TRANSPORTATION, STORAGE, RISK MANAGEMENT, FUTURES, AND GOVERNMENT PROGRAMS

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
PROCESSOR
MANUFACTURER
WAL-MART DIST CTR
WHOLESALER WAREHOUSE
TRUCK
OTHER MFGR
TRUCK
TRUCK
WAL-MART STORE
WAL-MART STORE
TRUCK
LOCAL WHOLESALER
TRUCK
RETAILER
4
Major Transportation Modes in the U.S.

• Railways
• Trucks
• Local
• Long distance
• Watercheap 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
Futures Trading

• 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

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-nismgovernment control of economy

Laissez-faireno government involvement purely
free market
Agriculture as public utilitystrong regulation
Fiscal policies within market economy (government
programs)
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
FOREIGN MARKET DEVELOPMENT
FAIR TRADE REGULATIONS
SUPPLY CONTROL (QUOTAS)
WELFARE AND FOOD STAMPS