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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. 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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  1. TRANSPORTATION, STORAGE, RISK MANAGEMENT, FUTURES, AND GOVERNMENT PROGRAMS • Transportation costs and consideration • Storage needs • Futures, contracts, and hedging • Government programs Dr. Sabry Shehata Professor

  2. 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

  3. 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

  4. 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

  5. Major Transportation Modes in the U.S. • Railways • Trucks • Local • Long distance • Water—cheap but slow and inflexible • Air • Intermodal Dr. Sabry Shehata Professor

  6. Dr. Sabry Shehata Professor

  7. Dr. Sabry Shehata Professor

  8. Transportation Regulation and Freight Rates • Interstate Commerce Commission • Regulate freight rates • Competition • Transportation routes Dr. Sabry Shehata Professor

  9. 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

  10. Trucking Rates • Common carriers • Regular trucking • Truck broker • Freight forwarder Dr. Sabry Shehata Professor

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. Storage • Voluntary (EFFIECENCY SPECULZATIVE) • involuntary (HARVEST GULT) Dr. Sabry Shehata Professor

  17. Storage Operation • Storage locations and capacities • Changing seasonal storage patterns • Eggs • Meat • technology Dr. Sabry Shehata Professor

  18. Storage Operation • Public warehouse supervision • Quality • Quantity • Insurance Dr. Sabry Shehata Professor

  19. 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

  20. 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

  21. Storage Issues • Cost • Quality • Title to goods • Capacity trends • Greater growth among • Processors • Wholesalers • Less growth with retailers Dr. Sabry Shehata Professor

  22. Improving Food Storage • The cost of the physical storage • Interest • Deterioration • Fresh vs. stored • Price risk Dr. Sabry Shehata Professor

  23. Food Stocks, Carryover and Reserves • Working inventory • Seasonal food stocks • Carryover stocks • Buffer food stocks • Speculative stocks • Voluntary and involuntary Dr. Sabry Shehata Professor

  24. Storage Operations • Storage locations and capacities (80% in cans bottles and packages) • Processing plants • Perishable • On farm storage Dr. Sabry Shehata Professor

  25. Storage Operations • Changing Seasonal Storage patterns • Changes technological development production and utilization patterns Dr. Sabry Shehata Professor

  26. Storage Operations • Public warehouse supervision Dr. Sabry Shehata Professor

  27. 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 Dr. Sabry Shehata Professor

  28. 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

  29. Increasing Productivity of Storage • Labor efficiency • Product development (frozen orange concentrate) • Improve in business management Dr. Sabry Shehata Professor

  30. 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

  31. 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

  32. 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

  33. Hedging and Options • Types • Storage • Pre-harvest • Premium costs • Options • Right to buy or sell • No obligation Dr. Sabry Shehata Professor

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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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