Processor Procurement

1
Chapter 13

• Processor Procurement
• Systems

2
Processor as Coordinator

• Goal to keep organization running with
  flow-through that is profitable
• Profitable operation requires careful management
  of volume and margin
• Adequate volume Costs are minimized when a firm
  and its plants operate at nearly full capacity
• Processors margin what he obtains for his
  services

3
Procurement Systems

• Management decision Make or buy
• Classification of systems
• Spot (current cash) market
• Procurement contracts
• Production contracts
• Labor contracts
• Bargaining cooperatives

4
Marketing-ProcurementAlternatives
5
Procurement in the Spot(Current Cash) Market

• Processor achieves advantage by better timing of
  purchases, anticipating when farmers are anxious
  to sell
• Requires monitoring of both private and public
  sources of market intelligence

6
Procurement Contracts

• Reduce both flexibility and uncertainties
• May give processor outs in case of strikes,
  acts of God and so forth
• May allow for price discounts or even refusal of
  delivery if commodity quality does not meet
  contract specifications
• May or may not fix price

7
Procurement byProduction Contract

• Agreement between two business entities to
  produce a good
• Put processor in the business of production
• Processors select producers largely based on
  geographical location

8
Procurement byLabor Contract

• Agreement between employer and employee to carry
  out specific tasks
• Processor is producer assumes production risks
  as well as profits and losses
• Production in ones own facilities by ones own
  employees, representing complete vertical
  integration

9
Procurement from aBargaining Cooperative

• Processor bargains with cooperative over price
  and quantity
• Prices paid by all processors likely to be the
  same
• Processors may feel cooperative hinders
  communication with individual producers
• Producers favor cooperatives because of quantity
  sales, higher prices, and more efficient market
  timing

10
Livestock Procurement

• Most livestock procured through non-cash methods
• Decisions of packer in organizing total
  procurement based on several factors
• How hard is operation relative to nearby
  competitors?
• Are his purchases large enough to affect market
  price?
• To what extent are supplies available through
  other producers?
• and so on

11
Pork Procurement

• Methods have evolved rapidly
• Focus on economies of size motivated rapid
  expansion, management efficiencies, use of
  production contracts
• Processors have integrated vertically

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Percentage of HogsSold on Cash Market
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Cattle Procurement

• System involves a staff of cattle buyers
• Packers maintain excellent communication system
  to keep buyers informed
• Market information published as Yellow Sheet and
  Meat Sheet and by AMS division of USDA
• Packers buy on carcass grade and yield

14
Percentage of Cattle SoldThrough Non-Cash Market
15
Vegetable Procurement

• Value to be attributed to raw product depends on
  market factors that are difficult to anticipate
• Vegetable processor makes annual price
  determination
• Little direct competition in negotiation of
  contracts processor typically procures within
  50-mile radius of plant
• Processor buys on grade and yield

16
Wheat, Corn, SoybeanProcurement

• Grain and soybean channels have considerable
  vertical integration
• Limited organization of processors
• Inventory management
• On-track buying
• Back-to-back trading
• Use of basis pricing and basis trading
• Consider convenience yield in determining
  inventories

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Grain M-P Channelsand Pricing Points
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Class Exercise

• Using your assigned commodity, interview a
  procurement person for one of the agribusinesses
  that buy the commodity. Suggested questions
• What methods (cash, contract, broker) are used to
  buy the commodity?
• What logistical issues arise?
• Is quality an issue in the buying decision?
• What does a typical business day involve?