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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

  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

  3. 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

  4. Major Transportation Modes in the U.S. • Railways • Trucks • Local • Long distance • Water—cheap but slow and inflexible • Air • Intermodal

  5. Freight Costs • Perishability calls for speed that leads to less efficient shipping methods • 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”)

  6. Storage • Types • Queuing • Seasonal food stocks • Carryover • Reserve (“Buffer”) Stocks • Speculative stocks • Current inventory • Economic order quantity • Voluntary vs. involuntary

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

  8. 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

  9. 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

  10. 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

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

  12. 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

  13. Why Buy or Sell Options or Futures Contracts • Speculation • “Bulls” • “Bears” • Balancing other investments (a buy and sell option can cancel each other out)

  14. 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

  15. 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

  16. 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

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