consumption is becoming a more common theme in society with, for
example, many people considering their impact on the planet using calculators like that from
the Global Footprint Network®. Leading global companies are beginning to recognize the
potential around sustainable consumption (Box 4.3). A simple definition of environmental
marketing used in this text is:

Identifying and providing for the wants and needs of customers, while recognizing the
necessity to minimize impacts to the environment and to gain a profit.

Clearly, marketing is one mechanism for supporting sustainable development. It serves to

build a bridge between companies and stakeholders, especially customers. The basic function
of marketing is to analyse customer needs and transform them into business opportunities. If
customers are environmentally conscious and want to make choices that support sustainable
development, a company can transform these environmental requirements into business
opportunities. Truly forward-thinking companies will try to lead their customers toward more
sustainable consumption. This means integrating environmental perspectives into all aspects
of marketing planning, particularly in marketing strategies.

Environmental marketing can also be a tool to promote socially and ecologically sustainable
forestry. From the industry’s point of view, environmental marketing is a tool for achieving
company goals and gaining competitive advantage. True environmental marketing originates
in a strong company philosophy of responsibility toward society and the environment. This
philosophy must be seen as a true commitment to environmental issues and improved
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Ardhi University
@ 2021/2022
performance – otherwise, a company may be accused of “greenwashing,” which is generally
perceived as worse than doing nothing at all.

Box 6.3 The Growing Importance of Sustainable Consumption32

According to the World Business Council for Sustainable Development, consumption patterns around
the world are unsustainable and technological advances and efficiency gains will not be enough to
bring consumption to a sustainable level. Therefore, changes will be necessary in consumer lifestyles
and in the way they use products and services. Companies have a role in working with consumers to
alter lifestyles. A more immediate role is focusing on procurement practices. The World Business
Council for Sustainable Development and the World Resources Institute produced an extensive
document for use by companies in evaluating their procurement procedures. The document,
Sustainable Procurement of Wood and Paper-based Products, outlines 10 things that purchasers should
know:

 Where do the products come from?

 Is information about the products credible?
 Have the products been legally produced?
 Have forests been sustainably managed?
 Have special places, including sensitive ecosystems, been protected?
 Have climate issues been addressed?
 Have appropriate environmental controls been applied?
 Has recycled fibre been used appropriately?
 Have other resources been used appropriately?
 Have the needs of local communities or indigenous peoples been addressed?

As companies use tools such as this in their purchasing practices, forest industry companies must have
adequate answers to each of these. Accordingly, companies can use this question list to begin
evaluating their many responsibilities and contribute to sustainable consumption.

An example is the following quote from the Chief Forester of Stora Forests in Sweden:

“Commitment to sustainable forestry must be real. A media campaign to change

attitudes will not work. They will find you out.” 33

Responsibility and Performance

The link between responsibility and positive company financial performance has seen
considerable attention. Early research in pollution prevention found that companies
practicing pollution prevention often benefit from lower costs. However, the link between

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Ardhi University
@ 2021/2022
environmental practices and financial performance is less clear in other areas, such as
changing forest management practices to meet certification requirements. Overall, the
literature provides evidence that being a good environmental steward results in enhanced
financial performance, but growing evidence suggests the relation may not be tied to how
proactive the firm is. On the other hand, small firms may benefit more than large. There is
clearly much to be learned regarding the conditions that lead to “being green paying for
itself.” There are other benefits to acting responsibly that indirectly impact business
performance. According to the World Business Council on Sustainable Development, these
benefits include better alignment of company and societal goals, maintaining company
reputation, assuring a continued license to operate, and reducing risks and their associated
costs34.

In the final analysis, not every action taken by companies to be socially and environmentally
responsible will be reflected in reputation, profitability, or stock prices. However, it is clear
that a certain level of responsibility is a prerequisite for operating in today’s society. By
adopting a responsibility focus and internalizing the concepts of environmental marketing,
companies will be well-placed to capitalize on their positive environmental and social
performance.

6.3 Marketing Efficiency

Marketing efficiency is essentially the degree of market performance. It is a broad and

dynamic concept. If is the ratio of market output (satisfaction) to marketing input (cost of
resources). An increase in ratio represents improved efficiency and vice versa. The
Components of marketing efficiency are35:

1. Effectiveness with which a marketing service is performed.

2. The cost at which the service is provided.
3. The effect of this cost and the method of performing the service as production and
consumption i.e., effect of (1) & (2), last two are more important.

The assessment of marketing efficiency can be from two main points:

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Ardhi University
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(i) Technical or Physical or Operational efficiency: It pertains to the cost of
performing a function; Efficiency is increased when the cost of performing a
function per unit of output is reduced. e.g. - Storage processing, handling etc. and
(ii) Pricing / A locative efficiency: System is able to allocate farm products either
over time, across the space or among the traders, processors and consumers at a
point of time in such a way that no other allocation would make producers and
consumers better off. Pricing efficiency refers to the structural characteristics of
the marketing system, when the sellers are able to get the true value of their
produce and the consumers receive true worth of their money 36.

Empirical assessment of marketing efficiency involves a reduction in the cost for the same
level of satisfaction or an increase in the satisfaction at a given cost results in the
improvement in efficiency37.

E = level of efficiency
O = value added to the marketing system.
I = real cost of marketing

Shepherd „s formula of marketing efficiency:

ME = Index of marketing efficiency

V = Value of the goods sold or price paid by the consumer (Retail price)
I = Total marketing cost or input of marketing.

This method eliminates the problem of measurement of value added.

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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
6.3.1 Marketing costs

The movement of products from the producers to the ultimate consumers involves costs,
taxes, and Cess which are called marketing costs. These costs vary with the channels through
which a particular commodity passes through. e.g.: - Cost of packing, transport, weighment,
loading, unloading, losses and spoilages. Marketing costs would normally include:

i. Handling charges at local point

ii. Assembling charges
iii. Transport and storage costs
iv. Handling by wholesaler and retailer charges to customers
v. Expenses on secondary service like financing, risk taking and market intelligence
vi. Profit margins taken out by different agencies.
vii. Producer’s share in consumer’s TZS

Producer’s share in consumer’s TZS

Where, Ps = Producer’s share; PF = Price received by the farmer; Pr = Retail price paid by
the consumer

Total cost of marketing of commodity,

C = Cf + Cm1 + Cm2 + . . . + Cmn

Where, C= Total cost of marketing of the commodity; Cf = Cost paid by the producer from
the time the produce leaves till he sells it; Cmi= Cost incurred by the i th middlemen in the
process of buying and selling the products.

Marketing costs are the actual expenses required in bringing goods and services from the
producer to the consumer. The objectives of studying marketing costs in Agri-forestry
production include38;

(i). To ascertain which intermediaries are involved between producer and consumer;
(ii) To ascertain the total cost of marketing process of commodity;
(iii) To compare the price paid by the consumer with the price received by the producer and

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Ardhi University
@ 2021/2022
(iv) To see whether there is any alternative to reduce the cost of marketing.

Marketing Costs could therefore escalate because of a number of reasons such as High
transportation costs; Consumption pattern – Bulk transport to deficit areas; Lack of storage
facilities; Bulkiness of the produce; Volume of the products handled; Absence of facilities
for grading; Perishable nature of the produce; Costly and inadequate finance; Seasonal
supply; Unfair trade practices; Business losses; Production in anticipation of demand and
high prices; Cost of risk; Sales service. Thus, factors affecting marketing costs include 39;

f. Perishability
g. Losses in storage and transportation
h. Volume of the product handled; Volume of the More – less cost and Volume of the
Less – more cost
i. Regularity in supply: Costless irregular in supply – cost is more 40
j. Packaging: Costly (depends on the type of packing)
k. Extent of adoption of grading
l. Necessity of demand creation (advertisement)
m. Bulkiness
n. Need for retailing: (more retailing – more costly)
o. Necessity of storage
p. Extent of Risk
q. Facilities extended by dealers to consumers. (Return facility, home delivery, credit
facility, entertainment)

Ways of reducing marketing costs of farm products41.

1. Increased efficiency in a wide range of activities between produces and consumers

such as increasing the volume of business, improved handling methods in pre-
packing, storage and transportation, adopting new managerial techniques and changes
in marketing practices such as value addition, retailing etc.
2. Reducing profits in marketing at various stages.
3. Reducing the risks adopting hedging.
4. Improvements in marketing intelligence.
5. Increasing the competition in marketing of farm products.

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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022

Figure 6:2 An example of forest pproducts value addition42

6.3.2 Importance of efficient marketing

Any efficient marketing system should address the following 43:

i. Supply of food crops and livestock in the form, place, and time the consumers want
them.
ii. Location of where there are surpluses of produce and bringing them to where there
are shortages.
iii. Marketing is important for countries whose products are export oriented since
earnings from such exports are used to finance other development programs.
iv. Marketing is an indicator of consumer preferences through the prices they are
prepared to pay and this also affects the production decisions of farmers, as they are
likely to produce commodities that have high demand.
v. Efficient marketing system leads to increase in employment, rise in the standard of
living of the people and wealth of the community.

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Ardhi University
@ 2021/2022
vi. It also leads to increased incentives for government to provide infrastructures such as
roads, water, electricity, and storage facilities.
vii. It leads to stimulation of research into techniques of food preservation, preparation
and processing to meet the needs and tastes of the people. h) It ensures that supplies
of goods that are seasonal become available throughout the year with little variation
in prices.

6.4 Marketing Functions

Marketing functions are the activities performed by a marketing system in presenting goods
to consumers in the form, place and time they want the goods so that both producers and
consumers gain44. Marketing functions describe what happens or what can happen to the
product between the time of production and time of purchase by the final consumers. They
are the major specialized activity performed in accomplishing the marketing process. Any
single activity performed in carrying a product from the point of its production to the
ultimate consumer may be termed as a marketing function 45. A marketing function may have
anyone or combination of three dimensions, viz., time, space and form. The marketing
functions may be classified in various ways. Thomsen has classified the marketing functions
into three broad groups. These are:

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Ardhi University
@ 2021/2022
Figure 6:3 Marketing chain of wood and paper-based forest products46

i. Primary Functions47: Assembling or procurement, Processing and Dispersion or

Distribution
ii. Secondary Functions: Packing or Packaging, Transportation, Grading,
Standardization and Quality Control, Storage and Warehousing, Price Determination
or Discovery, Risk Taking, Financing, Buying and Selling, Demand Creation,
Dissemination of Market Information
iii. Tertiary Functions: Banking, Insurance, Communications – posts & Telegraphs,
Supply of Energy – Electricity

Huegy and Mitchell have classified marketing functions in a different way. According to
them, the classification is as follows48:

1. Physical Movement Functions: Storage, Packing, Transportation, Grading,

Distribution
2. Ownership Movement Functions: Determining need creating demand, Finding
buyers and sellers, Negotiation of price, Rendering advice, Transferring the title to
goods
3. Market Management Functions: Formulating Policies, Financing, providing
organization, Supervision, Accounting, Securing Information

6.5 Approaches to Marketing

Kohls and Uhl classification of marketing functions has the following classes 49;

1. Physical Functions: Storage and Warehousing, Grading, Processing, Transportation

2. Exchange Functions50: These are activities involved in the transfer of title to good. It is at
this stage that price determination enters the study of marketing. The activities involved
include;
 Seeking out the sources of supply.
 Buying the products and activities associated with purchase
 Assembling of products.
 Selling; activities associated with merchandizing such as physical display of
goods, advertising to create demand.

46
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Ardhi University
@ 2021/2022
3. Facilitative Functions51: Unlike the ownership transfer and value-adding functions of
marketing, facilitating functions help the marketing process operate. They are activities that
make possible the smooth performance of the exchange and physical functions. They
include5253;

o Standardization of measures including inspection of merchandise quality.

 Financial services
 Provide liquidity for day-to-day operations.
 Minimize costs of transferring goods.
 Risk bearing
 Marketing intelligence (Business climate)
 Conducive business environment.
 Clear understanding of ownership privileges and legal code.
o Economic information including current and prospective market conditions
(e.g., local and futures prices).

6.5.1 Functional approach to marketing

Activities that involve handling, movement and physical change of the goods to solve the
problem of when, what and where utilities in marketing, the functions are: Storage,
Transportation, and Processing54.

Packaging

Packaging is the first function performed in the marketing of Agri-forestry commodities 55. It
is required for nearly all farm products at every stage of the marketing process. The type of
the container used in the packing of commodities varies with the type of the commodity as
well as with the stage of marketing. For example, gunny bags are used for cereals, pulses and
oilseeds when they are taken from the farm to the market. Packing means, the wrapping and
crating of goods before they are transported. Goods have to be packed either to preserve
them or for delivery to buyers. Packaging is a part of packing, which means placing the

51
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FYzNEdRVjYwVDFRYVlHeC5xMDYuMHVja2pJb3dfYzJFV3NGejhWZzVHX2xkQjRPX1YweDZPdVNO
ME9zVjg2a0I2BGNsaWVudANib3NzBHNlcnZpY2UDQk9TUwRzbGsDdGl0bGUEc3JjcHZpZANTX3k3M
WtnZUF1MmZTanB6cDJTS19vd0tKbS5UVGt2YV9LOEFEWHRH/SIG=12gavtq7d/**http%3A//www.nou.e
du.ng/noun/NOUN_OCL/pdf/pdf2/AEM%2520251%2520-%2520Main.pdf
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Ardhi University
@ 2021/2022
goods in small packages like bags, boxes, bottles or parcels for sale to the ultimate
consumers.

Packaging is a very useful function in the marketing process of Agri-forestry commodities.

The main advantages of packing and packaging are56:

1. It protects the goods against breakage, spoilage, leakage or pilferage during their
movement from the production to the consumption point.
2. The packaging of some commodities involves compression, which reduces the bulk
like cotton, jute and wool.
3. It facilitates the handling of the commodity, especially such fruits as apples, mangoes,
etc., during storage and transportation.
4. It helps in quality-identification, product differentiation, branding and advertisement
of the product.
5. Packaging helps in reducing marketing costs by reducing handling and retailing costs.
6. It helps in checking adulteration.
6. Packaging ensures cleanliness of the product.
7. Packaging with labeling facilitates the conveying of instructions to the buyers as to
how to use or preserve the commodity. The label shows the composition of the
product.
8. Packaging prolongs the storage quality of the products by providing protection from
the ill effects of weather, especially for fruits, vegetables and other perishable goods.

Transportation:

In its literally meaning, transportation means the movement or carriage of persons, goods and
messages from place to place. It also means the ability to overcome distance or the friction of
distance57. In this course, our concerned here is on the movement of farm produces from
where it is produced (farm site) to where it is been assemble (collection point) before their
final movement (distribution) to centers where their demand are needed. However, in the
distribution and transportation of farm products, the middlemen are highly involved and they
are saddle with that responsibility with the transportation and distribution of farm products.
They ensure the adequate movement for the supply of these products from the producers to
the final consumers. It should be noted however that the importance of transportation cannot
be devoured from Agri-forestry marketing because whatever the farmers produce must be
transported and distributed to the final consumers. Transportation of farm produce can be of
various forms e.g., railways, motor vehicles, bicycles, and trucks. However, most
transportation of farm produce is done by motor vehicles (trucks) and wheel bicycles etc.
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Ardhi University
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Transportation or the movement of products between places is one of the most important
marketing functions at every stage, i.e., right from the threshing floor to the point of
consumption. The main advantages of the transport function are 58:

r. Widening of the Market:

s. Narrowing Price Difference Over Space:
t. Creation of Employment:
u. Facilitation of Specialized Farming:
v. Transformation of the Economy:
w. Mobility of the Factors of Production:

Box 6.4 Calculating transport cost59

Other things remaining the same, the transportation cost of a commodity depends on the
following factors60:

1. Distance
2. Quantity of the Product
3. Mode of Transportation
4. Condition of Road
5. Nature of Products:
a) Perishability (e.g., Vegetables);
b) Bulkiness (e.g., straw);
c) Fragility (e.g., tomatoes);
d) Inflammability (e.g., Petrol);
e) Requirement of a special type of facility (i.e., for livestock and milk).
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Ardhi University
@ 2021/2022
6. Availability of Return Journey consignment
7. Risk Associated: Problems in Transportation of Agri-forestry Commodities

The important problems arising out of the transportation of Agri-forestry commodities are 61:
1. The means of transportation used are slow moving;
2. There are more losses/damages in transportation because of the use of poor packaging
material.
3. The transportation cost of the farm produce is higher than that for other goods.
4. There is lack of co-ordination between different transportation agencies, e.g., the
railways and truck companies.

Grading and standardization

Grading and standardization is a marketing function which facilitates the movement of

produce. Grade standards for commodities are laid down first and then the commodities are
sorted out according to the accepted standards. Standardization means the determination of
the standards to be established for different commodities. Pyle has defined standardization as
the determination of the basic limits on grades or the establishment of model processes and
methods of producing, handling and selling goods and services. Standards are established on
the basis of certain characteristics-such as weight, size, colour, appearance, texture, moisture
content, staple length, amount of foreign matter, ripeness, sweetness, taste, chemical content,
etc. These characteristics, on the basis of which products are standardized, are termed grade
standards62.

Thus, standardization means making the quality specifications of the grades uniform among
buyers and sellers over space and over time. Grading means the sorting of the unlike lots of
the produce into different lots according to the quality specifications laid down. Each lot has
substantially the same characteristics in so far as quality is concerned. It is a method of
dividing products into certain groups or lots in accordance with predetermined standards.
Grading follows standardization. It is a sub-function of standardization.

Grading may be done on the basis of fixed standards or variable standards. It is of three
types63:

1. Fixed Grading / Mandatory Grading: This means sorting out of goods according to
the size, quality and other characteristics which are of fixed standards. These do not
vary over time and space.

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Ardhi University
@ 2021/2022
2. Permissive / Variable Grading: The goods are graded under this method according
to standards, which vary over time. In India, grading by this method is not
permissible.
3. Centralized / Decentralized Grading: Based on the degree of supervision exercised
by the government agencies on grading of various farm products, the programme can
be categorized into centralized and decentralized grading. Under the centralized
grading system, an authorized packer either sets up his own laboratory manned by
qualified chemists or seeks access to an approved grading laboratory set up for the
purpose by the state authorities / co-operatives / associations / private agencies.
Grading in respect of commodities such as ghee, butter and vegetable oils where
elaborate testing facilities are needed for checking purity and assessing quality has
been placed under centralized grading system. The decentralized grading system is
implemented by State Marketing Authorities under the overall supervision and
guidance of the Directorate of Marketing and Inspection.

Grading offers the following advantages to different groups of persons 64:

1. Grading before sale enables farmers to get a higher price for their produce. Grading
also serves as an incentive to producers to market the product of better quality.
2. Grading facilitates marketing, for the size, color, qualities and other grade
designations of the product are well known to both the parties, and there is no need on
the part of the seller to give any assurance about the quality of the product.
3. Grading widens the market for the product, for buying can take place between the
parties located at distant places on the telephone without any inspection of the quality
of the product.
4. Grading reduces the cost of marketing by minimizing the expenses on the physical
inspection of the produce, minimizing storage loses.
5. Grading minimizing advertisement expenses and eliminating the cost of handling and
weighing at every stage.
6. Grading makes it possible for the farmer –
a) To get easy finance when commodities are stored;
b) To get the claims settled by the railways and insurance companies;
c) To get storage place for the produce;
d) To get market information;
e) To pool the produce of different farmers;
f) To facilitate futures trading in a commodity.
7. Grading helps consumers to get standard quality products at fair prices.
8. Grading contributes to market competition and pricing efficiency

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Ardhi University
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Storage

The storage function adds the time utility to products. Agriculture is characterized by
relatively large and irregular seasonal and year – to – year fluctuations in production. The
consumption of most farm products, on the other hand, is relatively stable. These conflicting
behaviours of demand and supply make it necessary that large quantities of farm produce
should be held for a considerable period of time 65.

Warehousing: warehouses are scientific storage structures especially constructed for the
protection of quantity and quality of stored products Warehousing may be defined as the
assumption of responsibility for the storage of goods. It may be called the protector of
national health, for the produce stored in warehouses is preserved and protected against
rodents, insects and pests.

Box 6.5 Calculating Storage costs66

The storage of Agri-forestry products is necessary for the following reasons 67:

1. The storage of goods, therefore, from the time of production to the time of
consumption, ensures a continuous flow of goods in the market;
2. Storage protects the quality of perishable and semi – perishable products from
deterioration;
3. To cope with this demand, production on a continuous basis and storage become
necessary;
4. It helps in the stabilization of prices by adjusting demand and supply;
5. Storage is necessary for some period for the performance of other marketing
functions.

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Ardhi University
@ 2021/2022
6. The storage of some farm commodities is necessary either for their ripening (e.g.
banana, mango, etc.) or for improvement in their quality (e.g., rice, pickles, cheese, ,
etc.);
7. Storage provides employment and income through price advantages.

The important functions of warehouses are 68:

1. Scientific storage: Here, a large bulk of Agri-forestry commodities may be stored.

The product is protected against quantitative and qualitative losses by the use of such
methods of preservation as are necessary.
2. Financing: Nationalized banks advance credit on the security of Warehouse receipt
issued for the stored products to the extent of 75 % of their value
3. Price stabilization: Warehouses help in price stabilization of Agri-forestry
commodities by checking the tendency to making post-harvest sales among the
farmers. Warehouse helps in staggering the supplies throughout the year. Thus, helps
in stabilization of Agri-forestry prices.
4. Market intelligence: Warehouses also offer the facility of market information to
persons who hold their produce in them. They inform them about the prices
prevailing in the period, and advise them when to market their products. This facility
helps in preventing distress sales for immediate money needs or because of lack of
proper storage facilities.

Box 6.6 Calculating storage cost over time69

The storage of Agri-forestry commodities involves three major types of risks. These are:

i. Quantity Loss
ii. Quality Deterioration:

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by Samwel Alananga Sanga
Ardhi University
@ 2021/2022
iii. Price Risk:

Processing

Processing is an important marketing function in the present-day marketing of Agri-forestry

commodities. A large proportion of farm products was sold in an unprocessed form. At
present, consumers are dependent upon processing for most of their requirements. The
processing activity involves a change in the form of the commodity 70. Processing converts
the raw material and brings the products nearer to human consumption. It is concerned with
the addition of value to the product by changing its form 71.

The specific advantages of the processing function are:

1. It changes raw food and other farm products into edible, usable and palatable forms.
The value added by processing to the total value produced at the farm level varies
from product to product.
2. The processing function makes it possible for us to store perishable and semi –
perishable Agri-forestry commodities which otherwise would be wasted and
facilitates the use of the surplus produce of one season in another season or year.
3. The processing activity generates employment.
4. Processing satisfies the needs of consumers at a lower cost.
5. Processing serves as an adjunct to other marketing functions, such as transportation,
storage and merchandising.
6. Processing widens the market. Processed products can be taken to distant and
overseas markets at a lower cost.

6.5.2 Exchange function

Buying and Selling

Buying and selling is the most important activity in the marketing process. At every stage,
buyers and sellers come together, goods are transferred from seller to buyer, and the
possession utility is added to the commodities. The number of times the selling and buying
activity is performed depends on the length of the marketing channel. The buying activity
involves the purchase of the right goods at the right place, at the right time, in the right
quantities and at the right price. It involves the problems of what to buy, when to buy, from
where to buy, how to buy and how to settle the prices and the terms of purchase. The
objective of selling is to dispose of the goods at a satisfactory price. The prices of products,

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Ardhi University
@ 2021/2022
particularly of Agri-forestry commodities vary from place to place, from time to time, and
with the quantity to be sold. Selling, therefore, involves the problems of when to sell, where
to sell, through whom to sell, and whether to sell in one lot or in parts 72.

Box 6.7 Calculating processing cost7374

The following methods of buying and selling of farm products are prevalent inAgri-forestry
markets75:

(i) Under Cover of a Cloth (Hatha System): By this method, the prices of the produce
are settled by the buyer and the commission agents of the seller by pressing/twisting
the fingers of each other under cover of a piece of cloth. Code symbols are associated
with the twisting of the fingers, and traders are familiar with these. The negotiations
in this manner continue till a final price is settled. When all the buyers have given
their offers, the name and offer price of the highest bidder is announced to the seller
by the commission agent. This method has been banned by the government because
of the possibility of cheating.
(ii) Private Negotiations: By this method, prices are fixed by mutual agreement. This
method is common in unregulated markets or village markets. Under this method, the
individual buyer come to the shops of commission agents at a time convenient to the
latter and offer prices for the produce which, they think, are appropriate after the

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Ardhi University
@ 2021/2022
inspection of the sample. If the price is accepted, the commission agent conveys the
decision to the seller, and the produce is given, after it has been weighed, to the
buyer. In villages, too, private negotiations take place directly between buyer and
seller. The sellers take the sample to the buyer and ask him to quote the price. If it is
acceptable to the buyer, a contract is executed.
(iii) Quotations on Samples taken by Commission Agent: By this method the
commission agent takes the sample of the produce to the shops of the buyer instead of
the buyer going to the shop of the commission agent. The price is offered, based on
the sample, by the prospective buyers. The commission agent makes a number of
rounds of prospective buyers until none is ready to bid a price higher than the one
offered by a particular buyer. The produce is given to the highest bidder.
(iv) Dara Sale Method: By this method, the produce in different lots is mixed and then
sold as one lot. The advantages of this method are that, within a short time, a large
number of lots are sold off. The disadvantage is that the produce of a good quality
and one of a poor quality fetch the same price. There is, therefore, a loss of incentive
to the farmer to cultivate good quality products.
(v) Moghum Sale Method: By this method, the sale of produce is affected on the basis
of a verbal understanding between buyers and sellers without any pre-settlement of
price, but on the distinct understanding that the price of the produce to be paid by the
buyer to the seller will be the one as prevailing in the market on that day, or at the rate
at which other sellers of the village sold the produce. This method is common in
villages, for farmers are indebted to the local money lenders.
(vi) Open Auction Method: By this method, the prospective buyers gather at the shop of
the commission agent around the heap of the produce, examine it and offer bids
loudly. The produce is given to the highest bidder after taking the consent of the seller
farmer. This method is preferred to any other method because it ensures fair dealing
to all parties, and because the farmers with a superior quality of produce receive a
higher price. In most regulated markets, the sale of the produce is permissible only by
the open auction method. The following are the merits of the open auction method 76:

a) A sale by this method inspires confidence among the buyers and sellers.
b) The auction serves as a meeting place for supply of, and demand for goods.
c) It disposes of the market supply promptly.
d) A wide variety of goods are available to buyers for selection.
e) The auction method reduces the number of salesmen needed in the process.
f) Buyers of small lots are not put to disadvantage against the buyers of large
lots.
g) The payment of the price of the goods is made immediately after the sale.

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Ardhi University
@ 2021/2022

The disadvantages of the open auction method are:

a) The auction method requires more time on the part of both the buyer and the
seller, for they have to wait for the day and time of the auction.
b) An open auction is a very time-consuming process because of the variation in
the quality of the various lots.
c) In big market centers, especially in the peak marketing season, the time
allotted for auction is short. Both the buyers and the sellers are in a hurry. As a
result, sellers may receive a low price
d) In an open auction, buyers sometimes join hands.
e) The auction leads to a “buyers’s market”, for buyers have full information
about the supply of and demand for the product.

Some of the problems arising out of the open auction method may be overcome if the
grading of agroforestry produce is adopted by the cultivators.

Box 6.8 Calculating the cost of product losses77

(vii) Close Tender System: This method is similar to the open auction method, except
that bid are invited in the form of a close tender rather than by open announcement.
The produce displayed at the shop of the commission agent is allotted lot numbers.
The prospective buyers visit the shops, inspect the lots, offer a price for the lot which

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Ardhi University
@ 2021/2022
they want to purchase on a slip of paper, and deposit the slip in a sealed box lying at
the commission agent’s shop. When the auction time is over, the slips are arranged
according to the lot number, and the highest bidder is informed by the commission
agent that his bid has been accepted and that he should take delivery of the produce.
Some of the regulated markets have adopted this method of sale,

6.5.3 Facilitating function

Market information

Market information is an important marketing function which ensures the smooth and
efficient operation of the marketing system. Accurate, adequate and timely availability of
market information facilitates decision about when and where to market products. Market
information creates a competitive market process and checks the growth of monopoly or
profiteering by individuals. It is the lifeblood of a market. Market information may be
broadly defined as a communication or reception of knowledge or intelligence. It includes all
the facts, estimates, opinions and other information which affect the marketing of goods and
services. Market information is useful for all sections of society which are concerned with
marketing. Its importance may be judged from the point of view of individual groups. These
are78:

a) Farmer-Producers: Market information helps in improving the decision-making

power of the farmer. A farmer is required to decide when, where and through whom
he should sell his produce and buy his inputs. Price information helps him to take
these decisions.
b) Market Middlemen: Market middlemen need market information to plan the
purchase, storage and sale of goods. On the basis of this information, they are able to
know the pulse of the market, i.e., whether the market is active or sluggish.
c) General Economy: Market information is also beneficial for the economy as a whole.
In a developed economy, there is need for a competitive market process for a
commodity, which regulates the prices of the product. The competitive process
contributes to the operational efficiency of the industry.
d) Government: Market information is essential for the government in framing its Agri-
forestry policy relating to the regulation of markets, buffer stocking, import export
and administered prices.

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Ardhi University
@ 2021/2022
Market information is of two types79;

a) Market Intelligence: This includes information relating to such facts as the prices
that prevailed in the past and market arrivals over time. These are essentially a record
of what has happened in the past. Market intelligence is therefore, of historical nature.
b) Market News: This term refers to current information about prices, arrivals and
changes in market conditions. This information helps the farmer in taking decisions
about when and where to sell his produce. The availability of market news in time
and with speed is of the utmost value.

Good market information must meet the following criteria so that it may be of maximum
advantage to the users80:

a) Comprehensive
b) Accuracy
c) Relevance
d) Confidentiality
e) Trustworthiness
f) Equal and Easy Accessibility
g) Timeliness:

Financing

The financing function of marketing involves the use of capital to meet the financial
requirements of the agencies engaged in various marketing activities. No business is possible
nowadays without the financial support of other agencies because the owned funds available
with the producers and market middlemen (such as wholesalers, retailers and processors) are
not sufficient. The capital requirements of a marketing agency for its marketing business
vary with the following factors:

(i) Nature and Volume of Business:

(ii) Necessity of Carrying Large Stocks:
(iii) Continuity of Business during Various Seasons
(iv) Time Required between Production and Sale
(v) Terms of Payment for Purchase and Sale
(vi) Fluctuations in Prices

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Ardhi University
@ 2021/2022
(vii) Risk-taking Capacity
(viii) General Conditions in the Economy

Figure 6:4 Benefits of product value addition8182

6.5.4 Possible roles of marketing

In modern society, production and consumption are separated, and marketing acts as a
bridge, or integrator, between the two. Marketing can integrate the various functions of a
company, connecting the company to its customers and its other stakeholders. Figure 6.5
describes marketing’s role as a connector and relationship builder83.

i. Marketing as a connector – Traditionally, marketing was the link between production

and consumption, coordinating the integration of the two functions. At a company
level, marketing connects the production of the company with the needs of the
customer.

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Ardhi University
@ 2021/2022
ii. Marketing as a relationship builder – Marketing can serve to build and maintain
relationships among the company, its customers, and other stakeholders. In modern
marketing, this role is critical. “Relationship marketing,” a term popularized in the
early 90s, suggests the importance of positive relationships with a range of
stakeholders. The concept is an integral part of advanced marketing and successful
business.

Figure 6:5 Marketing as a Connector and Relationship Builder84

iii. Marketing can have either a narrow, functional role in an organization (i.e., that of
“selling”), or it can have a broad, integrating role. The difference between the two
roles can be seen in Figure 6.2.
iv. Marketing as one function of the company – The narrowest possible role for
marketing is as one of the company’s functions between production and the
marketplace. From this perspective, the role of marketing is to assure that products
are efficiently transferred to the market. In this context, marketing is limited to
selling.
v. Marketing as the integrator of company functions – In its more sophisticated
implementation, marketing has an integrative function focused on the entire value
chain, from the forest to the end user. It allows an organization to align its various
processes to offer products and services in a way that is beneficial to itself and its
customers.

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Ardhi University
@ 2021/2022

Figure 6:6 Marketing as a Function of the Company and as an Integrator

In practice, marketing can play all of the above-mentioned roles. In fact, marketing should
serve to connect the company to its environment, allow it to develop a better understanding
of markets and customer needs, and convert this understanding into business opportunities.
Marketing should integrate the company’s functions and divisions into a customer-serving
entity, ensuring fluid transfer of products and services to end-users.

6.6 Wood and Fiber Main Global Market Potentials

The previous section of this analysis provided a broad indication of the potential markets and
sources of supply for the main categories of forest product. This section increases the level of
disaggregation to sharpen the focus of the analysis on the countries that account for most of
the world's wood supply and demand and the most important countries in each of the main
developing regions of the world85. The top ten consumer and producer countries across all
forest product categories are mostly the same: the G5 countries, Sweden, Finland, Russian
Federation, China and Indonesia. The United States of America is the largest producer and
consumer of wood products across all product categories. Given the World Bank's focus on
less developed countries therefore, this section has grouped OECD member countries
together and included the most important producer and consumer countries in the developing
regions in the analysis.

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Ardhi University
@ 2021/2022
However, even outside the OECD country group, the same countries tend to appear as large
producers or consumers across all product categories. Of the less developed countries, China,
Russian Federation, Brazil and Indonesia are within the top six producers and consumers
across all product categories. India, Malaysia and Chile are also important in many of the
product categories. Countries which are not so important at a global scale but are important
within their respective regions include: Thailand; Turkey; Nigeria; South Africa; and
Argentina. The analysis presented below has used the country groupings described earlier (i.
e. three OECD regions and four non-OECD regions). Statistics for an alternative country
grouping - World Bank client and non-client countries in each of their operational regions - is
given in Annex 286.

6.6.1 Patterns in major wood products

Industrial roundwood production and consumption

Current and projected industrial roundwood production and consumption is shown in Table
6.2. In terms of production, OECD countries, led by the United States of America and
Canada, currently produce 62% of the world's industrial roundwood. Other large OECD
producers include: Sweden, Finland and Germany. Of the non-OECD regions, Asia and
Oceania has the greatest share of world industrial roundwood production (17%) and four
producers of global significance (China, Indonesia, Malaysia and India). The only other
globally significant producers in the non-OECD regions are Russian Federation, Brazil; Chile
and South Africa.

Industrial roundwood production in non-OECD Europe is dominated by the Russian

Federation (production in other countries in Eastern Europe is very small at the global scale).
However, Russian production continues to be significantly lower than experienced in
previous decades due to the economic circumstances facing the country. It is likely that, of
all the non-OECD countries, the Russian Federation has the greatest potential to increase
industrial roundwood production substantially.

The non-OECD South and Central America and Asia and Oceania regions both contain a
number of large industrial roundwood producers. Production in these regions comes from a
mixture of tropical natural forests, tropical plantations and temperate plantations. The
plantations in these regions have tremendous potential to increase wood supplies in the
future. However, there are uncertainties about the yields which might be achieved in some of
these plantations. The other major supply uncertainty in these regions concerns the amounts
and manner of harvesting which will be allowed in the regions' natural forests in the future.

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Ardhi University
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Table 6.1 Current and projected industrial roundwood production and consumption by region and
country

Region 1996 2010 (projection)

Production Consumption Production Consumption
3 3 3
(1,000 m ) % (1,000 m ) % (1,000 m ) % (1,000 m3) %
OECD - Europe 256,327 17% 277,108 19% 326,616 17% 362,780 19%
OECD - Asia and Oceania 72,448 5% 115,960 8% 97,024 5% 156,812 8%
OECD - Americas 595,622 40% 581,326 39% 653,304 35% 637,086 34%
OECD total 924,397 62% 974,394 65% 1,076,943 58% 1,156,678 62%
Russian Federation 67,000 4% 51,652 3% 94,523 5% 83,542 4%
Romania 9,441 1% 9,516 1% 9,028 <1% 9,008 <1%
Belarus 9,206 1% 8,690 1% 14,221 1% 13,278 1%
Latvia 5,690 <1% 3,387 <1% 6,920 <1% 1,660 <1%
Slovakia 4,887 <1% 4,343 <1% 4,549 <1% 3,515 <1%
Others 17,091 1% 13,564 1% 46,201 2% 37,682 2%
Non-OECD Europe total 113,315 8% 91,153 6% 175,442 9% 148,685 8%
China 108,718 7% 112,407 8% 151,582 8% 154,770 8%
Indonesia 47,245 3% 46,739 3% 57,256 3% 56,960 3%
Malaysia 35,771 2% 28,843 2% 37,910 2% 24,883 1%
India1 24,989 2% 25,302 2% 46,936 3% 49,955 3%
Turkey 10,745 1% 11,501 1% 13,789 1% 13,806 1%
Others 21,698 1% 16,701 1% 70,707 4% 63,474 3%
Non-OECD Asia & Oceania 249,165 17% 241,493 16% 378,180 20% 363,849 19%
total
Brazil 84,711 6% 82,504 6% 97,405 5% 88,114 5%
Chile 21,387 1% 14,938 1% 28,933 2% 21,971 1%
Argentina 6,220 <1% 5,258 <1% 10,752 1% 7,756 <1%
Ecuador 5,514 <1% 5,495 <1% 1,558 <1% 1,519 <1%
Paraguay 3,877 <1% 3,882 <1% 2,107 <1% 2,094 <1%
Others 13,007 1% 12,644 1% 16,725 1% 15,390 1%
Non-OECD Americas 134,716 9% 124,721 8% 157,480 8% 136,844 7%
South Africa 18,176 1% 15,780 1% 21,677 1% 18,214 1%
Nigeria 8,479 1% 8,470 1% 9,698 1% 9,796 1%
Congo, Democratic Republic of 3,433 <1% 3,255 <1% 4,694 <1% 4,580 <1%

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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 m3) % (1,000 m3) % (1,000 m3) % (1,000 m3) %
Cameroon 3,364 <1% 2,057 <1% 3,455 <1% 1,806 <1%
Côte d'Ivoire 3,008 <1% 2,676 <1% 2,989 <1% 2,929 <1%
Others 31,471 2% 28,930 2% 41,016 2% 37,358 2%
Africa total 67,931 5% 61,168 4% 83,529 4% 74,682 4%
Non-OECD total 565,127 38% 518,535 35% 794,631 42% 724,060 38%
World total 1,489,524 1,492,929 1,871,574 1,880,738
Note: 1. Based on production of wood products, it is suspected that current industrial roundwood production in
India is substantially under-reported. A figure of closer to 40 million m3 is probably the current level of
industrial roundwood production and growth from 1996 to 2010 will, consequently, really be lower than
appears here.

Africa is a minor industrial roundwood producing region, despite containing most of the
major remaining countries which will export tropical logs. One third of industrial roundwood
production in Africa comes from South Africa (mostly from temperate plantations).
However, industrial roundwood production in this country is small at the global scale.

In terms of current industrial roundwood consumption, the picture is only slightly different.
OECD countries account for 65% of world industrial roundwood consumption, again led by
the United States of America and Canada. Japan is the next major consumer and, as a result
of relatively low domestic production, is a major importer (Japan accounts for a substantial
share - about 40% - of the world's industrial roundwood imports). Other major consumers
are: Sweden; Finland; and France.

Of the non-OECD countries, the same six countries (Russian Federation, China, Indonesia,
Malaysia, India and Brazil) are the top industrial roundwood consumers and account for 24%
of world consumption. All the other non-OECD countries added together only account for
11% of global industrial roundwood consumption. Non-OECD countries in Asia have the
greatest share of consumption of the non-OECD regions (19%) and this region is a net
importer of industrial roundwood.

By 2010, it is expected that non-OECD countries will have increased their share of global
industrial roundwood production and consumption to 42% and 38% respectively. The United
States of America and Canada will remain the world's largest industrial roundwood
producers and consumers, but with a smaller share of the global market. Most other OECD
countries are expected to increase production and consumption in line with the global trend.
Japan will remain a significant log buyer, but will find it increasingly difficult to source logs

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from its traditional supplier countries. It is likely to look to the southern countries,
particularly in Oceania and South America, for new sources of supply.

Of the non-OECD countries, industrial roundwood production is expected to increase in all

the major producer countries. However, there are uncertainties about supply in some of the
larger producers. China has announced a policy to restrict harvesting from the natural forest
as has Malaysia. Several smaller countries (e.g., Sri Lanka; Thailand and the Philippines)
already have production bans in the natural forest and others are examining this policy option
(e.g., Vietnam). Most industrial roundwood production growth in non-OECD countries is
expected to come from the maturation of plantations in large producer countries such as:
China; Brazil; and Indonesia. Other slightly smaller producer countries are also expected to
increase their share of world industrial roundwood production due to the maturation of their
plantation resources (e.g., Chile and Argentina).

6.6.2 Sawn wood production and consumption

Current and projected sawn wood production and consumption is shown in Table 6.3. OECD
countries currently have a 68% share of world production and a 69% share of world
consumption. The United States of America and Canada again lead the sawn wood
production table, although this time they are followed by: Japan; Sweden; Germany; and
France. In terms of sawn wood consumption, major consumers in this group are: United
States of America; Japan; Germany; Canada; France and Italy. Canada is by far the largest
sawn wood exporter in the world. Major sawn wood importers are the United States of
America, Japan, the United Kingdom, Germany and Italy. Of the non-OECD countries, the
top four sawn wood producers (Russian Federation, China, India and Brazil) account for 19%
of global production and consumption. The remaining developing countries added together
account for about 13% of sawn wood production and 14% of sawn wood consumption.

Non-OECD Asia and Oceania again has the largest share of non-OECD sawn wood
production (15%) and consumption (16%). In this region, Malaysia, Indonesia and Turkey
are significant sawn wood producers and consumers at the regional level. Other countries of
regional significance include: Chile in South America; and Nigeria and South Africa in
Africa. Out of all the non-OECD countries, only the Russian Federation and Malaysia are
globally significant sawn wood exporters and China is the only major sawn wood importer.
Brazil is of minor significance as a world exporter of sawn wood.

By 2010, the OECD share of world sawn wood production is expected to decline only
slightly, but its share of global sawn wood consumption is expected to fall to 65%. This is
due to slow growth in sawn wood consumption expected in the United States of America and
Canada. Growth in the other OECD countries is expected match the global trend. Overall, the

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market for sawn wood in OECD countries is expected to grow by only 0.6% per annum or
9% in total over the period87.

In contrast, relatively high rates of growth in consumption of sawn wood are expected in
non-OECD countries, particularly in Asia and Eastern Europe, as their economies expand.
Average annual growth of 2.2% or total growth of 35% over the period is expected in the
non-OECD countries; this figure is roughly twice the rate of growth in OECD countries. An
important projection for non-OECD Asia and Oceania is that sawn wood consumption
growth is expected to exceed production growth over the period to 2010. Most exporters in
the region are expected to consume more of their domestic production and have less sawn
wood left over for export and sawn wood imports are projected to increase in several
countries. As a result, the region is projected to change from net exporter of sawn wood to
net importer of sawn wood.

Table 6.2 Current and projected sawn wood production and consumption by region and country88

Region 1996 2010 (projection)

Production Consumption Production Consumption
(1,000 m ) %
3
(1,000 m )3
% (1,000 m )
3
% (1,000 m3) %
OECD - Europe 79,763 19% 80,006 19% 90,515 18% 94,540 19%
OECD - Asia and Oceania 38,663 9% 51,206 12% 50,121 10% 60,325 12%
OECD - Americas1 175,026 41% 163,222 38% 193,442 39% 165,269 33%
OECD total 293,452 68% 294,433 69% 334,077 67% 320,133 64%
Russian Federation 21,600 5% 16,927 4% 30,586 6% 26,457 5%
Romania 1,693 <1% 808 <1% 1,527 <1% 1,217 <1%
Belarus 1,545 <1% 1,397 <1% 1,961 <1% 1,652 <1%
Latvia2 1,300 <1% .. .. 476 <1% 223 <1%
Lithuania 1,250 <1% 204 <1% 623 <1% 621 <1%
Others 3,134 1% 2,435 1% 9,485 2% 9,575 2%
Non-OECD Europe total 30,522 7% 21,771 5% 44,658 9% 39,746 8%
China 26,969 6% 28,901 7% 29,920 6% 37,202 7%
India 17,460 4% 17,450 4% 22,208 4% 22,207 4%
Malaysia 8,382 2% 4,985 1% 6,243 1% 5,948 1%
Indonesia 7,338 2% 6,941 2% 11,381 2% 10,553 2%
Turkey 4,331 1% 4,455 1% 4,848 1% 4,884 1%

87
sawnwood
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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 m3) % (1,000 m3) % (1,000 m3) % (1,000 m3) %
Others 1,788 <1% 7,144 2% 9,980 2% 15,555 3%
Non-OECD Asia & Oceania 66,267 15% 69,875 16% 84,580 17% 96,349 19%
total
Brazil 19,091 4% 17,563 4% 20,067 4% 20,453 4%
Chile 3,802 1% 2,739 1% 3,182 1% 3,155 1%
Ecuador 1,886 <1% 1,803 <1% 270 <1% 269 <1%
Argentina 1,000 <1% 1,121 <1% 1,356 <1% 1,296 <1%
Costa Rica 780 <1% 779 <1% 842 <1% 927 <1%
Others 3,699 1% 3,800 1% 3,617 1% 5,189 1%
Non-OECD Americas 30,258 7% 27,805 7% 29,334 6% 31,289 6%
Nigeria 2,723 1% 2,698 1% 3,135 1% 3,132 1%
South Africa 1,574 <1% 1,948 <1% 1,852 <1% 1,812 <1%
Cameroon 1,400 <1% 1,084 <1% 259 <1% 224 <1%
Côte d'Ivoire 706 <1% 206 <1% 730 <1% 110 <1%
Ghana 604 <1% 364 <1% 494 <1% 463 <1%
Others 2,140 <1% 6,111 1% 2,134 <1% 5,028 1%
Africa total 9,147 2% 12,411 3% 8,604 2% 10,770 2%
Non-OECD total 136,193 32% 131,862 31% 167,177 33% 178,154 36%
World total 429,645 426,295 501,254 498,288
Notes: 1. It is not really possible to compare actual consumption in 1996 with the projection for 2010, because
the projection is a projection of the trend and consumption in 1996 was significantly above this trend.
Consequently, the growth trend in consumption is higher than the appearance given here.
2. Net exports of sawn wood from Latvia were greater than officially recorded production in 1996, so
consumption cannot be accurately estimated.

Wood-based panel production and consumption89

Current and projected wood-based panel production and consumption is shown in Table 6.4.
OECD countries have a 67% share of world wood-based panel production and 73% share of
wood-based panel consumption. Again, the United States of America is the world’s largest
producer and consumer. Germany, Canada, Japan, Italy and France are the next largest
producers and the order of the next largest consumer countries is: Japan; Germany; the
United Kingdom; Italy; Canada and France. Canada is the largest OECD exporter of wood-
based panels. However, in contrast to the market for sawn wood, it is not the world's largest
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exporter (Indonesia is). The high level of wood-based panels production in Japan is partly
dependent on the import of industrial roundwood (the same is true of Japan's sawn wood
production).

An interesting feature to note, is that European production of wood-based panels is globally

much more significant compared with Europe's position in the global markets for industrial
roundwood and sawn wood. Europe is particularly strong in markets for reconstituted panels,
which form a much greater share of the market for solid wood products (sawn wood and
wood-based panels) in Europe than elsewhere. For example, reconstituted panels account for
about 30% of solid wood product consumption in Europe, compared with 15% in North
America and just over 10% in Asia.

Non-OECD countries have a one-third share of world wood-based panel production and a
slightly lower share of world consumption. The top three wood-based panel producers
(China, Indonesia and Malaysia) have a 22% share of world production and Brazil and
Russian Federation are the only other globally significant developing country producers with
a 2% share of world production each. Asia and Oceania are by far the largest non-OECD
producer region and wood-based panel production in many Asian countries is currently
concentrated in the plywood sector. Much of this current strength in plywood production is
based on the natural advantage of a relatively abundant availability of large logs from the
natural forest. The same is also true of Brazil to some extent.

Several of the non-OECD countries shown in Table 6.4 are also globally significant wood-
based panel exporters. For example, Indonesia is the world's largest exporter of wood-based
panels, Malaysia is the world's third largest exporter and Brazil is the world's eighth largest
exporter. Most of these exports are of commodity-grade plywood to markets in East Asia,
including: China; Japan; and Republic of Korea. The shares of wood-based panel production
and consumption held by OECD countries and non-OECD countries is not expected to
change by very much by 2010. The only major expected change is that, as with sawn wood,
production growth in non-OECD countries is not expected to keep-up with consumption
growth. Thus, net exports from non-OECD countries to OECD countries are expected to fall
significantly as these countries consume more of their production in their domestic markets.

Table 6.3 Current and projected wood-based panel production and consumption by region and country 90

Region 1996 2010 (projection)

Production Consumption Production Consumption
(1,000 m3) % (1,000 m3) % (1,000 m3) % (1,000 m3) %

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Ardhi University
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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 m3) % (1,000 m3) % (1,000 m3) % (1,000 m3) %
OECD - Europe 37,942 25% 38,808 26% 52,415 29% 49,514 28%
OECD - Asia and Oceania 12,389 8% 20,238 14% 17,370 10% 24,935 14%
OECD - Americas 49,605 33% 49,002 33% 53,394 30% 53,150 30%
OECD total 99,936 67% 108,049 73% 123,180 69% 127,599 71%
Russian Federation 3,036 2% 2,126 1% 6,305 4% 5,628 3%
Hungary 459 <1% 337 <1% 477 <1% 517 <1%
Romania 433 <1% 435 <1% 508 <1% 556 <1%
Belarus 374 <1% 348 <1% 570 <1% 485 <1%
Slovenia 361 <1% 303 <1% 168 <1% 499 <1%
Others 1,562 1% 1,305 1% 3,782 2% 3,966 2%
Non-OECD Europe total 6,225 4% 4,853 3% 11,809 7% 11,651 7%
China 1
15,349 10% 19,479 13% 13,912 8% 16,014 9%
Indonesia 10,128 7% 1,873 1% 11,978 7% 3,376 2%
Malaysia 6,770 5% 1,760 1% 4,141 2% 2,183 1%
Turkey 1,078 1% 1,316 1% 835 <1% 1,126 1%
Philippines 596 <1% 833 1% 496 <1% 499 <1%
Others 1,140 1% 3,393 2% 3,953 2% 8,368 5%
Non-OECD Asia & Oceania total 35,061 23% 28,653 19% 35,315 20% 31,567 18%
Brazil 3,558 2% 2,617 2% 3,320 2% 1,849 1%
Chile 844 1% 446 <1% 782 <1% 786 <1%
Argentina 590 <1% 448 <1% 1,274 1% 1,208 1%
Ecuador 380 <1% 296 <1% 336 <1% 335 <1%
Venezuela 194 <1% 212 <1% 351 <1% 392 <1%
Others 776 1% 847 1% 1,081 1% 1,298 1%
Non-OECD Americas 6,342 4% 4,866 3% 7,143 4% 5,867 3%
South Africa 653 <1% 741 <1% 492 <1% 456 <1%
Côte d'Ivoire 272 <1% 199 <1% 72 <1% 56 <1%
Nigeria 115 <1% 135 <1% 113 <1% 153 <1%
Ghana 105 <1% 33 <1% 90 <1% 88 <1%
Tunisia 104 <1% 136 <1% 214 <1% 258 <1%
Others 573 <1% 774 1% 1,081 1% 1,347 1%
Africa total 1,822 1% 2,019 1% 2,062 1% 2,357 1%

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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 m3) % (1,000 m3) % (1,000 m3) % (1,000 m3) %
Non-OECD total 49,450 33% 40,391 27% 56,328 31% 51,441 29%
World total 149,385 148,440 179,508 179,040
Note: 1. The trend in wood-based panel production and consumption in China is broadly upwards over the
projection period. Sudden very high levels of production and consumption were reported for China in 1995 and
1996 and it is believed that these figures may be a statistical anomaly.

Given that such a large share of wood-based panel production in non-OECD countries in
Asia is plywood production and, consequently, dependent on the supply of large logs from
the natural forest, the uncertainties about this source of industrial roundwood supply raised
earlier must also apply to the outlook for wood-based panel production. Much of the recent
increase in plantation area in Asia is accounted for by short-rotation pulpwood species which
will not supply the sorts of logs required to make plywood. Furthermore, the areas which
have been planted with suitable species will require some considerable time to mature and
are unlikely to make much of a difference within the timescale of this analysis. Therefore, the
projected increases in wood-based panel production shown here may be difficult to achieve
without continued harvesting in the natural forest (at possibly even greater levels) or some
restructuring of the industry into reconstituted panel production 91.

Another alternative solution might be to source such logs from other countries and there are
already signs that some producers are looking to countries in other developing regions in
order to obtain large logs from natural forests and keep this industry going. It is questionable
however, whether such moves can be sustained in the long-run.

Pulp production and consumption92

Current and projected pulp production and consumption is shown in Table 6.4. OECD
countries currently have a three-quarters share of world pulp consumption and production
and are again dominated by United States of America and Canada. Non-OECD Asia and
Oceania currently has a 17% share of global pulp production and a 19% share of global pulp
consumption. The non-OECD regions are relatively insignificant. Broadly speaking, the non-
OECD region as a whole is a very small net exporter to OECD countries. Of the non-OECD
countries, China is the only globally significant pulp producer and consumer. The Russian
Federation, Brazil and South Africa are significant within their regions, but fairly small

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producers at a global scale. It should also be noted that non-wood fibre pulp accounts for a
major share of the Chinese market (as it does in India).

Very little growth in production and consumption is expected over the period to 2010. Most
growth is likely to occur in non-OECD countries, particularly Asia and Oceania but also, to
some extent, South and Central America. Thus, the OECD share of future world production
and consumption is expected to fall slightly to 70% and 72% respectively. The forecast for
pulp production and consumption growth is relatively low considering that, of all the product
categories, paper consumption is expected to grow the fastest in the future. This is because
the GFPM analysis presented here has assumed that the use of recovered fibre will increase
in the total fibre furnish in line with historical trends.

The collection and utilisation of recovered fibre is largely policy driven, so the extent to
which this material is used in the future is largely in the hands of government policymakers
(not necessarily forestry policymakers, though). At the rates of recovery assumed in this
analysis, there is still scope to increase recovery further, but much will depend upon the costs
of collecting more material and the incentives or regulations requiring producers and
consumers to do so.

Table 6.4 Current and projected pulp production and consumption by region and country93

Region 1996 2010 (projection)

Production Consumption Production Consumption
(1,000 MT) % (1,000 MT) % (1,000 MT) % (1,000 MT) %
OECD - Europe 33,958 19% 39,859 22% 43,425 21% 44,035 21%
OECD - Asia and Oceania 14,367 8% 19,604 11% 17,714 9% 22,601 11%
1
OECD - Americas 83,386 47% 73,577 41% 82,098 39% 80,049 39%
OECD total 131,711 74% 133,039 75% 143,236 69% 146,686 71%
Russian Federation 3,725 2% 2,758 2% 2,936 1% 2,734 1%
Romania 247 <1% 258 <1% 273 <1% 267 <1%
Slovakia 235 <1% 203 <1% 166 <1% 168 <1%
Bulgaria 107 <1% 77 <1% 157 <1% 91 <1%
Slovenia 101 <1% 192 <1% 95 <1% 202 <1%
Others 214 <1% 217 <1% 1,001 <1% 923 <1%
Non-OECD Europe total 4,629 3% 3,703 2% 4,628 2% 4,385 2%
China 24,751 14% 26,809 15% 35,330 17% 36,467 18%

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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 MT) % (1,000 MT) % (1,000 MT) % (1,000 MT) %
Indonesia 2,635 1% 2,143 1% 2,753 1% 2,810 1%
India 1,870 1% 2,132 1% 2,375 1% 2,392 1%
Thailand 503 <1% 718 <1% 436 <1% 1,007 <1%
Turkey 354 <1% 500 <1% 203 <1% 621 <1%
Others 719 <1% 1,196 1% 3,327 2% 3,853 2%
Non-OECD Asia & Oceania 30,832 17% 33,498 19% 44,424 21% 47,150 23%
total
Brazil 6,225 3% 4,258 2% 7,144 3% 4,363 2%
Chile 2,123 1% 479 <1% 4,056 2% 514 <1%
Argentina 822 <1% 768 <1% 1,005 <1% 535 <1%
Colombia 307 <1% 380 <1% 476 <1% 642 <1%
Venezuela 165 <1% 358 <1% 124 <1% 195 <1%
Others 139 <1% 227 <1% 498 <1% 718 <1%
Non-OECD Americas 9,781 5% 6,470 4% 13,303 6% 6,966 3%
South Africa 1,547 1% 1,177 1% 1,888 1% 1,693 1%
Swaziland2 200 <1% .. .. 99 <1% .. ..
Morocco 104 <1% 60 <1% 9 <1% 68 <1%
Kenya 66 <1% 71 <1% 143 <1% 143 <1%
Egypt 60 <1% 124 <1% 77 <1% 105 <1%
Others 154 <1% 276 <1% 204 <1% 344 <1%
Africa total 2,131 1% 1,708 1% 2,419 1% 2,353 1%
Non-OECD total 47,373 26% 45,379 25% 64,774 31% 60,854 29%
World total 179,083 178,418 208,009 207,540
Notes:
1. It is not really possible to compare actual consumption and production in 1996 with the projection for 2010,
because the projection is a projection of the trend and consumption and production in 1996 was significantly
above this trend. Consequently, the growth trend in consumption and production is higher than the appearance
given here.
2. Net exports of sawn wood from Swaziland were greater than officially recorded production in 1996, so
consumption cannot be accurately estimated.

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Paper production and consumption94

Current and projected paper and paperboard production and consumption is shown in Table
6.6. As with the market for pulp, OECD countries have a dominant share of the global
market for paper, accounting for nearly 80% of global production and 75% of global
consumption. However, OECD countries as a whole are net exporters to non-OECD
countries. Again, China is the only non-OECD country with a significant paper market and
non-OECD Asia and Oceania holds the largest global share of paper production (15%) and
consumption (18%) of all the non-OECD regions.

Table 6.5 Current and projected paper production and consumption by region and country95

Region 1996 2010 (projection)

Production Consumption Production Consumption
(1,000 MT) % (1,000 MT) % (1,000 MT) % (1,000 MT) %
OECD - Europe 75,544 27% 68,652 25% 103,608 26% 95,186 24%
OECD - Asia and Oceania 41,581 15% 42,645 15% 61,676 16% 61,876 16%
OECD - Americas 106,634 37% 97,911 35% 133,247 34% 130,881 33%
OECD total 223,759 79% 209,208 75% 298,531 76% 287,943 74%
Russian Federation 3,212 1% 1,788 1% 4,252 1% 3,563 1%
Slovenia 460 <1% 368 <1% 1,013 <1% 910 <1%
Hungary 363 <1% 522 <1% 457 <1% 753 <1%
Romania 332 <1% 320 <1% 433 <1% 402 <1%
Slovakia 327 <1% 190 <1% 321 <1% 377 <1%
Others 698 <1% 1,049 <1% 1,788 <1% 2,031 1%
Non-OECD Europe total 5,392 2% 4,238 2% 8,263 2% 8,036 2%
China 30,253 11% 32,917 12% 50,980 13% 48,098 12%
Indonesia 4,386 2% 3,372 1% 5,014 1% 4,278 1%
India 3,025 1% 3,369 1% 4,338 1% 4,340 1%
Thailand 2,241 1% 2,506 1% 1,863 <1% 3,081 1%
Turkey 1,235 <1% 1,772 1% 1,128 <1% 1,366 <1%
Others 1,856 1% 6,414 2% 6,403 2% 14,610 4%
Non-OECD Asia & Oceania 42,996 15% 50,350 18% 69,728 18% 75,772 19%
total
Brazil 5,885 2% 5,574 2% 7,714 2% 6,376 2%

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Region 1996 2010 (projection)
Production Consumption Production Consumption
(1,000 MT) % (1,000 MT) % (1,000 MT) % (1,000 MT) %
Argentina 1,108 <1% 1,630 1% 947 <1% 2,006 1%
Venezuela 735 <1% 799 <1% 1,047 <1% 801 <1%
Colombia 676 <1% 961 <1% 1,194 <1% 1,236 <1%
Chile 597 <1% 606 <1% 910 <1% 873 <1%
Others 540 <1% 1,968 1% 2,005 1% 2,690 1%
Non-OECD Americas 9,541 3% 11,538 4% 13,817 4% 13,982 4%
South Africa 1,871 1% 1,708 1% 2,439 1% 2,616 1%
Egypt 221 <1% 483 <1% 232 <1% 824 <1%
Kenya 129 <1% 149 <1% 268 <1% 276 <1%
Morocco 106 <1% 239 <1% 189 <1% 356 <1%
Tunisia 90 <1% 154 <1% 66 <1% 219 <1%
Others 278 <1% 671 <1% 420 <1% 926 <1%
Africa total 2,695 1% 3,405 1% 3,614 1% 5,217 1%
Non-OECD total 60,624 21% 69,531 25% 95,421 24% 103,007 26%
World total 284,383 278,740 393,952 390,950

As with other product categories, the share of the global market held by OECD countries is
expected to decline by 2010. Production share will fall back 3% to 76% as less developed
countries expand their production capacity more rapidly than OECD countries. Consumption
share will fall back only slightly, by 1% to 74%. Paper consumption growth in most non-
OECD countries is expected to exceed growth in the OECD countries by a wide margin.
However, due to the currently extremely low levels of consumption in many of these
countries, this is not expected to change the picture of global supply and demand by very
much in the near future96.

In terms of future paper (and pulp) production, the main uncertainty about the forecast
presented here concerns the large area of pulpwood plantations which have been established
in many tropical countries over the last decade or so. The potential volume of fibre which can
be produced from these plantations is huge and this is shown in the projections of the GFSM.
However, although these potential supply increases are incorporated in the GFPM, the latter
is somewhat constrained to follow trends starting from existing patterns of production
capacity. If large volumes of cheap available fibre in Asia and South America were to

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suddenly emerge over the next 10 years or so, this could change production costs and result
in a shift in manufacturing capacity into these regions.

The extent to which this might occur will depend on several factors including: the ease with
which the complex processing technology required for pulp and paper manufacturing can be
introduced into many of these countries; the comparative cost of other factors of production;
and the competition for this resource from the reconstituted panels sector (see above). If
conditions are favourable, production could shift on a scale which is noticeable at the global
level. If not, some of these countries could be left with a large resource without a market.

6.6.3 Major bilateral trade flows

The last section of this report showed the broad inter-regional trade flows of wood and wood
products and previous parts of this section have noted some of the world's major wood and
wood product importers and exporters. Before concluding, this section will present a little
more detail about some of the main trade flows of wood and wood products currently taking
place. Unfortunately, the GFPM in its current formulation, does not produce projections for
country-to-country or region-to-region trade flows, but only produces projections for exports
and imports (to the rest of the world) for each country. The model is also based on economic
rationality and fails to capture some of the significant impacts of trading policies on trade
flows. However, an attempt will be made to describe some of the changes in trade flows
which may occur over the period to 2010, based on a careful interpretation of the model's
results and a general appraisal of current trends in wood and wood products trade.

Current trade flows by product and region97

In terms of international wood and wood products trade, a handful of major exporting and
importing countries appear at the top of the trade tables for nearly all products. To a large
extent, major producers are also major exporters and major consumers are also major
importers. The only exceptions to this rule are United States of America, Japan and China
which are both major producers and importers of some wood products. Of the OECD
countries, major exporter countries include: United States of America (industrial roundwood
and all products); Canada, Finland and Sweden (most products); and Australia and New
Zealand (industrial roundwood). Of the non-OECD countries, major exporters are: Russian
Federation; Chile and Malaysia (industrial roundwood and some products); Indonesia and
Brazil (some products). Major importers into the OECD include: Canada and Finland
(industrial roundwood); Japan and Republic of Korea (industrial roundwood and most
products); and United States of America, United Kingdom, Germany, Italy and France (some

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products). The only major non-OECD importer is China. The main trade flows by product
are set-out below.

Industrial roundwood. The largest trade flow of industrial roundwood occurs between
countries on the Pacific Rim. Six countries (United States of America, Russian Federation,
Chile, Australia, Malaysia and New Zealand) export industrial roundwood to Japan, China
and Republic of Korea. Together, these activities accounted for around 50 million m 3 of
industrial roundwood trade in 1995 or 43% of the global total of 113 million m 3. The only
other major industrial roundwood trade flow is from United States of America to Canada (4.5
million m3).

Industrial roundwood (tropical). Despite the attention given to tropical roundwood trade,
trade flows of tropical logs are actually very small (14% of total industrial roundwood trade).
The only major exporter is Malaysia which, joined by Papua New Guinea and Solomon Isles,
exports to Japan, Republic of Korea and China. African exports are also fairly low. The two
largest exporters (Gabon and Cameroon) export to a range of European and Asian Countries.
Sawn wood. Total trade in sawn wood in 1995 was 107 million m 3. Exports from Canada to
United States of America accounted for 40 million m 3 of this. Exports from Canada and
United States of America to Japan and from Sweden and Finland to the rest of Europe
accounted for much of the rest of world trade. The Russian Federation and Malaysia are the
only significant non-OECD sawn wood exporters and exported to a broad range of countries.
Wood-based panels. Total trade in wood-based panels amounted to 41 million m 3 in 1995.
Two trade flows are significant: Malaysia and Indonesia to China, Japan and Republic of
Korea (8.7 million m3 , mostly plywood); and Canada to United States of America (4.6
million m3, mostly particleboard).

Pulp. Pulp trade is, perhaps, the most interesting of all because major countries involved in
the total trade of 33 million MT in 1995 can be found on four continents. The trading patterns
are also quite complex. The largest individual trade flow is from Canada to United States of
America (4.5 million MT). Significant trade flows also occur between these two countries
and Europe and Sweden and Finland and the rest of Europe. Canada and United States of
America are joined by Brazil and Chile as major exporters to Japan, China and Republic of
Korea. However, Brazil and Chile are also significant exporters to United States of America.
Outside Asia, this is the only major trade flow from non-OECD countries to an OECD
country98.

Paper. The main trade flows in paper products are similar to the trade flows in sawn wood.
Canada exported 11 million MT to United States of America in 1995 (out of total global

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trade of 69 million MT). The other main trade flows were from Canada, United States of
America, Finland and Sweden to the rest of Europe. Interestingly, Asia is not a major trader
in paper products. Only China is an importer of minor significance. Japan chooses to
manufacture most of its own needs from recycled fibre and imports of industrial roundwood
(much of which is imported in the form of chips).

Possible future trade flows in 201099.

As noted above, any forecast of trade flows in 2010 is likely to be highly speculative.
However, the changes in supply and demand expected in the future might lead to the changes
in trading patterns outlined below.

Industrial roundwood. Global industrial roundwood trade in the future will continue to be
concentrated around the Pacific Rim. Japan, China and Republic of Korea will continue to
have significant levels of demand for imported industrial roundwood, unless their trading
policies change or current exporters can provide them with finished products at very
competitive prices. However, the extent to which they manage to continue to import a
significant proportion of their wood needs in the form of industrial roundwood, rather than
products, will largely depend upon export policies and industrial developments in the
countries currently supplying them.

There will be a significant increase in the availability of plantation-grown wood in some of

their supplier countries. However, it seems likely that some of their current suppliers will
develop significant wood processing industries of their own and may prefer to export
products in the future. The most likely to do this are the developed supplier countries, such as
Australia and New Zealand and, maybe, Malaysia. Consequently, log export flows may shift
somewhat towards countries which are some ways behind these with the development of
their domestic processing industries (e.g., in developing South America and Oceania) 100.

A further potentially vast source of future supply in this area is Eastern Siberia. Expansion of
harvesting into this area will depend upon the economics of production and, to some extent,
diplomatic relations in the region. It is anticipated, however, that production from this region
will expand to fill-in an expected reduction in temperate industrial roundwood exports from
the United States of America.

In summary, the main centres of import demand are expected to remain the same, but the
weight of the various exporting countries is expected to shift from United States of America

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to Russian Federation in the northern hemisphere and from Southeast Asia and developed
Oceania to less developed Oceania and South America in the Southern Hemisphere.

Sawn wood. No major changes in the trade flows of sawn wood are expected in the future.
As already noted, most international trade in sawn wood takes place between developed
countries and this is expected to continue in the future. China will become a larger importer
of sawn wood and is likely to have to rely on a wider range of countries to meet its import
needs. A greater share of exports to China are also likely to come from outside Asia. Sawn
wood exports from the few significant developing country exporters (Malaysia, Russian
Federation and Brazil) are also likely to decline as their domestic demand growth exceeds
production growth. Indeed, Russian Federation may remain the only large developing
country exporter of sawn wood by the year 2010.

Wood-based panels. Trading patterns in wood-based panels are also expected to remain
more or less the same in 2010. Of the three significant developing country exporters, exports
from Brazil and Indonesia are expected to remain roughly the same as production growth
keeps up with domestic consumption growth. In Malaysia, domestic consumption growth is
expected to exceed production growth, leading to a decline in exports. China, Japan and
Republic of Korea will therefore, have to look elsewhere for some of their future wood-based
panel imports.

As already noted, the majority of wood-based panel exports from developing countries are in
the plywood sector. Production in Malaysia is expected to decline somewhat over the period
to 2010 due to increasing log scarcity. To the extent that this affects Brazil and Indonesia,
these countries may also see a decline in exports in the future rather than the constant level of
exports projected here. If this leads to upward price pressure in plywood markets, other
countries with substantial remaining natural forest resources (e.g., Papua New Guinea,
Suriname and Guyana) or more mature plantations (e.g., Chile and Argentina) may choose to
develop greater export plywood markets. They would be unlikely however, to reach a
globally significant scale within the time period of this analysis 101.

An alternative for many plywood exporting countries facing potential log shortages, would
be to move into production of other types of wood-based panel. It is likely that this will
eventually occur across the whole of Southeast Asia and some restructuring may take place
during the period of this forecast. Again, it is unlikely however, that they would be able to
reach a globally significant scale within the time period of this analysis.

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Pulp and paper. The most interesting potential development in pulp and paper trade which
is quite likely to occur over the period to 2010, is the continued increase in pulp exports from
South America (Chile, Argentina and Brazil) to Asia and, possibly, United States of
America. This region has already developed the nucleus of a globally significant centre of
pulp production and exports and it should be relatively simple to build on this base and
expand production and exports further. (In the case of Brazil, these comments apply equally
to the paper industry). There will, however, be continued pressure (in terms of both
production economies and government policies) to integrate pulp production with paper
production, thus tending to limit expansion in the trade of pulp.

In contrast, two of the three largest Asian pulp and producers (China and India) produce
mostly non-wood fibre pulp and the only other significant producer (Indonesia) is still
relatively inexperienced in this area. The rate at which pulping and papermaking capacity is
installed and effectively managed in these and other countries, will have a profound impact
on whether Asia's vast pulpwood plantation resource is left in the ground, produced and
exported as chips or roundwood, or produced and exported as pulp and paper 102.

6.7 Determinants of demand of wood and other fibers 103

Economic analysis has recognized the role of key variables in determining demand and
consumption. In practice, the distinction between demand (as a schedule of quantities as a
function of price, other factors held constant) and consumption as an equilibrium quantity at
a given price is frequently ignored. The development of "gap" type models illustrates the
common approach of projecting 'demand' as a fixed quantity independent of price 104.
Demand, as the relationship between price and quantity, is subject to change over time due to
changes in the underlying factors held constant by the static notion of demand. Changes in
demand "shifters" are often included in economic estimation of demand representing
anticipated dynamics in these determinants 105. A range of factors affect the demand for wood
and wood products, including: the price of the products themselves; the price of substitute
products; population and income levels; and trends in consumer preferences. In addition to
these factors, most forest products are intermediate goods. They are used in other industrial
processes or commercial activities (e.g., construction), such that technological changes in
these processing or end-use sectors can have a major impact on the demand for forest
products through the efficiency with which they are transformed into other products 106.

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i. Levels of income: A key determinant of demand is the level of income evident in the
appropriate country or region under analysis. As a generality, the higher the level of
aggregate and/or personal income the higher will be the demand for a typical
commodity, including forest products. More of a good or service will be chosen at a
given price where income is higher. Thus, determinants of demand normally utilize
some form of income measure, including Gross Domestic Product (GDP).
ii. Population: Population is of course a key determinant of demand. Although all forest
products do not necessarily enter final consumer markets, the actual markets are
largely presumed to be functionally related to population. Growing populations are
positively correlated to timber demands in the aggregate, as well as specifically to
individual forest products. Frequently, population and income estimators are
combined, as in the case of the use of Gross Domestic Product per capita.
iii. End market indicators: The use of end market indicators as determinants of demand
is frequently incorporated into demand analysis. For example, much of the final use
of forest products is linked to construction (residential and total). Indicators and
trends related to construction activities, or which are determinants of construction,
provide indirect estimates of the influence of these activities as the source of derived
demand for wood. Housing starts, public investments, interest rates, etc. can be highly
correlated to timber demand.
iv. Availability and price of substitute goods: Consumption choices related to timber
are also influenced by the alternative options facing users in the relevant marketplace.
The availability of potential substitute products, and their prices, weighs heavily in
determining the elasticity of demand, both in the short run (static) sense and over time
(long run). Fuelwood, as a dominant use of timber in the Asia Pacific Region, reflects
conditions of very limited options for energy sources at 'reasonable' prices.

Empirical evidence suggests that the use of wood products in the future will continue be
challenged by substitute products from the metals, plastics, Agri-forestry, cement, and
chemical industries107. A correlation between increasing incomes and preferences for
environmentally friendly products and outcomes suggests a future of increasingly complex
interplay in the demands placed on forests and the relative acceptability to consumers of
forest products and competing non-forest substitutes. Several of these factors will be
examined later in this paper. This first section concentrates on the two main forces that tend
to drive the demand for forest products over time: population and income growth 108.

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6.7.1 Population growth109
Population growth broadly acts to increase the demand for forest products by increasing the
number of forest product consumers. World population has roughly doubled in the last four
decades, and growth in the consumption of roundwood (including wood fuel) has increased
at only a marginally lower rate. Rates of population growth in most developed countries have
declined (and are indeed now negative in many developed countries) and it is expected that a
changing distribution of global population, from developed towards less developed countries,
will have a moderate impact on future forest product demand patterns 110.

The distribution of world population and expected population growth is shown in Table 6.7.
This shows that developed countries currently account for just under one-fifth of world
population. The latest population projections from the UN Population Division, indicate that
world population will probably increase by just under 20% over the next 15 years. It is
expected that most growth will occur in less developed countries, led by African countries
where population is expected to grow by over 40% or over twice the world average. In
contrast, population in developed countries is expected to grow by only 6% and the share of
world population in developed countries is expected to decline to 17%. Asia is and will
remain the world's most populous region with over half of the world's population.

Table 6.6 World population in 1995 and projection for 2010 (medium fertility variant)111

Region 1995 2010 Growth 1995 - 2010

(millions) (%) (millions) (%) (annual) (total)
Countries within OECD
Europe 432 8% 431 6% +0.0% -0.3%
Asia and Oceania 252 4% 270 4% +0.5% +7.0%
The Americas 388 7% 440 7% +0.8% +13.4%
Subtotal 1,072 19% 1,141 17% +0.4% +6.4%
Non-OECD countries
Europe 295 5% 282 4% -0.3% -4.6%
Asia and Oceania 3,214 57% 3,819 57% +1.2% +18.8%
The Americas 386 7% 465 7% +1.3% +20.7%
Africa 719 13% 1,028 15% +2.4% +42.8%
Subtotal 4,614 81% 5,593 83% +1.3% +21.2%

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Region 1995 2010 Growth 1995 - 2010
(millions) (%) (millions) (%) (annual) (total)
World total 5,687 6,734 +1.1% +18.4%
Source: UN (1998)

6.7.2 Income growth112

The second principal factor influencing the demand for forest products is wealth or income.
Leaving aside the issue of income distribution, demand for most forest products generally
increases as countries become richer and can afford to buy more of all goods and services. In
the context of markets for wood products, the only major exception to this is wood fuel. Per
capita consumption of wood fuel tends to decline as incomes increase, because people switch
towards using more convenient types of energy. Current and projected gross domestic
product (GDP) for all the main regions of the world is shown in Table 6.8. GDP is currently
very unevenly distributed. For example, 80% of world GDP is accounted for by the 29
OECD countries, in stark contrast to their 20% share of world population. Asian developing
countries account for 13% of world GDP and 7% of world GDP is produced in other less
developed countries. It is expected, however, that GDP will grow at the highest future growth
rates in less developed countries. Many less developed countries are expected to sustain GDP
growth at over 3% per annum (and some much faster than this) compared with growth of
only 2% to 3% in most developed countries. Thus, by 2010, the share of world GDP
produced in less developed countries is expected to increase from 20% to around 35%. Also,
compared with the size of their economies in 1995, less developed countries are expected to
double in size by 2010, whereas developed countries are expected to increase by only around
50%. These developments may have a profound effect on the demand for forest products.

Table 6.7 World GDP in 1995 and projection for 2010113

Region 1995 2010 Growth 1995 - 2010

(billions) (%) (billions) (%) (annual) (total)
Countries within OECD
Europe 5,997 30% 8,797 27% 2.6% 46.7%
Asia and Oceania 3,664 18% 6,049 18% 3.4% 65.1%
The Americas 6,147 31% 8,941 27% 2.5% 45.5%
Subtotal 15,807 79% 23,786 72% 2.8% 50.5%
Non-OECD countries

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Region 1995 2010 Growth 1995 - 2010
(billions) (%) (billions) (%) (annual) (total)
Europe 523 3% 958 3% 4.1% 83.2%
Asia and Oceania 2,369 12% 5,864 18% 6.2% 147.5%
The Americas 785 4% 1,411 4% 4.0% 79.7%
Africa 476 2% 860 3% 4.0% 80.6%
Subtotal 4,153 21% 9,092 28% 5.4% 118.9%
World total 19,961 32,879 3.4% 64.7%
Source: FAO (1997b) GDP figures have been converted to US$ at 1987 prices and exchange rates

6.7.3 Other impacts of population and income growth114

Population and income growth may not only affect the demand for forest products, but also
affect the supply of wood raw materials. For example, increasing population density
increases the pressure to convert forestland into other uses and higher incomes tend to result
in higher demands for environmental services from forests (Solberg et al 1996). Thus, the
changes outlined above are likely to put pressure on forest resources both in terms of the
wood and fibre products that will be desired from them and the other non-wood goods and
services that they will be expected to produce (which may consequently reduce their
availability for timber supply).

6.8 Determinants of supply of wood and other fiber 115

A large number of economic, technical and biological factors are likely to influence the
future supply of wood and other fibre. Box 4.9 lists some of the factors most likely to have a
significant impact on supply. The factors listed in Box 4.9 have been identified and
considered as part of this analysis. The list is not an exhaustive collection, but rather a subset
of a larger set of variables that have been identified as affecting wood supplies in various
studies within the last decade. These variables have been chosen because of their suspected
importance and the availability of information about their presence and likely impacts on
forests around the world.

Box 6.9 Factors most likely to affect future wood and other fibre supplies

Wood supply from the natural forest:

 Management regime (as expressed by cutting cycle and intensity);
 Forest loss - e.g., Unplanned and planned deforestation; and

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 Forest change - e.g., forest degradation, conversion to legally protected areas or expansion of the
exploitation frontier.
Wood supply from industrial forest plantations:
 Afforestation rate; and
 Development gains in rates of growth and fibre yields.
Non-wood fibre supply:
 Capacity to collect and process non-wood fibre sources.
Recovered fibres:
 Capacity to collect and process recovered paper.

4.2.1 Changes to natural forest management regimes

The implications of Sustainable Forest Management (SFM) for wood and other fibre supply
are frequently mentioned in forest policy discussion. The concept of SFM has been
broadened in recent years and, as a result, the objectives of natural forest management in
many countries are gradually shifting emphasis away from predominantly management for
timber production towards management that balances timber production with ecological and
social sustainability. These changes could have significant impacts on the amount of timber
which can be harvested from the world's natural forests in the future.

4.2.2 Forest loss116

Deforestation remains a serious forestry policy issue for most regions. The main direct
impact of deforestation on future wood availability is that it reduces the area of forest
available for wood supply. A more subtle impact it has, is that it increases the pressure on
forestry policymakers to place forest areas in legally protected areas (see below) or prevent
harvesting in some other way (e.g., logging bans), thus further reducing the amount of wood
that can be harvested from the remaining forest areas.

4.2.3 Forest change

A more subtle change that has occurred within many of the world's forests in recent years is
the process of gradual forest degradation. Forest degradation can manifest itself in many
ways including: loss of site fertility; soil erosion; reduction in biological diversity; and
fragmentation of forest areas, but probably the single most important indicator of degradation
(and one of the most important in terms of future timber supply) is the gradual loss of
standing biomass.

Forest degradation will affect timber supplies by reducing the amount of standing
commercial timber available for harvest in the future. Thus, for example, as countries move

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from harvesting old-growth or primary forest stands into second growth forest, it can be
expected that harvesting volumes per unit of area will decline. Such shifts are likely to take
place over several decades in countries where virgin forest still accounts for a major share of
current wood production (e.g., many tropical countries) and they have been taken into
account in this analysis.

Partly in response to the problems of deforestation and forest degradation, countries are also
placing more natural forest into legally protected areas. As areas of forest are placed into
protected areas, they are taken out of production and this reduces the long-run sustainable
supply of timber that can be harvested from the natural forest. This is another aspect of forest
change that has been examined in the analysis.

4.2.4 Afforestation rate and development gains in industrial forest

plantations117
Increasing the forest area by establishing forest plantations is one way in which future supply
of wood from forests can be increased. Table 6.9 shows the current estimated rates of
afforestation in some of the main countries actively pursuing vigorous plantation
establishment policies. Because tree growth in plantations is generally much higher than in
natural forests, policy developments that promote the establishment and use of plantations
can have a significant impact on future wood supplies. There is frequently a significant
difference between planned and actual afforestation rates, due to poor establishment
practices. But, for the purposes of this study, the planned rates were used as a starting point
for the analysis.

Table 6.8 Estimated annual rate of afforestation in selected countries118

Africa South America Asia-Pacific

Country Area Country Area Country Area
1,000 ha 1,000 ha 1,000 ha
South Africa 24 Argentina 25 Australia 20
Zimbabwe 5 Brazil 200 Bangladesh 50
Chile 120 China 500
Uruguay 20 India 500
Indonesia 250
Malaysia 50
New Zealand 50

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Africa South America Asia-Pacific
Country Area Country Area Country Area
1,000 ha 1,000 ha 1,000 ha
Pakistan 50
Philippines 44
Sri Lanka 10
Source: FAO (1999a)

Development gains, particularly in industrial forest plantations, are another key factor that
will affect future potential wood supply. Such gains will include both silvicultural and
genetic gains. Vichnevetskaia119 provides a partial survey of studies published on factors
affecting productivity in tropical forest plantations. Such gains are a further potential source
of increased wood supply, although they have not been included in the analysis presented
later.

4.2.5 Development of non-wood and recovered fibre supplies120

Currently, wood is the major raw material input to the global pulp and paper industry.
Significant levels of non-wood fibres are currently used in a handful of countries, most
notably in: China; India; and a few other Asian countries. However, there are also currently
indications of increasing interest in non-wood fibres, particularly in North America. At
present, the most common non-wood fibre used to make pulp and paper is straw (see Table
4.10), which accounts for 46 % of total non-wood fibre consumption 121. This is followed by
bagasse (14 %) and bamboo (6 %). Other non-wood fibres, such as cotton, hemp, sisal, and
kenaf, are gradually becoming more important in the manufacture of pulp and paper.

Table 6.9 Global non-wood fibre papermaking capacity122

Material Capacity (thousand metric tons)

1985 1988 1990 1993
Straw 6,166 5,260 7,623 9,566
Bagasse 2,339 2,267 2,646 2,984

119
Klara Vichnevetskaia (1997 )Factors Affecting Productivity of Tropical Forest Plantations: Acacia,
Eucalypt, Teak, Pine, GLOBAL FIBRE SUPPLY STUDY - Working Paper Series

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Atchison, J.E. 1995. Twenty-five years of global progress in non-wood plant fibre pulping Historical
highlights, present status and future prospects. Pulping Conference, 1-5 October 1995, Chicago, IL, USA. Tappi
Proceedings, Book 1, p. 91-101. Atlanta, GA, USA, Tappi Press
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Bamboo 1,545 1,674 1,468 1,316
Miscellaneous 3,302 6,366 6,870 6,870
Total non-wood fibre papermaking capacity 13,352 15,567 18,607 20,736
Total paper and paperboard production 178,558 225,887 238,939 250,359
Estimated production from non-wood fibres 7.4% 6.9% 7.8% 8.3%
Source: Mabee and Pande (1997)

In total, it is estimated that non-wood fibres currently account for around 8% of global pulp
and paper production. Given the world's area of Agri-forestry crops, their potential
contribution to meet future demands for fibre is vast, but much will depend on the economic,
environmental and technical feasibility of collection and processing the resource. For
example, pollution from non-wood fibre pulp mills is becoming an increasing environmental
concern in China. More important to the future wood product supply and demand balance is
the outlook for wastepaper recovery and utilisation. Figure 6.6 shows how the utilisation of
wood and non-wood fibre pulp in the manufacture of paper has declined over the last 25
years, largely due to the increased use of recovered paper in the total fibre furnish.

Figure 6:7 Trend in the utilisation of pulp in the manufacture of paper123

Source: FAO (1999b)

Table 6.7 shows that currently, most regions of the world are recovering around 40% of the
paper they consume. The exceptions to this are Africa and the countries of the former USSR.

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Poor infrastructure may be the cause of low recovery rates in Africa and the abundance of
forest resources is almost certainly the cause of the very low recovery rate in the countries of
the former USSR. Because of the size of its domestic market for paper products, North
America is by far the largest producer of recovered paper in the world 124.

Figure 6:8 Global wastepaper recovery in 1995125

Region Wastepaper Recovery as a Wastepaper Consumption as a

recovery proportion of paper consumption proportion of paper
consumption production
1,000 MT % 1,000 MT %
Europe 31,923 45 32,297 46
Asia-Pacific 35,603 40 40,946 40
North America 41,999 40 34,427 45
Latin America 4,354 42 5,853 31
Africa 901 26 924 23
Former USSR 40 1 629 2
World 115,820 41 116,076 41

In terms of wastepaper utilisation, the table shows that North America and Europe lead the
world in terms of the share of paper produced from recycled fibre, while the Asia-Pacific
region is the largest consumer of recovered paper overall. However, even though North
America has the highest rate of utilisation, the region has consistently recovered more
wastepaper than it uses (due to domestic recycling and waste management policies) and has
become the world's dominant exporter of recovered paper. Much of this material is sold to
the Asia-Pacific region. Europe, Africa, Latin America and the Former USSR each have a
lower level of imports and demand that could easily be met by increases in national recovery
levels in these regions126.

6.9 Measuring elasticity of forest product demand

Given a demand curve, there will be some quantitative response in the quantity sold if its
determinant is changed. Such type of phenomena can be explained by elasticity concept.
There are mainly three type of elasticity concept in use 127.

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1. Price elasticity:
2. Income elasticity:
3. Cross elasticity:

6.9.1 Price elasticity

Studying elasticities is useful for a number of reasons, pricing being the most important.
Well-estimated price and income elasticities of demand are important for understanding
consumer behaviour and for making long-run projections in global and national demand for
forest products128. Estimating elasticities of demand for forest products has been the topic of
much research. Buongiorno129130, using panel data of 43 high- and low-income countries, 40
estimated price and income elasticities of demand for newsprint, printing and writing paper,
other paper and paperboard, coniferous sawn wood, non-coniferous sawn wood, plywood,
particleboard, and fiberboard. Simangunsong and Buongiorno 131 estimated price and income
elasticities of demand for nine end-use forest products using panel data analysis from 64
countries, also divided into high and low income. Such estimates are useful in describing;

• the demand relationship and its implication with respect to price, quantity, revenue
relationship; and
• Movement along the demand curve.

................................................................................................ [1]

Where, ∆Q = Change in quantity; ∆P = Change in price; P = Initial Price; Q = Initial

Quantity

Since demand curves are almost always negatively sloped it follows that price elasticity will
normally be negative. In practice, however, the sign is usually ignored and elasticity is said to

128

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_id=24992&item_no=1
129
Buongiorno, J. 1978. Income and Price Elasticities in the World Demand for Paper and Paperboard. Forest
Science, Vol. 24, p.231-246
130
. Buongiorno, J. 1979. Income and Price Elasticities of Demand for Sawn Wood and Wood-Based Panels: A
Pooled Cross-Section and Time-Series Analysis. Canadian Journal of Forest Research, Vol. 9, p.141-148.
131
Simangunsong, B. C. H., & Buongiorno, J. (2001). International Demand Equations for Forest Products: A
Comparison of Methods. Scandinavian Journal of Forest Research, 16(2), 155–
172. doi:10.1080/028275801300088242

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vary zero to infinity. If Ep is less than one the curve is described as being inelastic, and if
zero it is called perfectly inelastic. If elasticity is greater than one, the demand is termed
elastic, and Ep tends toward to an infinite value the curve is said to be perfectly (or infinitely)
elastic. The special case of Ep = 1 is termed unit elasticity.

Calculation of arc elasticity:

Calculation of 'arc elasticity' such as this reveals a particular difficulty, for clearly, the
percentage change might be based on either the beginning or ending values. To eliminate this
problem, it is usual to make the average of the two prices and quantities the bases for the
percentage calculations. Consequently, arc elasticity becomes an "average" elasticity between
two selected points.

............................................................................... [2]

Elasticity at a point: A more precise measure is obtained by permitting P and Q to tend to

zero, and treating elasticity as a point concept, then becomes, , or the reciprocal of the
slope. Hence, to calculate elasticity of demand with respect to price at any point on the
demand curve one can simply multiply the reciprocal of the slope of the curve by the ,
using this value of P and Q the slope as the desired point. Eventually relation can be
expressed as;

....................................................... [3]

If we were to calculate elasticity at every point on a demand curve, we could divide it into
these elastic, unit elastic, and inelastic areas, as shown in Figure 6.8 132. This means the
impact of a price change will depend on where we are producing. Feel free to calculate the
elasticity in any of the regions, you will find that it indeed fits the description.

To demonstrate, we have calculated the elasticities at a point in each of the zones:

Point A

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= Elastic

Point B =

=Inelastic

Figure 6:9 Elasticity along a linear demand curve

Point C =

=Unit Elastic

In reality, the only point we need to find to determine which areas are elastic and inelastic is
our point where elasticity is 1, or Point C. This isn’t as hard as it may seem. Since our
formula is equal to the inverse of our slope multiplied by a point on the graph, it will only
equal 1 when our point is equal to the slope of our graph. For a linear graph, this only occurs
at the middle point.

Elasticity and revenue:

The key consideration when thinking about maximizing revenue is the price elasticity of
demand. Total revenue is the price of an item multiplied by the number of units sold: TR = P
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x Qd. When a firm considers a price increase or decrease, there are three possibilities, which
are laid out in Table 6.11, below133.

Table 6.10 Price Elasticity of Demand134

If demand is . . . Then . . . Therefore . . .

A given % rise in P will be more than offset by a

% change in Qd is greater
Elastic larger % fall in Q so that total revenue (P times
than % change in P
Q) falls.

A given % rise in P will be exactly offset by an

% change in Qd is equal to
Unitary equal % fall in Q so that total revenue (P times
% change in P
Q) is unchanged.

% change in Qd is less than A given % rise in P will cause a smaller % fall in

Inelastic
% change in P Q so that total revenue (P times Q) rises.

If demand is elastic at a given price level, then the company should cut its price, because the
percentage drop in price will result in an even larger percentage increase in the quantity
sold—thus raising total revenue. However, if demand is inelastic at the original quantity
level, then the company should raise its prices, because the percentage increase in price will
result in a smaller percentage decrease in the quantity sold—and total revenue will rise.

Table 6.11 Elasticity and revenues

So far, we have determined how to calculate elasticity at and between different points, but
why is this knowledge useful?

Consider a coffee shop owner considering a price hike. The owner has two things to account
for when deciding whether to raise the price, one that increases revenue and one that
decreases it. Elasticity helps us determine which effect is greater. Referring back to Table
6.12:
 When you increase price, you increase revenue on units sold (The Price Effect).
 When you increase price, you sell fewer units (The Quantity Effect).

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These two effects work against each-other. To determine which outweighs the other we can
look at elasticity:

 When our point is elastic our % change in quantity > % change in price % change in
quantity > % change in price meaning if we increase price, our quantity effect
outweighs the price effect, causing a decrease in revenue 135.
 When our point is inelastic our % change in quantity < % change in price % change
in quantity < % change in price meaning if we increase price, our price effect
outweighs the quantity effect, causing a increase in revenue. This information is
summarized in Figure 6.9:

Figure 6:10 Elasticity and revenues136

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The first thing to note is that revenue is maximized at the point where elasticity is unit elastic.
Why? If you are the coffee shop owner, you will notice that there are untapped opportunities
when demand is elastic or inelastic;

 If elastic: The quantity effect outweighs the price effect, meaning if we decrease
prices, the revenue gained from the more units sold will outweigh the revenue lost
from the decrease in price.
 If inelastic: The price effect outweighs the quantity effect, meaning if we increase
prices, the revenue gained from the higher price will outweigh the revenue lost from
less units sold.

The effects of price increase and decrease at different points are summarized in Figure 6.10.

Figure 6:11 Price, elasticity and revenues137

What about Expenditure

You will notice that expenditure is mentioned whenever revenue is. This is because a dollar
earned by the coffee shop corresponds to a dollar spent by the consumer. Therefore, if the
firm’s revenue is rising, then the consumer’s expenditure is rising as well. You must
understand how to answer questions from both sides.

Forestry provides several goods and services to the people which include timber, fuelwood,
forages for cattle, grasses, Medicinal plants, different fruits etc.

 Timber whose substitute are available in the market so it is more elastic.

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 Fuelwood in rural area and some far-flung areas substitute are not available is less
elastic.
 Grasses and forages have also substituted in agriculture products so it is elastic.
 Medicinal Plants have no substitute it is less elastic.
 Pulp & paper have no substitute it is less elastic.

6.9.2 Income elasticity

A change in any variable other than price implies a shift of the demand curve rather than a
movement along the curve itself. Any variable other than price may be income. To describe
the relationship between incomes and demand the term income elasticity is used.

....................... [6.4]

Eventually the relation may be expressed as;

.................. [6.5]

The basic relationship included population sizes, incomes and rates of urbanization which
were extrapolated to the targeted years 138. Population changes over targeted years were
extrapolated by the formula below.

𝑃 =𝑃𝑒 ………………………………............................... [6.6]

Where; Po = Previous population size, Pt = Population at time t in years, e = Base of natural

logarithm (2.71828183), r = Average annual population growth, t = Time interval in years
between two periods

6.9.3 Cross elasticity:

Cross elasticity is another term that may be encountered in forest economics. It may be
defined as;

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……………............................... [6.7]

6.10 Derived demand by a firm

Whenever several items are required to make a particular commodity, the demand for various
commodities is termed as the Derived Demand and demand of ultimate commodity is called
as Direct Demand. For example, the demand for building is a direct demand and demands for
cement, bricks, sand, timber, etc., are called as derived demands. It is denoted by the given
line diagram (Fig. 4.11).

Figure 6:12 Derived Demand

The demand for a factor of production is said to be a derived demand. This is because both
the intensity of demand and the relationship between factor price and quantity demanded are
determined by the demand for the final products. The greater the demand for the finished
products will be, the greater the demand for the factor of production and vice-versa.

We know that the demand for most timber, paper and plywood is not direct but is derived
from the sale or the expected sale of finished house, furniture, or of newspapers, magazines,
books, or of the hundreds of other things into which these products are fabricated. Demand
may be distinguished as autonomous and derived demand 139. Autonomous demand for a
commodity is one that arises independent of the demand for any other commodity whereas
derived demand is one that is tied to the demand for some 'parent product'. The demand for a
commodity which arises directly from the biological or physical needs of the human beings
may be considered as autonomous demand, e.g., demand for food, clothes, shelter etc. On the
other hand, demand for a commodity that arises because of the demand for some other
commodity may be considered as derived demand 140.

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• Demand for land, fertilizers, and Agri-forestry tools and implements are derived
demand because they are dependent on or tied with the demand for food.
• Demand for cotton, bricks, cement, wood etc are derived demand.
• Demand for producers' goods or firms' goods or industrial inputs are derived demand.
• Demand for complementary commodities which complement the use of other
commodities, or for supplementary commodities which supplement or provides
additional utility from the use of other goods is a derived demand.
• For, instance, power regulator is complementary goods of a refrigerators and TV sets,
and a chair is a complement and table glass are supplement to the use of table.

Therefore, demand for power regulator, chair, and table glass would be considered as derived
demand. The conceptual distinction between autonomous demand (i.e., demand for parent
product) and derived demand would be useful for firms' point of view to the extent the
former can serve as an indicator of the latter. The demand for many of the major forest
products is derived demand. For example, that for timber, plywood, pulp, many kinds of
industrial paper etc. The demand for tissue paper, writing paper, firewood etc in contrast is
direct demand. The demand for most of the product of a forest firm, i.e., the demand for
standing wood or wood in the firm of logs, is derived demand. Therefore, it is necessary to
see how a derived demand is obtained.

Instead of starting with consumer's utility function we start with the production function of
the firm which demands the commodity. Let it be,

where, Q is the quantity of the output of the finally consumed commodity produced by the
firm per unit of time, and X1, X2 are the quantities of the two (only two in this case) inputs
required in the production process; Let us suppose that the prices of the produced commodity
and the two inputs are constant over the relevant range and are denoted by P, P1, P2
respectively and the profit made by the firm is M rupees, now;

From this equation, eventually, we can obtain the derived demand functions for the two
products.

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6.11 Wood Products Markets in Tanzania

4.9.1 Demand by sectors

Indufor identified four major sub-sectors in round wood industry; construction, pulp and
paper, furniture and joinery, and utility poles sector 141. Additionally, there is an arising
veneer production industry, which is included in this study. In overall, the demand for pine
products is fairly uniform across the country though there are variances in quality, tolerance,
and size. Some regions have moderate demand specifics which affect the prevalence of
certain sizes and treatments. The range of eucalyptus products is developing rapidly for two
key reasons: 1) pine is in short supply, and 2) producers are more willing to try alternatives,
though lack of knowledge how to process and use eucalyptus is hampering the efforts 142.

Construction sector143

The largest wood user in Tanzania is presumably the construction sector but there are no
statistics or research findings estimating the volumes used by this sector. Trend for wood use
can be estimated from the level of construction activity. According to BMI Research (2016),
the growth in real terms in Tanzanian construction is forecasted to reach 10% in 2016 and
averaging 9% in the next 10-year period. The construction sector includes residential and
commercial buildings and infrastructure development projects. The sawn timber most in
demand are two-inch boards of widths from two to six inches. They are used for roof trusses
and framing. The market does not use a lot of thinner one-inch-thick boards in narrow
widths. Nevertheless, there is market for widths in excess of eight inches (200 mm). Such
boards are used as barge boards and soffit boards for roofs and buildings. The reduction in
pine resources and the imminent threat of sawmills harvesting immature pine stands will
however result in a shortage of one-inch thick (25+ mm) boards in wide sections for 8” and
greater (200mm). This was also demonstrated by the survey where markets showed concern
considering the availability of wide pine boards, but expressed reluctance to use eucalyptus
as an alternative.

The eucalyptus boards are often perceived as improperly dried and thus, become split and
twisted after a while. The most popular size of sawn timber is two-by-fours (inches), but two-

141
INDUFOR (2011): Timber Market Dynamics in Tanzania and in Key Export Markets. Market Study for the
Private Forestry and Carbon Trading Project
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by-twos and two-by-threes are used as cross members on roofing construction and as battens
for supporting tiles and metal sheeting. Large sizes are purchased for use in large spans, or,
more commonly, bought to convert on-site to two-by-twos and two-by-fours as needed. Until
four or five years ago, 12 ft (3.6 m) was the standard length, but now, because of new
sawmill technology, the maximum length can go up to 20 ft (6 m). The difference has
resulted in a two-tier pricing system differentiated by different units of sale. Traditional 12-ft
planks are sold by piece and, as most comes from dingdong saws, the quality and size
tolerances and consequently the prices are less than those for long planks, which are sold per
meter or foot144.

Narrower one-inch boards are used in a number of end markets, particularly in the pallet
industry, which has been increasingly installing mechanical handling lines that require a high
degree of size tolerance. Since the sawn timber produced by low tech sawmills does not meet
the demands of this industry, they are effectively excluded from being suppliers. Companies
in Arusha region double up one-by-four boards for use as roof trusses. They do so to save
money as one-by-fours cost so much less than two-by-fours, that they can afford the extra
cost of a carpenter’s work. Companies in other areas of Tanzania have not adopted this
practice.

The market for sawn timber is gradually starting to acknowledge quality differences in sawn
timber and pay a higher price for better quality. Sawn timber produced by newer technology
sawmills is of better quality than the timber produced from dingdong saws, and consequently
paid a higher price. The majority of sawn timber from dingdong 8 saws is 12” or 3.6 m long
and is sold based on the price per piece. Higher quality sawn timber is now becoming
available in lengths from 4 – 6 m long and is sold based on a price calculation per running
meter or running foot. This sector of the market is also used to offering on a price basis of
cubic meters. The large industry sellers with high quality sawn timber and tight size
tolerances sell with published price lists showing prices per running foot, running meter and
cubic meters. The average price premium of high-quality timber is 27% per cubic meter to
lower quality timber from small sawmills.

The demand of the construction industry for treated timber varies in different regions not
because timber is used without treatment but because companies wish to use domestic
products or believe that it is cheaper to treat wood themselves. In general, pine must be
subjected to an anti-termite and rot treatment process (chromated copper arsenate (CCA)
with 100% penetration of chemicals) such that if a piece of timber is cut and trimmed after

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treatment, the integrity of the treatment process is not affected. This process can be
effectively carried out only in a vacuum-pressure chamber with correct and controlled
dosing. Only a few of the main companies treat their timber correctly, and they supply just
25% to 30% of the material that enters the market. Many buyers are aware of the difference
between properly and improperly treated timber and, as a result, try to source properly treated
material when they have an important project. 80% of sawmills in Mufindi reported that they
sold timber locally.

Timber is collected from sawmills and stacked in the traders’ yards for air drying. This is
done mostly by traders who have their distribution yards in the Mufindi District and then sell
onwards to the construction market. Only 13% of sawmills selling locally sold to end
customers as well. Sawmills sell also flitches and slabs produced as side-product in sawing
process to local markets, though small volumes may travel to other markets. Flitches are
used in low-grade buildings such as those used for Agri-forestry purposes or located in a
rural setting, as well as for fencing and partitioning. Good-quality slabs are used by the
manufacturers of baskets and boxes to transport Agri-forestry produce. Pine slabs are rarely
used for firewood or charcoal because their calorific value is low and they give off little heat,
they burn too quickly, and they give off much smoke. Eucalyptus slabs are used in the Iringa
region by tobacco processors in their boilers.

Pulp and paper sector 145

Mufindi Paper Mills (MPM) is the sole paper producer in the southern highlands. Its
production capacity—over one million cubic meters—far exceeds the current supply of raw
material (pine logs) from government plantations, just 200,000 m3. Therefore, the company
will continue to plant to provide raw material for the future. The factory generates power
from a biomass boiler that enables it to use waste from harvesting and industrial processes. In
order to expand the range of sizes of raw materials, the mill needs to invest capital in
changing the technical capacity of its debarking line. The mill produces sack kraft paper,
which requires long-fibre wood material. The strength of the paper produced is negatively
affected by the use of eucalyptus as raw material although eucalyptus can be used in the
biomass boilers.

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Furniture and joinery sector146

Furniture glue board is currently manufactured by only one producer but its potential for the
furniture industry is considerable. Tanzanians believe that furniture and joinery should be
made from hardwood, so the demand for pine furniture and cabinets is low. However, as the
cost of indigenous hardwood increases furniture producers will have little option but to use
commercially produced glue board in order to reduce waste and increase the amount of low-
grade sawn timber that can be used in high-grade 9 applications. The volumes used by
furniture sector were not surveyed as collecting data from a huge number of small producers
across the country would not have fitted with the timeline and geographic area of the study.

Utility poles sector147

Tanzanian market for utility poles is dominated by two main customers, TANECO and
REA148, both of which are helping to increase electrification among the urban and rural
populations of Tanzania. Tanzania´s electrification program is one of the biggest in Africa.
Only 2% of the rural population had electricity connections in 2012, and even in areas with
transmission network, the rate of connection was low. Since then, connection fees have been
reduced and now demand for connections is high. Since 2013, between 200,000 and 250,000
new connections have been established annually. Under the high demand pole treatment
plants have difficulties sourcing enough good quality raw poles to fill their orders.
TANESCO reported that serious defects in the quality of some of the treated poles delivered
to their projects had shortened their life spans. These defects included treating wet instead of
dry poles, insufficient chemical concentration, and improper treatment processes.

According to TANESCO, quality of poles is a critical challenge to their plans for the growth
and development of rural and urban electrification. Persistent shortages have led utility
companies to consider alternatives like concrete poles, especially as poor-quality wooden
poles have a short service life. Besides, wooden poles are also easily damaged in grassland
fires. Also increasing costs of wood and transportation are pushing utility companies toward
using concrete poles. Presently local electricity company TANESCO (Tanzania Electric

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TANESCO, a parastatal under Ministry of Energy and Minerals, owns the interconnection power grid and
handles consumer connections. REA is the government body in charge of extending the transmission network
into rural areas through projects financed by the Rural Electrification Fund. Under the REA´s turnkey scheme,
contractors build medium-voltage extensions and low voltage distribution grids and connect the first wave of
customers. Then, when all construction work is complete, they transfer all assets to TANESCO payment-free
and TANESCO is expected to continue connecting customers.

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Supply Company Limited) sources 30% to 50% of the poles from abroad (South Africa,
Uganda, Zimbabwe and Zambia)149.

The annual domestic market for poles is estimated to exceed 350,000 in 2016 and will grow
to 400,000 by 2020 provided donor and government funding is available to continue the
nation’s electrification campaign. The government has, however, struggled to make funding
available in time. According to TANESCO’s own data demand of wooden utility poles
increased from 62,875 poles in 2010 to 136,460 in 2014 and the demand for 2016 is
projected to be 240,100 poles (Figure 3.1). The increase in demand is due to the increase in
the customer connection target from 100,000 annually to 250,000 annually in order to meet
the government’s targets of 30% connection in 2015, 50% in 2025, and at least 75% by 2033.

Though no concrete poles have been used in power and telephone networks in recent years,
in 2010 TANESCO floated a tender for concrete poles and in 2014 the Minister of Energy
informed that from 2015 onwards concrete poles would begin to be produced in order to be
able to supply power to the markets. This decision was a direct result of sourcing difficulties
and perceived and actual defects in the quality of wooden poles supplied in the past, which
shortened their life spans. One for profit social enterprise has started producing plastic wood
poles and planks for construction sector to replace traditional wooden products (planks for
Kenya market) in Tanzania. Volumes produced and sold are not yet high but especially if
quality problems cannot be addressed in eucalyptus pole production, plastic poles may
become a preferred option for some consumers150.

Most utility poles are made from Eucalyptus grandis, E. Saligna, or E. maidenii, although
technical treatment requirements specify that only E. grandis is suitable. Poles are treated
with the Tanalith brand of chromated copper arsenate (CCA) or, to a lesser extent, creosote.
There is currently no creosote plant in Tanzania although a new plant is planned for
installation in 2016. In addition to utility poles, eucalyptus is also used for smaller fencing
poles, poles for buildings, as withies, and as scaffolding and building support poles during
construction. Poles for fencing have been in demand only for the last five or six years, but as
rates of land ownership have risen, landowners wishing to protect their property against land
or stock encroachment have started to fence off their plots.

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Poles needed for buildings, particularly for the straw and grass roofs of banders and domestic
buildings, can be taken from thinning and forest waste. Their average diameter does not
exceed four inches (100 mm) and their length ranges from 12 ft to 20 ft (3.6 m to 6 m).
Withies, poles whose diameter does not exceed two inches (50 mm), are used as cross-
members in the construction of bander roofs, usually in conjunction with poles for building.
When constructing multiple-floor buildings, small poles are used to shutter concrete and for
scaffolding. No standards cover this use of eucalyptus though poor-quality poles can
endanger employees and risk the safety of a building if concrete dries poorly 151.

Against the background of high raw material demand and a forest data deficit, the domestic
market for utility poles is strong. The range of utility pole sizes has increased in the recent
period with the entry of a number of companies demanding light poles for the
communications industry. This has increased the forest potential by allowing smaller and
younger trees to be harvested either from thinnings or clear cutting. 0 50,000 100,000
150,000 200,000 250,000 300,000 2010 2012 2014 2016 projected number of poles Year 11

Veneer production industry

Until recently all the plywood sold in Tanzania was imported mainly from China, India and
Kenya and other overseas suppliers, but one Tanzanian producer, TANWAT (Tanganyika
Wattle Company Limited) producing plywood in Njombe, has started to supply the domestic
market. Nevertheless, the market for plywood is still sustained by imports from overseas
producers who have now started to set up veneer production units to manufacture veneer for
shipment back to their home country production units. Prices appear strong although the
range of sizes and qualities in the market are limited. Not all sizes are reported to be available
at all times and popular grades sell quickly before the next overseas arrival. In recent times (6
– 12 months) the currency fluctuation has had a strong influence on sales prices as most
material has been imported at US Dollar value.

In addition to the plywood factory operated by TANWAT in Njombe, there are three new
producers starting to operate in Mafinga area to produce veneers from eucalyptus. At the
time of the report, two of these were functioning and one was in the process of installing
machinery. All of these projects are part of overseas based plywood manufacturers and the
production of veneers are for exports to supply their own production units. Although the
companies interviewed had considered the availability of pine for veneer production, none
had made any contracts for the supply of pine material. Although the largest producer has
received an allocation of 70,000 m³ of eucalyptus from government stands in Mufindi

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District, it buys almost exclusively from private growers and farmers. The raw material is
eucalyptus logs with a maximum length of 1.3 m. Diameters can be from 100 mm up to 300
mm in two cases and up to 400 mm in one case 152.

The veneer making machinery used is imported Chinese spindle-less peeler machine that
allows use of logs with diameters as small as 10 cm. large volumes of eucalyptus logs are
expected to be harvested. The first allocations from government plantations for the new
veneer producers were in the listing for the 2015/2016. By adding veneer producers, the
government will be able to allocate eucalyptus stands that are too mature and oversized for
utility poles, stands that have been in the harvesting plan for some years but which, due to the
poor uptake of eucalyptus allocations, have been left to grow. The inclusion of veneer
producers will allow the harvesting plan to catch up with the forest management plan. Veneer
production is not expected to significantly affect the demand for eucalyptus stands as in a
typical stand only a small portion of total volume is used for utility poles and the rest is poor
quality, low diameter logs either for low quality sawn products (narrow width and short
length) or firewood. Veneer production can compete for some of this material and possibly
the revenue for the forest owner could increase.

Miscellaneous sawn wood products

Most handles of implements are made from hardwoods such as eucalyptus, but some are
made from pine. The prices of implements with pine handles are very low and sellers report
that very few are sold. Eucalyptus handles, though not found in great quantity, are now more
common because eucalyptus wood is cheap and available. The sales prices of such
implements are quite high, however. Eucalyptus handles are produced both by hand and by
machine and their quality varies greatly. Some are very low grade as there are no grading
standard for these items despite the fact that low-grade materials are a safety hazard. An axe
handle that breaks in use, for example, can do tremendous harm.

The main market demand for doors is for hardwood doors with indigenous hardwoods to the
fore. Cheaper low-quality doors are being made from eucalyptus but as with other joinery
products from the same raw material, they become split and twisted after fitting. There is a
limited market for pine doors and those that have been made are characterised by stability
and good finishing. Since pine is easy to handle and dry, the quality of products made from it
is good. However, the resistance of pine to termite attacks is low and treatment is needed.
The treatments available in Tanzania are water-based CCA and Tanalith E, neither of which

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is compatible with the manufacture of joinery products. Spirit-based treatments are available
from abroad but are not currently being used 153.

The traditional building practices can restrict the possibility of production line door
manufacturing. Walls are erected first in a large number of building projects, following
which the openings are measured and the doors ordered. The resulting list of various sizes
makes standardisation difficult. National Housing Corporation does buy large volumes of
standard sized doors for their projects. They told of serious problems in being able to buy
locally made doors of suitable quality and economic prices. Other larger building companies
have their own joinery workshops to produce doors and windows for their own projects.
Other door production is from small joinery workshops with capacity averaging 10 doors per
week. Indigenous hardwoods and eucalyptus were observed as the main material for
production of solid wood doors. Pine was not seen being used.

4.9.2 Imports and exports of wood products154

The volume of exports and imports is not well documented and the figures obtained from the
Tanzania Revenue Authority may not include the entire volume of imports. Data for
Tanzania was extracted from UN Comtrade global trade statistic service to assess the trends
in international timber trade. Since there has been a shortage of raw material available inside
Tanzania, TANESCO has been importing 30% to 50% of its demand for utility poles, largely
from companies in South Africa. It also gets poles from Zimbabwe and Zambia and
increasingly from Uganda. A small proportion of poles from Uganda are transported by ferry
across Lake Victoria. The shortest land route to Tanzania from Uganda, and also the one in
the best condition, is through Kenya. The value of lumber exports from Tanzania to
neighboring countries is insignificant; only Kenya stands out as a historic export partner.
Nevertheless, as Kenya lifted its ban for harvesting of saw logs in 2012, majority of imports
from Tanzania have stopped.

The value of sawn timber exports has dropped from almost USD 2 million in 2010 to only
USD 80,000 in 2014. In addition to sawn wood few thousand poles are also exported
annually to Kenya, despite the high demand in domestic markets. Though still rather small
volumes, the export of teak to India and China has increased considerably during past years.
In 2015 these exports accounted for around 15,665 m³

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6.12 Planning and Modelling Approach to Marketing

6.12.1 Scientific approach to marketing155

The scientific method can be applied to the planning and modelling of marketing. The first
step of this approach is to define the problem situation. As a pragmatic science, marketing
aims at controlling the phenomena connected to it. For example, the salesperson tries to have
an impact on the customer. The prerequisites of control are a detailed knowledge of
customers, markets, and marketing. To influence customers the salesperson must know buyer
behaviour and understand why people act the way they do. Exact descriptions and
explanations of why things happen the way they do make predictions possible. If the
salesperson understands customer behaviour, she can anticipate the customer’s next move.
Description, explanation, and prediction are prerequisites of control. This means the
salesperson can influence the behaviour of the customer. The aim of marketing planning is to
increase the predictability of and control over marketing phenomena.

To summarize, solving marketing problems can follow the same steps as the scientific
method156:

 Description
 Explanation
 Prediction
 Control

The scientific approach is a matter of course in marketing research but is equally useful as a
practical tool for everyday marketing work. The scientific approach is the competitive
advantage of the highest-level marketing education and should be applied to everyday
marketing work. What does the scientific approach in marketing mean? It is the ability to use
theories and models to help solve practical marketing problems. Figure 6.18 illustrates how
the solution to a marketing problem can be developed through moving back and forth
between marketing reality and marketing abstraction157.

The scientific approach applies scientific knowledge in the form of models and theories to
marketing problem solving. The first step when applying the scientific approach is taking the

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marketing problem situation to a theoretical level. Concepts, models and theories of
marketing science and/or mother sciences are used to do this. If we use research in problem
solving, hypotheses are drawn from the theoretical/hypothetical constructs and tested with
empirical data. Research produces a general description or explanation of the problem
situation, which is then operationalized back to the marketing reality.

Figure 6:13 The Scientific Approach to Marketing158

The scientific approach, however, can also be applied in everyday marketing planning and
implementation without marketing research, as the dotted arrow (Figure 6.18) going directly
from the Theoretical Construct to the Description or Explanation demonstrates. When a
marketing manager meets a problem, she converts it into a theoretical construct using all the
experience, theoretical concepts, models and theories in her possession. From this theoretical
construct, she can see the essential features of the problem situation. Scientific theories help
the manager find explanations to problem situations. The last step is to apply the theoretical
explanation to the practical marketing situation. It can be concluded that the essential point in
the scientific approach is the ability to use159:

 Concepts, models and theories

 Information based on scientific research or practical experience

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6.12.2 Planning Approach to Marketing160
Marketing planning is the basis for grounded decisions about future strategic actions. The
most important aspect of this planning may actually be the learning and development that
takes place among participants during the process. They may gain greater understanding of
the challenges they face and the intricacies of their market. For a marketing manager,
marketing is essentially the process of marketing planning. A marketing plan explains,
adjusts, guides, and coordinates all that is happening in marketing. As such, it is a
management instrument that can be used to communicate with all those parties in the
company implementing marketing. In a modern, market-oriented company, the network of
parties implementing marketing is extensive.

Marketing planning is necessary for a number of reasons. As already mentioned, a critical

aspect is the learning process that occurs during the planning process. At a conceptual level,
marketing planning can be thought of as a run-through of the entire marketing process, a sort
of conceptual simulation. At a practical level, it is a document that helps implement
marketing on the ground and can be compared with actual outcomes. In order to operate at
the conceptual level, a marketing designer needs models that describe the functional
environment as well as models that describe marketing functions, e.g., personal selling and
advertising. Models are effective guides that show the decisions to be made during planning.
The models should also show the information that is needed for decision-making. The main
planning tools are models and information. The whole structure of this book follows a
planning model and the necessary planning information is analyzed thoroughly.

6.12.3 Models of marketing161

A model is an abstract picture of the real world which describes some phenomenon. A
marketing model can provide a structural framework for planning, guiding a company in
decisions about how to adapt to its future environment. Although marketing models come in
many different variations, most are organized around the traditional theme of the 4P’s of
marketing—price, promotion, product, and place (distribution). Figure 6.19 illustrates the 4P
approach and how the “marketing mix” can be tailored to different market segments.

The marketing mix, or 4P’s, has had a profound impact on the field of marketing, as
evidenced by its dominant role in numerous models of marketing. However, there are
shortcomings of this approach. For example, from a planning perspective, the 4P’s do not

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provide a comprehensive picture of the decisions that must be made in marketing a product.
In addition, there is no hierarchy in the 4P model so it appears, for example, that decisions
regarding the communication channel are equally important to decisions regarding which
products to produce. This text uses the Integrated Model of Marketing Planning which will
be discussed in detail later (Section 2.4).

Figure 6:14 The Traditional 4Ps of Marketing162

6.12.4 Modelling the Marketing Environment163

The marketing environment is simply a company’s context or external environment. A
popular way of looking at the external environment is through PEST analysis, which
considers the factors in the environment that are impacting the company in political/legal,
economic, sociocultural, and technological realms (Figure 6.20).

The Information Environment Model (Figure 6.21) used in this text divides the environment
into macro and micro categories. The macro-environment contains demand, supply and
“other” environments, which include the economic, technical, legal and social environments.
In practice, economic indicators, demand, and supply are aggregated and analyzed with
econometric research instruments. The information describing the macro-environment is
critical to investment planning in the forest industry, and important on the highest strategic
level of marketing planning. These analyses are also used in the policy planning of the whole
forest sector.

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Figure 6:15 Traditional “PEST” Elements of the Marketing Environment164

The micro-environment contains information about the behaviour of customers, competitors

(size, structure, etc.), and distribution systems. Although marketing channels would seem to
be part of a company’s own marketing system, these channels must conform to the existing
distribution system of the markets, and are thus considered part of the marketing
environment. As you will find in the next section, this model of the information environment
becomes a key component of the Integrated Model of Marketing Planning.

Figure 6:16 The Information Environment Model165

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6.12.5 Integrated model of marketing planning

The origin and development of the model166

Many researchers and authors have presented their own models of marketing planning. This
book utilizes the Integrated Model of Marketing Planning (IMMP) (see Figure 2-8). The
model and its operationalization were developed at the University of Helsinki in Finland, and
has been particularly influenced by the work of Ansoff and Shirley et al. While the model
contains the usual components of marketing planning presented in marketing textbooks, the
central ideas differ notably. The differences in terms of the model’s ideological background
and hierarchical structure are most evident when the model is compared, for example, to the
traditional 4P model described above.

The model contains four hierarchical levels: strategies, structures, functions and action plans.
As one key activity of the business unit, marketing gets its objectives from the whole unit.
Because of its central position in the model, most strategic decisions in marketing are also
integral to the strategy of the business unit. This also means that decisions concerning
marketing strategies are made on the highest hierarchical level in the business unit. The
hierarchy in the model signifies that the highest decisions must be made first, and objectives
for the following levels must be subsequently established. Strategies come first and structures
(and systems) follow. When there are changes in strategies, there should also be changes in
structures167.

The other relationship between strategies and structures illustrated in Figure 6.22 indicates
that there can be institutional constraints in the structures. Structures can inhibit the
realization of strategies, or – when properly established – can function as frames and tools for
realizing strategies. For example, a structure which includes powerful intermediaries may
make it difficult for a company to develop a detailed understanding of end-users, which in
turn inhibits the ability to produce special or custom-made products for these customers.

Marketing functions allow a company to realize its strategies and satisfy the needs of its
customers. By contrast, in many other models, these functions are seen only as tools for
competing against other companies. Strategies, structures, and functions form a strategic
marketing plan that is implemented through action plans, often called annual marketing plans

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or budgets. Strategies act as objectives that guide the annual planning of marketing. Plans
related to marketing functions guide decisions concerning the marketing measures carried out
during the planning period.

Figure 6:17 The Integrated Model of Marketing Planning168

The core of the IMMP is organizational strategies, structures, functions, and action plans.
These aspects can best be described by operationalizing the model, that is by developing
practical measures for each aspect and by providing decision options for each of the
elements, as explained below. The company determines its strategy by making decisions
concerning its products, target customer groups, the geographical limits of its market, and
core competencies. Each one of these four strategic decisions can be divided into various
alternatives, which are outlined broadly below. Product strategy can be divided into three
alternatives169:

 Emphasis on commodity products

 Emphasis on special products
 Emphasis on custom-made products

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For an individual company, these must be more specific. For example, if a company chooses
to produce special products, it must determine the specific product for a given market like
components for the window industry or a special paper for a certain type of printer.

The customer strategy alternatives are:

 As many customer groups as possible

 Few well-specified segments
 Known end-users

At the company level, the choice for a sawmill might be the window industry or big box
retailers. Market area strategy is described with two alternatives 170:

 As many regions/countries as possible

 Few well-specified regions/countries

At the company level, market area might be defined as Southern Germany or a particular
region such as New England.

The following might be considered core competencies171:

 Quality of the products

 Efficient marketing channels
 Customer relationships
 Efficient personal selling
 Technical and other services
 Marketing communication
 Advantageous price
 Well-known trade mark
 Efficient marketing
 Freedom in price policy
 Large market share

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The combination of product, customer, and market area strategies, along with the appropriate
core competencies, leads to the development of a competitive advantage. Pursuing a
sustainable competitive advantage is the essential goal of strategic marketing planning.
Marketing structures are the systems within a company which allow marketing to be
implemented through its various functions (Figure 6.22). Examples include 172:

 The type of management system and organization used in the company

 The type of information and planning system that is used in the company
 The marketing channel structure used

Marketing functions are the on-the-ground techniques that a company uses in the practical
marketing of products. There are basically two sets of functions. Communication functions
are those that marketing controls directly, while product functions are those where marketing
is a player along with other functional areas of the company. Examples of each include:

Communication Functions173
 How the personal selling/personal relationships are implemented
 How advertising is designed and implemented

Product Functions174

 How marketing participates in new product development processes

 How marketing participates in pricing decisions
 How physical distribution is conducted
 Action plans include quantitative goals for the next planning period, specific steps for
obtaining goals, and metrics to measure progress toward those goals. The process for
creating action plans is often called budgeting.

The decisions needed for marketing execution

In many ways, marketing planning is decision-making, and implementation is putting those

decisions into practice. Once the marketing designer has internalized the modelling approach
to marketing planning, identifying the necessary decisions is straightforward.

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Strategies
 What product(s) should the company produce?
 To what group(s) of customers are the products targeted?
 In what geographical region will the operations take place?
 Upon what core competencies will marketing be based?

Structures
 What management philosophy or system should be used?
 What is the most appropriate way to organize the marketing?
 Which planning and information systems will be used?
 Which marketing channels will be used?

Functions
 How will personal selling be implemented?
 How will other forms of communication be implemented?
 How will market information be collected?
 How will customer support be implemented?
 How will new product development be implemented?
 How will pricing be implemented?
 How will physical distribution be implemented?
 How will the daily marketing communication routines (customer service) be
implemented?

Action Plans
 What are the marketing targets per planning period?
 What methods will be used?
 What amount of money will be used?
 What is the schedule of the marketing measures?

6.12.6 New marketing designs and business models175

Marketing science and practice are constantly creating new tools to develop marketing. New
paradigms are responses to changing marketing environments and customer demands but
also ways to make marketing more efficient and business more profitable. It is important to
remember that the basic idea of marketing remains even though new ideas, e.g., for

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marketing structures, are created. In the same way it is important that the marketer sees the
connection between old structures and new tools as well as understands the role of new
paradigms in the comprehensive context of marketing.

Based on the IMMP, new marketing paradigms such as customer relationship management
(CRM), strategic account management (SAM), supply chain management (SCM) and E-
commerce can be seen as new ways to develop marketing structures. The comprehensive
construct containing new marketing paradigms and describing the conduct of business and
marketing can be seen through a modified Integrated Model of Marketing Planning. The
modification means that a new way of thinking is needed and various aspects of marketing
must be emphasized a bit differently. A key for this new thinking is an innovative creation of
knowledge-based capabilities and customer benefit-based value propositions. A modified
IMMP describing the comprehensive evolution of marketing can be seen in Figure 6.23.

In Figure 6.23 the knowledge-based capabilities are described through raw material,
technology and other core competencies. An emphasized feature of New Marketing Design
(NMD) is the close contact between producer and customer – the customer interface.
Marketing activities are realized on the customer interface. To reconfigure the customer
interface we use, for example, the above-mentioned CRM, SAM and SCM. The marketing
structures and functions of the company are arranged according to these management
philosophies or some other new management paradigms which may emerge.

Figure 6:18 An Expanded Integrated Model of Marketing Planning 176

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New marketing approaches will only be successful if customers can directly see the benefits
arising from them. If marketing is genuinely based on creating benefits and value to the
customer, a profitable, long-term partnership can be created. The value proposition (i.e., the
product offered, availability, enhanced services and marketing communication) is the most
visible aspect of customer interface. The biggest difference between traditional thinking and
NMD is how we see all marketing measures creating value for the customer. If optimized
logistical systems have traditionally been the key points when planning distribution solutions,
now according to NMD we emphasize availability for the customer. We aim at availability
which is more beneficial for the customer and makes the value proposition more attractive.
The same holds true with service and information planning. If traditionally the marketing
communication messages tried to persuade the customer to buy, now according to NMD,
more attention is paid to customer benefits and value when planning marketing
communication.

The definition of served customers is also changing. In Figure 6.23 the change is made
explicit when describing the customer as “a structure or network”. To take an example, the
main end-use for wood products is in the construction industry. The buying process for this
market includes decisions made by a number of actors, such as architects and designers,
construction business owners, specifiers and purchasing managers, as well as people who use
the product. This group of actors directly influences the demand for wood products and their
decision-making process calls for a new understanding of customers. Communicating with
this customer structure, gathering information about its needs and serving it, and promoting
wood products are the functions carried out on the customer interface. Box 4.10 contains
consequences of new thinking in the wood industry.

Box 6.10 Applications of New Marketing Designs and Business Models in the Wood industry 177

Based on New Marketing Designs it is possible to generate ideas for evolution of wood products marketing. In
the future, there will be demand for new products, new ranges of services and opportunities to reconfigure the
customer interface. Examples of these new business ideas can be seen below:
 Increasing requirements for product development and innovations, e.g., system solutions.
 Increasing requirements for sustainable development. Environmental Management Systems (EMS) and
CSR are becoming more important in business operations.
 Move from simple product manufacturing to service and solution providers.
 Cost competitiveness achieved through shortening the value-added chain – forming relationships
directly with customers.
 Business opportunities may exist in new positions in the value-added chain, which forest industry
companies can fill, e.g., a potential role as project managers in the construction industry rather than

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just manufacturers of building products.
 Value management as a performance improvement tool.
 New management systems to operate closer to the customer, e.g., CRM, TQM (total quality
management) and SAM are core issues of marketing development, enabled because of increased
knowledge management and information sharing through IT.
 Simultaneous provision of bulk and customized products – Mass Customization.
 The development of E-business environment provides more new business solutions.

6.12.7 Making the future of marketing178

Marketing has changed over time by responding to challenges which arise in the business
environment. For example, mass production gave rise to the sales approach to marketing,
while recent trends toward specialized products have prompted more tailored marketing
strategies. Marketing must continue to evolve in order to effectively deal with fast-paced
changes in the business environment. Although long-term predictions are inherently
inaccurate, we can reasonably forecast the following trends in the market:

 Local markets will continue to grow global

 Customer needs will become more diverse
 Companies will continue to grow in size and global reach
 The information environment will be even more transparent, global, and fast
changing
 Stakeholders will increasingly demand social and environmental responsibility
 Services will become a bigger proportion of forest industry revenue

Given the current state of the business environment, appropriate marketing practices can play
an increasingly important role in company success. The foundation of “Making the Future of
Marketing” is the concept that success through marketing is based on the ability of the
company to do the right thing, do things the right way, and utilize the best available
technologies.

The ability to do the right thing179

As our discussion of responsibility shows, companies will increasingly be judged not only on
their profitability but also on their ability to do the right thing. A major challenge here is to
take the needs of various stakeholders into account and to recognize how culture and other
local characteristics influence those needs. Social and environmental responsibility are

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especially important because the forest industries are using a globally important natural
resource – forests. The living conditions of people are heavily dependent upon forests on
both local and global levels. Responsible use of forests is vital for the future of mankind and
the challenge for the forest industry is to balance company profits, customer needs,
community interests, and local and global environmental needs. In the future, those
companies which can properly identify key responsibility issues and efficiently implement
strategies to deal with those issues will reap a competitive advantage.

The ability to do things right

Doing things right means choosing an appropriate approach to the problem, knowing the
right tools to use, and efficiently implementing plans. Experience has shown that a marketing
philosophy and a market orientation (in which customer demand guides production) produce
the most efficient production system at both societal and company levels. Consequently,
marketing thinking should drive all corporate strategies toward the goal of creating maximum
value for the customer.

Developments in the field of information technology require and enable business partners to
integrate their information systems. Current activities used by companies to improve the
efficiency of the production system include supply chain management, customer relationship
management, and e-business. Knowledge management and information sharing are clearly
relevant to marketing development. Thus, in order to “do things right,” companies must have
knowledge of the operating environment for marketing planning; provide value-oriented
information to customers with regard to products and services; and maintain a high-level of
information connected to business processes (e.g., transparency in the supply chain). In this
text, we stress a modelling approach to marketing. This modelling approach provides a
structure around which marketing problems can be analysed and appropriate analysis tools
can be brought to bear. This in turn allows for efficient implementation of the developed
marketing plans.

The ability to identify and use the best available tools 180

Information technology (IT) is altering the context within which firms operate, the role of
marketing within those firms and is changing the nature of communication with customers.
Essentially, IT is allowing marketers to develop better marketing information systems and
better marketing planning systems, thereby increasing the sophistication of marketing. In the
future, information will become ever more crucial as a basis for improved decision-making
and more advanced marketing systems. Marketing planning and implementation must evolve

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as the company’s ability to manage and use information improves. An essential question is
whether applying IT in forest products marketing promises to create stronger, closer
relationships among stakeholders since the most important benefits of IT will come from its
potential for facilitating deeper customer relationships and greater sharing of information.

An example of an underutilized tool in the forest sector is innovation management. Forest

industry companies are noted as being traditional in culture and tending to focus on low costs
as a core competency. Accordingly, innovation efforts have generally been in the area of
manufacturing process improvement. However, with increased sophistication of customers
and the general trend toward market orientation described above, a low-cost, commodity
mentality will not be sufficient to maintain competitiveness. Innovation in other areas,
especially in new product development will be necessary. Accordingly, companies must
invest in managing for innovation, something that in most cases will require a significant
shift in corporate culture. This shift may be essential for companies to make the transition to
the future bioeconomy

6.13 Summary

Developing countries have a roughly 20% to 30% share of global production and
consumption of all wood and wood product categories and their shares of the different
product category markets are generally expected to increase marginally by 2010. Of the four
developing regions identified in this analysis, Asia and Oceania is has by far the largest
market for wood and wood products. Developing countries which have been highlighted as
globally significant in production, consumption and trade include: Russian Federation, China
and Brazil (industrial roundwood and all products); and Indonesia and Malaysia (as
producers and consumers of industrial roundwood and most products and exporters of some
products). Of the above countries, all are major exporters with the exception of China. India
is also a major producer and consumer but does not register as a major trading nation in
wood and wood products markets181.

Other developing countries of minor global significance or regional significance include:

Chile and Argentina in South America; Turkey in Asia; and South Africa in Africa. It is
interesting to note that none of the developing European countries, with the exception of
Russian Federation, are of even minor significance in any of the wood and wood product
categories. This is probably due to their small size. However, it must also be noted that they
have tremendous marketing opportunities by being located so close to Western Europe. Just
as Japan has acted as a catalyst for forest product market development in Asia, countries such

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as Germany, Finland, Sweden and Austria could (and indeed already are to some extent) do
the same in Eastern Europe.

In terms of individual country’s forest products markets, it would appear that the most
interesting developments over the next decade or so are going to arise in the Pacific-Rim
countries. This region is and will continue to be a major centre of production, consumption
and trade, including a considerable amount of trade between developing and developed
countries. Major developing country producers in the region face uncertainties regarding
their future supply from the natural forest and the large area of plantations that they have
developed. In turn, this will cause many of them to consider carefully the forest processing
industry developments they will wish to pursue over the next few decades. Given the
timescale over which some of these changes might take place, they will have to examine such
changes fairly soon.

Rural low income or subsistence populations simply do not have 'options' regarding energy
i.e., they use wood or go without. Demand, at this basic level, in almost is perfectly inelastic.
The cost (if only implicit in terms of gathering time) does not materially affect consumption
quantity. Suitability of alternative goods and services is, in part, a question of knowledge as
well as availability. Market information regarding alternative products, quality, convenience,
and dependability all influence choices. Under conditions of increased scarcity and rising
prices for tropical hardwood panels, for example, users have a positive incentive to search for
and investigate the suitability of alternatives that were previously overlooked or ignored.

All markets are shaped by collective and individual tastes and preferences. The rational
utilization of NWFPs and NWFPs can lead to sustainable development for both the rural
societies and a country as whole, thus a major concern should be put on emphasizing the
scientific researches and inventories on NWFPs 182. These patterns are partly shaped by
culture and partly implanted by information and knowledge of products and services
(including the influence of advertising). Different societies use forest products differently
because of these differences in taste and preferences. The government should provide the
policy makers with priority in the development of NWFPs to enhance the development of the
societies and country as whole. For example, markets for wood products in Japan are
commonly recognized as requiring very high product quality standards, the importance of
visual attributes of wood, and other preferences not commonly found in many other markets.

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6.14 Test and Examination Questions

Self-Check Questions
1. How can marketing be defined and what are its various potential roles?
2. How and why has marketing evolved over time?
3. What does environmental marketing mean, and how does it differ from traditional
marketing?
4. What is marketing planning and why is it needed?
5. What is the value of models in marketing planning?
6. What is the Integrated Model of Marketing Planning (IMMP), and what is its role in the
remainder of the textbook?
7. How may marketing evolve in the future?
8. Define the following term
 Market
 The concept of marketing
 Market orientation.
 Production and sales orientation
9. Mention any five-marketing cost
10. What is the purpose of studying marketing costs?
11. Identify the list of stakeholders and the company’s responsibility?
12. What is the environmental market responsibility in forestry industry?
13. Identify the factors affecting Marketing costs?
14. What marketing function deals with?
15. What are the functional utilities in marketing of Agri-forests?
16. What is the risk obtained from storage of Agri-forestry commodities?
17. List the specific advantages of the processing function are.
18. What are the merits and demerits of open auction method in agroforestry markets?
19. What are the roles of the marketing?
20. Mention the factors affecting the supply of wood and other fibre.
21. Mention the various Tanzanian non wood forest products sold in the local and
international markets.

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22. What is scientific approach marketing?
Review Questions
1. What are the criteria aspects which characterize the production oriented?
2. What are the overviews how the various aspects of marketing are impacted by a market
orientation?
3. Explains shortly about the information system as used in market orientation?
4. Write short notes about the following terms
 Spatial transactions occur across space
 Temporal transactions occur across time
 Form transactions occur in a certain form
5. Explain the meaning of the corporate responsibility
6. Describe three kinds of responsibility of a company to the society?
7. Explain the views of classical economics based on corporate responsibility?
8. Explain the term marketing efficiency and its components?
9. Describe the main methods used to assess the Marketing Efficiency?
10. Differentiate technical/Operational efficiency from Pricing/Locative efficiency?
11. Write short notes on marketing costs?
12. Describe the reasons for escalate the marketing costs?
13. Explain ways of reducing marketing cost of farm products?
14. Highlights the importance of efficient marketing in Agri-forest?
15. Explain shortly about transportation as used in functional classification of marketing.
16. Enumerates the problems arising out of the transportation of Agri-forestry commodities.
17. Highlights the advantages of packing and packaging in the marketing process of Agri-
forest
18. Enumerates the determinants of demand of wood and other fibres.
19. Explain the derived demand by a firm.
20. Explain the followings terms
 A) price elasticity
 B) income elasticity
 C)cross elasticity
21. Explain the features of the of the non-wood forest product of Tanzania?
22. Explain the various models in marketing planning
23. Describe the integrated model of the marketing planning by explaining its central role,
logic and us
24. Enumerates the planning approach to marketing

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Critical Thinking Questions
1. A 15% rise in the price of a commodity raises its supply from 300 units to 345 units.
Calculate its Price Elasticity of Supply
2. A firm supplies 10 units of a good at a price of 15 per unit. Price Elasticity of Supply is
1.25. What quantity will the firm supply at a price of TZS 7 per unit.
3. A firm supplies 200 units of a good at a price of TZS 5 per unit. When price changes it
supplies 100 units less. Price Elasticity of Supply is 2.5. Calculate price after change
4. At a price of X 5 per unit of a commodity A, Total Revenue is TZS 800. When its price
rises by 20%, Total Revenue increases by TZS 400. Calculate its Price Elasticity of
Supply.
5. Commodities X and Y have equal Price Elasticity of Supply. The supply of X rises from
400 units to 500 units due to a 20% rise in its price. Calculate the percentage fall in
supply of Y if its price falls by 8%.
6. Define Elasticity of Demand. Explain nature of elasticity of demand of forestry products
with respect to other products/commodities and also mention its practical importance.
7. Define micromarketing and discuss its importance in integrated marketing
communications programs
8. Describe major differences between strategic and tactical planning.
9. Determine an advantage for using a product life cycle mode.
10. Discuss the classes of the marketing function
11. Discuss the prevalent methods of buying and selling farm products in agroforestry.
12. How does population growth affect the demand of the forest’s products?
13. How does the Corporate Social Responsibility (CSR) affect the performances of the
company financially?
14. How does the marketing support sustainable development in forestry industryTZS
15. How packaging affecting the marketing of Agri-forest commodity?
16. How reputation, profitability, and stock price reflect company social and environmental
responsibility?
17. How the assessment of marketing efficiency is conducted?
18. Provide an advantage for using segmentation, targeting, and positioning in developing
marketing strategies.
19. Provide one benefit and one drawback of using a viral market channel.
20. The Price Elasticity of Supply of Eucalyptus logs is 0.8. Its price rises by 50%. Calculate
the percentage increase in its supply
21. The Price Elasticity of Supply of Mpingo logs is 2.0. A firm supplies 200 units of it at a
price of TZS 8 per unit. At what price will it supply 250 units.
22. Total Revenue at a price of TZS 4 per unit of a commodity is TZS 480. Total Revenue
increases by TZS 240 when its price rises by 25%. Calculate its Price Elasticity of
Supply
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23. Total Revenue is TZS 400 when the price of the commodity is TZS 2 per unit. When
price rises to TZS 3 per unit, the quantity supplied is 300 units. Calculate the Price
Elasticity of supply.
24. When the price of a good rises from TZS 20 per unit to TZS 30 per unit, the revenue of
the firm producing this good rise from TZS 100 to TZS 300. Calculate Price Elasticity of
Supply.
Problems
1. (a) What does the term firm’s integration mean in relation to forest economics?
(b) Using vivid examples from Tanzania, explain the extent to which forestry (including
hunting) drives the Tanzanian economic growth
2. (a) What are the salient features of multiple productions?
3. (b) Access and utilization of forest resources is one of the areas of concern in this era of
globalisation. Using examples from Tanzania explain the challenges encountered by
local communities in accessing and using forest resources
4. (a) Explain the similarities and differences between the functional and Institutional
approach in marketing forest products and services
5. (b) Poverty reduction is at the centre of the industrialization policy in developing
countries. Evaluate the extent at which forest resource utilization in Tanzania are tailored
to support poverty reduction initiatives
6. Assume logs from one commercial forest can produce only timber and firewood. The
demand for Timber (DT) and Firewood (DF) as well as the supply of logs to the market
(processing and marketing) (SP & M) and the supply of standing trees from which logs
are produced (SST) are provided by the following functions:

DT : PT  10  0.5  QTD

DF : PF  20  QFD

S P& M : S LS  5  0.5  QLS

S ST : PSTS  20  3  QST

S

i) Determine the Joint demand for logs (2 marks)

ii) Solve for the derived demand for standing trees (2 marks)
iii) What is the equilibrium quantity of logs? (2 marks)
iv) Solve for the following equilibrium prices
a) Equilibrium price of standing trees (1 marks)
b) Equilibrium price of logs (1 marks)
c) Equilibrium price of timber (1 marks)
d) Equilibrium price of firewood (1 marks)

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7. All companies plan both strategically as well as tactically. There are four major
differences between strategy and tactics in organizational planning: context, scale,
rationale and time frame.
8. Micromarketing, often called niche marketing, is a marketing strategy that concentrates
on a specific customer characteristic in order to achieve a high degree of targeting focus.
This characteristic can be demographic or psychographic.

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6.15 References

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Coady, L. (1998). Strategy Shift and MacMillan Bloedel Limited. Presented at: Environmental
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28. Portland, Oregon.
Dixon-Fowler, H. R., Slater, D. J., Johnson, J. L., Ellstrand, A. E., & Romi, A. M. (2013).
Beyond “does it pay to be greenTZS” A meta-analysis of moderators of the CEP–CFP
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Flammer, C. (2015). Does corporate social responsibility lead to superior financial
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Han, X. & Hansen, E. (2015). Marketing sophistication in private sawmilling companies in the
United States. Canadian Journal of Forest Research, 46(2), 181-189.
Han, X. & Hansen, E. (2016). Marketing organization and implementation in private US
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Hansen,E. Fletcher,R. & McAlexander, J. (1998). Sustainable Forestry, Swedish Style for
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Hart, S. (1997). Beyond Greening: Strategies for a Sustainable World. Harvard Business Review.
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Kotler, P. (2000). Marketing Management, Millennium Edition. Prentice-Hall International
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Miles, M.P. & Covin, J. G. (2000). Environmental Marketing: A Source of Reputational,
Competitive, and Financial Advantage. Journal of Business Ethics. 23:299-311.
Peattie, K. (1995). Environmental Marketing Management, Meeting the Green Challenge.
Pitman Publishing. London. 309 pp.
Porter, M.E. & van der Linde, C. (1995). Green and Competitive: Ending the Stalemate. Harvard
Business Review. September-October:120-134.
Sheth, J. & Parvatiyar. A. (1995). Ecological Imperatives and the Role of Marketing. In:
Polonsky, M. and MintuWimsatt, A. (ed.). Environmental Marketing: Strategies,
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Shirley, R. Peters, M. & EL-Ansary, A. (1981): Strategy and Policy Formation - a
Multifunctional Orientation. John Wiley & Sons. New York. 286 pp.
Wang, L, & Heikki, J. (2007). New Business Models and Marketing Designs for the Nordic
Sawmilling Industry. Reports 41. University of Helsinki. Department of Forest
Economics. ISSN 1236-6218, ISBN 978-952-10-3883-9.

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Ardhi University
@ 2021/2022
WBCSD. (2000). Corporate Social Responsibility: Making Good Business Sense. World
Business Council for Sustainable Development. Geneva, Switzerland. 33 pp.
WBCSD. (2000). Corporate Social Responsibility: Making Good Business Sense. World
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WCED. (1987). Our Common Future. United Nations World Commission on Environment and
Development.

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