Commodity products
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Commodity Products. AG BM 460. A farmer won the lottery. When asked what he would do with the money he replied, “ I guess I’ll keep farming until it’s all gone. Introduction. Competition based on price No meaningful customer loyalty Quality important but widely available

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Commodity products

Commodity Products

AG BM 460


Commodity products

A farmer won the lottery. When asked what he would do with the money he replied, “ I guess I’ll keep farming until it’s all gone.


Introduction

Introduction

  • Competition based on price

  • No meaningful customer loyalty

  • Quality important but widely available

  • Cost structure determines future


Smithfield farmland deal

Smithfield-Farmland Deal

  • Smithfield Foods has signed an agreement to purchase Farmland Foods for $367 million (6th biggest pork processor) – will have 27% of slaughter market

  • Smithfield sow total to 800,000

    • Smithfield - 760,000 sows- three times as big as the next largest pork producer, Premium Standard Farms, Kansas City, Missouri.

    • Farmland's 36,000 sows


Bidding process

Bidding process

  • Cargill vs. Smithfield

  • Plants in Iowa, Kansas, Nebraska, Illinois, & Massachusetts

  • Gives Smithfield an increased midwestern presence

  • Supposedly all jobs secure


Meat industry

Meat Industry

  • Tyson, Cargill, Smithfield, & Swift control 2/3 of national meat supplies

  • Some say they have too much power in marketplace

  • Smithfield officials dismiss these concerns saying fierce competition keeps them honest

  • True on selling side, not on buying side


Commodity products

Why?


Costs

Costs

  • Pricing tends to reflect variable costs, not total costs

  • High fixed cost industries can lose money for years, yet stay in business

  • Production agriculture

  • Minimizing costs essential

  • Keep productivity high

  • Operate near minimum average costs


Risk management

Risk Management

  • Prices in these industries tend to change rapidly

  • Most futures markets reflect this – they are called commodity futures for a reason

  • The existence of the markets verifies the risk

  • Need to make conscious decisions about risk management


Risk management1

Risk Management

  • Has several aspects

  • Price risk

  • Production risk

  • Financial risk

  • Hazard – fire, food safety

  • Some are insurable, others must be self insured

  • Anyone making long-run decisions in a short-run market needs a plan


Tyson foods

Tyson Foods

  • Chicken company

  • Once mostly iced broilers

  • Then cut-up birds

  • Now more further processing

  • Why?


Tyson

Tyson

  • Half the further processed market is government contracts

  • How do you approach these?

  • Most of the rest is food service

  • How do you approach this?


Tyson1

Tyson

  • A bit of further processed is retail

  • Can you make this bigger?

  • How do you deal with the supermarkets?

  • Is there a way to brand legs & thighs?

  • Can you make deboned breasts a bigger product? How?

  • Can you brand it?


Tyson2

Tyson

  • Integrated growers

  • Tyson responsible for feed

  • Can they afford to take feed costs as they come?

  • If not, how do you control feed price risk?


Tyson bought ibp a few years ago

Tyson bought IBP a few years ago

Why would a chicken company buy a beef company?


Concluding comments

Concluding Comments

  • A big share of the food system is with commodity products

  • Fierce market place

  • Cannot rest on laurels

  • Efficiency is essential

  • Lots of jobs


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