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Commodity Products

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

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  1. Commodity Products AG BM 460

  2. 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.

  3. Introduction • Competition based on price • No meaningful customer loyalty • Quality important but widely available • Cost structure determines future

  4. 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

  5. Bidding process • Cargill vs. Smithfield • Plants in Iowa, Kansas, Nebraska, Illinois, & Massachusetts • Gives Smithfield an increased midwestern presence • Supposedly all jobs secure

  6. 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

  7. Why?

  8. 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

  9. 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

  10. 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

  11. Tyson Foods • Chicken company • Once mostly iced broilers • Then cut-up birds • Now more further processing • Why?

  12. 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?

  13. 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?

  14. 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?

  15. Tyson bought IBP a few years ago Why would a chicken company buy a beef company?

  16. 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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