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TRANSPORTATION, STORAGE, RISK MANAGEMENT, FUTURES, AND GOVERNMENT PROGRAMS Transportation costs and consideration Storage needs Futures, contracts, and hedging Government programs MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 1 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 MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 2 Transportation Example TRUCK WHEAT FARMER RAILROAD STATION MANUFACTURER WHOLESALER WAREHOUSE TRUCK TRUCK LOCAL MKTG 442 WAL-MART DIST CTR PROCESSOR TRUCK WAL-MART STORE TRUCK TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT WHOLESALER RETAILER OTHER MFGR TRUCK WAL-MART STORE Lars Perner, Instructor 3 Major Transportation Modes in the U.S. Railways Trucks Local Long distance Water—cheap but slow and inflexible Air Intermodal MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 4 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., “piggybacking”) MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 5 Storage Types Queuing Seasonal food stocks Carryover Reserve (“Buffer”) Stocks Speculative stocks Current inventory Economic order quantity Voluntary vs. involuntary MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 6 Storage Issues Cost Quality Title to goods Capacity trends Greater growth among Processors Wholesalers Less growth with retailers MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 7 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 MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 8 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 MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 9 Futures Trading Parties Sellers of product (e.g., farmers) Users of products (e.g., manufacturers) Speculators Hedgers Margin requirements MKTG 442 Eligibility Trading types “Long”: Actually hold what will be exchanged “Short:” Effectively selling assets not held (high leverage and risk) Payment timing TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 10 Hedging and Options Types Storage Pre-harvest Premium costs Options Right to buy or sell No obligation MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 11 Risks and Return Cost of option or contract Farmer ends up better off with futures contract or sell option Farmer ends up worse off than without contract. Option cost lost. Profitable to exercise option to buy if market price exceeds exercise right Party who sold option loses MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Range of price outcomes 12 “Expected” price Lars Perner, Instructor Why Buy or Sell Options or Futures Contracts Speculation “Bulls” “Bears” Balancing other investments (a buy and sell option can cancel each other out) MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 13 Political Philosophies of Agriculture and Government Laissezfaire—no government involvement; purely free market U.S. MKTG 442 Fiscal policies within market economy (government programs) Agriculture as public utility— strong regulation Europe China TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Communism— government control of economy Cuba Lars Perner, Instructor 14 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 MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 15 Government Programs TAX BREAKS GOVERNMENT AGRICULTURE PROGRAMS FOR BENEFIT OF CONSUMERS HEALTH AND SAFETY REGULATIONS LOAN PROGRAMS FOR BENEFIT OF INDIVIDUAL FARMERS FOR BENEFIT OF INDUSTRY EXTENSION SERVICE PRICE SUPPORTS RESEARCH FAIR TRADE REGULATIONS FOREIGN MARKET DEVELOPMENT WELFARE TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT AND FOOD STAMPS MKTG 442 EXPORT ASSISTANCE ANTI-DUMPING ENFORCEMENT SUPPLY CONTROL Lars Perner, Instructor 16 (QUOTAS)