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)