TRANSPORTATION, STORAGE, RISK MANAGEMENT, FUTURES, AND GOVERNMENT PROGRAMS

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TRANSPORTATION, STORAGE, RISK MANAGEMENT,
FUTURES, AND GOVERNMENT PROGRAMS

• Transportation costs and consideration
• Storage needs
• Futures, contracts, and hedging
• Government programs

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Transportation

• Estimated to contribute 6-11 of food costs
• Transportation through processing chain and
  distribution channel
• Issues
• Consumption and production widely dispersed
• Variability in production
• Need for specialized equipment (e.g., live cattle
  transport, refrigeration)
• Unequal load opportunities in each direction

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Transportation in the Food Industry

• Perishability calls for speed that leads to less
  efficient shipping methods
• Bulkiness
• Food and Feedgrains require high-capacity
  equipment
• Live animal need special equipment
• Supply and demand factors
• Increasing food prices
• Capacity and planning
• Freight forwarders as coordinators
• Improved information systems and capacity
  utilization
• Technological progress (e.g., piggy-backing)

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Transportation Example
WHEAT FARMER
TRUCK
RAILROAD STATION
PROCESSOR
MANUFACTURER
WAL-MART DIST CTR
WHOLESALER WAREHOUSE
TRUCK
OTHER MFGR
TRUCK
TRUCK
WAL-MART STORE
WAL-MART STORE
TRUCK
LOCAL WHOLESALER
TRUCK
RETAILER
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Major Transportation Modes in the U.S.

• Railways
• Trucks
• Local
• Long distance
• Watercheap but slow and inflexible
• Air
• Intermodal

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Transportation Regulation and Freight Rates

• Interstate Commerce Commission
• Regulate freight rates
• Competition
• Transportation routes

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Railroad Freight Rates

• Class rates
• Broad category
• Commodity rate
• Large volume low valued 90
• c.l., l.c.l, unit trains, transit privilege,
  diversion and reconsignment privilege ( produce)

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Trucking Rates

• Common carriers
• Regular trucking
• Truck broker
• Freight forwarder

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Improving efficiency

• Information technology advances have helped
  improve efficiency in transportation since
  shippers going in opposite directions during the
  same time period can now be more readily
  identified.

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Improving efficiency

• Parties within the value chain may be located at
  railroad locations to minimize transportation and
  transfer costs.
• As bulk is removed (e.g., as corn is moved from
  the cob), the value/bulk ratio improves and
  transportation costs decline.

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Freight Costs

• Perishability calls for speed that leads to less
  efficient shipping methods
• Supply and demand factors
• Increasing food prices
• Capacity and planning
• Full load, eliminate empty return trip
• Freight forwarders as coordinators
• Improved information systems and capacity
  utilization

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Technological progress

• Piggyback - a system of transportation requiring
  the transfer of containers from truck to rail.
• Birdyback - a system of transportation requiring
  the transfer of containers from truck to
  aeroplane.
• Fishyback - a system of transportation requiring
  the transfer of containers from truck to ship.

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Storage

• Types
• Queuing
• Seasonal food stocks harvest in short
  time-consumed year around
• Carryover from one-year-next
• Reserve (Buffer) Stocks
• Speculative stocks
• working inventory
• Economic order quantity

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Storage

• Voluntary (EFFIECENCY SPECULZATIVE)
• involuntary (HARVEST GULT)

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Storage Operation

• Storage locations and capacities
• Changing seasonal storage patterns
• Eggs
• Meat
• technology

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Storage Operation

• Public warehouse supervision
• Quality
• Quantity
• Insurance

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Storage

• Storage is needed for certain products for
  purposes such as
• Awaiting processing while a backlog exists
  during a harvest season
• Maintaining safety or other stocks
• Storing a food for use outside its season or
  for a time of heavy consumption (e.g.,
  cranberries at Thanksgiving) or
• Keeping unsold quantities from a previous
  period.

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Efficiency

• Efficiency is important here, too, but costs must
  be weighted against the quality of storage
  provided. Some products may require cooling to
  avoid spoilage, for example.

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Storage Issues

• Cost
• Quality
• Title to goods
• Capacity trends
• Greater growth among
• Processors
• Wholesalers
• Less growth with retailers

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Improving Food Storage

• The cost of the physical storage
• Interest
• Deterioration
• Fresh vs. stored
• Price risk

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Food Stocks, Carryover and Reserves

• Working inventory
• Seasonal food stocks
• Carryover stocks
• Buffer food stocks
• Speculative stocks
• Voluntary and involuntary

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Storage Operations

• Storage locations and capacities (80 in cans
  bottles and packages)
• Processing plants
• Perishable
• On farm storage

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Storage Operations

• Changing Seasonal Storage patterns
• Changes technological development production and
  utilization patterns

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Storage Operations

• Public warehouse supervision

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Who Should Store

• Costs are not necessarily the same
• Each level tries to push much of storage function
• Should farmer store hid own product
• The Commodity Credit Corporation

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Food Storage Cost

• Maintenance cost (repair, deprecations,
  Insurance)
• Interest cost
• Quality deterioration and shrinkage
• Poor consumer acceptance of the stored vs fresh
  product
• Price risk

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Increasing Productivity of Storage

• Labor efficiency
• Product development (frozen orange concentrate)
• Improve in business management

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Risk Management

• Risk types
• Product deterioration
• Deterioration of value
• Market price fluctuations due to supply and
  demand
• Impact of limited and unequal market information
  and forecasts

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Futures Markets

• Contracts to buy and sell at a given time for a
  given price
• Allows parties to
• Attempt gains by speculation (can be very risky)
• Curtail risks by settling price in advance

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Futures Trading

• Parties
• Sellers of product (e.g., farmers)
• Users of products (e.g., manufacturers)
• Speculators
• Hedgers
• Margin requirements

• Eligibility
• Trading types
• Long Actually hold what will be exchanged
• Short Effectively selling assets not held
  (high leverage and risk)
• Payment timing

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Hedging and Options

• Types
• Storage
• Pre-harvest
• Premium costs
• Options
• Right to buy or sell
• No obligation

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Risks and Return
Farmer ends up worse off than without contract.
Option cost lost.
Cost of option or contract
Farmer ends up better off with futures contract
or sell option
Profitable to exercise option to buy if market
price exceeds exercise right
Party who sold option loses
Range of price outcomes
Expected price
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Why Buy or Sell Options or Futures Contracts

• Speculation
• Bulls
• Bears
• Balancing other investments (a buy and sell
  option can cancel each other out)

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Political Philosophies of Agriculture and
Government
Commu-nismgovernment control of economy

Laissez-faireno government involvement purely
free market
Agriculture as public utilitystrong regulation
Fiscal policies within market economy (government
programs)
U.S.
Europe China Cuba
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Recurring Political Concerns about Agriculture

• Instability of prices
• Foreign imports
• Loss of family farms
• Environmental damage
• Conversion of farmland to residential and
  industry use
• Food affordability
• Stability of supply
• Public health

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Government Programs
EXPORT ASSISTANCE
TAX BREAKS
LOAN PROGRAMS
FOR BENEFIT OF INDIVIDUAL FARMERS
GOVERNMENT AGRICULTURE PROGRAMS
EXTENSION SERVICE
PRICE SUPPORTS
FOR BENEFIT OF INDUSTRY
FOR BENEFIT OF CONSUMERS
RESEARCH
ANTI-DUMPING ENFORCEMENT
HEALTH AND SAFETY REGULATIONS
FOREIGN MARKET DEVELOPMENT
FAIR TRADE REGULATIONS
SUPPLY CONTROL (QUOTAS)
WELFARE AND FOOD STAMPS