Post on 22-Dec-2015
Competing in Commodity Product Markets
AG BM 460
Introduction
• Commodity products represent most farm output & substantial portions of processed food
• The buyer has no particular loyalty to a supplier
• Many suppliers provide essentially the same product
• Price is the key to competition
Examples
• Most farm products • Flour• Vegetable oil• Beef • Institutional pack tomatoes• Private label grocery products• Feed• Fertilizer
Operating Environment
• Largely price taker
• Way to increase profits are to control costs and increase volume
• Products are not homogeneous, but structure of premiums and discounts well understood
Controlling Costs
• Keep labor productivity high
• Keep input costs down
• Operate near optimal efficient scale
• Manage capital structure well
• Keep operation modern, but not over-capitalized
• Get lucky
Increasing Volume
• Be competitive
• Be flexible in order size, payment terms
• Aggressively pursue incremental business (bids)
• Keep existing customers happy
• Provide good quality
• Keep your eyes open for new markets
Existing customers
• Often have a captive market – near plant
• Don’t take it for granted
• Remember these customers pay the bills
• May have cost advantage serving them, so per unit profit is higher than marginal customer
Customers on Competitive Fringe
• Face tough competition for these customers
• No supplier has intrinsic advantage
• Can easily get into a price war over them
Contracts
• Food service business – school lunch chicken nuggets
• Short term contracts – several bidders
• Can’t expect to cover all fixed costs on this business
• Need to understand cost structure – Catherine & plumbing contracts
Grades
• Quality differences important
• Higher cost to provide higher quality
• Higher price for higher quality
• Conscious decision about quality targets
• Need to understand cost structure
New Markets
• Entry often manageable
• What is cost of serving new market?
• What is potential revenue?
• Will it pay?
• Transportation costs, brokerage fees, etc.
Growth
• Must be able to grow
• Margins per unit decline over time
• Weak firms exit
• Growth requires new customers
• It also requires expanded production
• Existing plant or new plant?
• Buy or own? Scrap or refit?
Some Big Players
• Conagra
• ADM
• Tyson – with IBP operations & poultry
• Cargill
• Land O’Lakes & DFA
Concluding Comments
• Price competition
• Low barriers to entry
• Cost side important
• Capacity utilization important
• Pennies matter