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. Transportation. Estimated to contribute 6-11% of food costs

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

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Transportation storage risk management futures and government programs

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

  • Transportation costs and consideration

  • Storage needs

  • Futures, contracts, and hedging

  • Government programs

Dr. Sabry Shehata Professor


Transportation

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

Dr. Sabry Shehata Professor


Transportation in the food industry

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”)

Dr. Sabry Shehata Professor


Transportation example

Transportation Example

WHEAT

FARMER

TRUCK

RAILROAD

STATION

MANUFACTURER

PROCESSOR

WAL-MART

DIST CTR

WHOLESALER

WAREHOUSE

TRUCK

OTHER

MFGR

TRUCK

TRUCK

WAL-MART

STORE

TRUCK

WAL-MART

STORE

LOCAL

WHOLESALER

TRUCK

RETAILER

Dr. Sabry Shehata Professor


Major transportation modes in the u s

Major Transportation Modes in the U.S.

  • Railways

  • Trucks

    • Local

    • Long distance

  • Water—cheap but slow and inflexible

  • Air

  • Intermodal

Dr. Sabry Shehata Professor


Transportation storage risk management futures and government programs

Dr. Sabry Shehata Professor


Transportation storage risk management futures and government programs

Dr. Sabry Shehata Professor


Transportation regulation and freight rates

Transportation Regulation and Freight Rates

  • Interstate Commerce Commission

    • Regulate freight rates

    • Competition

    • Transportation routes

Dr. Sabry Shehata Professor


Railroad freight rates

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)

Dr. Sabry Shehata Professor


Trucking rates

Trucking Rates

  • Common carriers

  • Regular trucking

  • Truck broker

  • Freight forwarder

Dr. Sabry Shehata Professor


Improving efficiency

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.

Dr. Sabry Shehata Professor


Improving efficiency1

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.

Dr. Sabry Shehata Professor


Freight costs

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

Dr. Sabry Shehata Professor


Technological progress

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.

Dr. Sabry Shehata Professor


Storage

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

Dr. Sabry Shehata Professor


Storage1

Storage

  • Voluntary (EFFIECENCY SPECULZATIVE)

  • involuntary (HARVEST GULT)

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Storage operation

Storage Operation

  • Storage locations and capacities

  • Changing seasonal storage patterns

    • Eggs

    • Meat

    • technology

Dr. Sabry Shehata Professor


Storage operation1

Storage Operation

  • Public warehouse supervision

    • Quality

    • Quantity

    • Insurance

Dr. Sabry Shehata Professor


Storage2

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.

Dr. Sabry Shehata Professor


Efficiency

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.

Dr. Sabry Shehata Professor


Storage issues

Storage Issues

  • Cost

  • Quality

  • Title to goods

  • Capacity trends

    • Greater growth among

      • Processors

      • Wholesalers

    • Less growth with retailers

Dr. Sabry Shehata Professor


Improving food storage

Improving Food Storage

  • The cost of the physical storage

  • Interest

  • Deterioration

  • Fresh vs. stored

  • Price risk

Dr. Sabry Shehata Professor


Food stocks carryover and reserves

Food Stocks, Carryover and Reserves

  • Working inventory

  • Seasonal food stocks

  • Carryover stocks

  • Buffer food stocks

  • Speculative stocks

  • Voluntary and involuntary

Dr. Sabry Shehata Professor


Storage operations

Storage Operations

  • Storage locations and capacities (80% in cans bottles and packages)

    • Processing plants

    • Perishable

    • On farm storage

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Storage operations1

Storage Operations

  • Changing Seasonal Storage patterns

    • Changes technological development production and utilization patterns

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Storage operations2

Storage Operations

  • Public warehouse supervision

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Who should store

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

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

Dr. Sabry Shehata Professor


Increasing productivity of storage

Increasing Productivity of Storage

  • Labor efficiency

  • Product development (frozen orange concentrate)

  • Improve in business management

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Risk management

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

Dr. Sabry Shehata Professor


Futures markets

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

Dr. Sabry Shehata Professor


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

Futures Trading

Dr. Sabry Shehata Professor


Hedging and options

Hedging and Options

  • Types

    • Storage

    • Pre-harvest

  • Premium costs

  • Options

    • Right to buy or sell

    • No obligation

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Risks and return

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

Dr. Sabry Shehata Professor

Range of price outcomes

“Expected” price


Why buy or sell options or futures contracts

Why Buy or Sell Options or Futures Contracts

  • Speculation

    • “Bulls”

    • “Bears”

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

Dr. Sabry Shehata Professor


Political philosophies of agriculture and government

Political Philosophies of Agriculture and Government

Commu-nism—government control of economy

Laissez-faire—no government involvement; purely free market

Fiscal policies within market economy (government programs)

Agriculture as public utility—strong regulation

U.S. Europe China Cuba

Dr. Sabry Shehata Professor


Recurring political concerns about agriculture

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

Dr. Sabry Shehata Professor


Government programs

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

FAIR

TRADE

REGULATIONS

FOREIGN

MARKET

DEVELOPMENT

SUPPLY

CONTROL

(QUOTAS)

WELFARE

AND

FOOD STAMPS

Dr. Sabry Shehata Professor


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