Chapter 13Chapter 13

Processor ProcurementProcessor Procurement

SystemsSystems

Processor as CoordinatorProcessor as Coordinator

Goal: to keep organization running with Goal: to keep organization running with flow-through that is profitableflow-through that is profitable

Profitable operation requires careful Profitable operation requires careful management of volume and marginmanagement of volume and margin

Adequate volume:Adequate volume: Costs are minimized Costs are minimized when a firm and its plants operate at when a firm and its plants operate at nearly full capacitynearly full capacity

Processor’s margin:Processor’s margin: what he obtains for what he obtains for his serviceshis services

Procurement SystemsProcurement Systems

Management decision: Make or buyManagement decision: Make or buy Classification of systems:Classification of systems:

– Spot (current cash) marketSpot (current cash) market– Procurement contractsProcurement contracts– Production contractsProduction contracts– Labor contractsLabor contracts– Bargaining cooperativesBargaining cooperatives

Marketing-ProcurementMarketing-ProcurementAlternativesAlternatives

Procurement in the SpotProcurement in the Spot(Current Cash) Market(Current Cash) Market

Processor achieves advantage by Processor achieves advantage by better timing of purchases, anticipating better timing of purchases, anticipating when farmers are anxious to sellwhen farmers are anxious to sell

Requires monitoring of both private and Requires monitoring of both private and public sources of market intelligencepublic sources of market intelligence

Procurement ContractsProcurement Contracts

Reduce both flexibility and uncertaintiesReduce both flexibility and uncertainties May give processor “outs” in case of May give processor “outs” in case of

strikes, “acts of God” and so forthstrikes, “acts of God” and so forth May allow for price discounts or even May allow for price discounts or even

refusal of delivery if commodity quality refusal of delivery if commodity quality does not meet contract specificationsdoes not meet contract specifications

May or may not fix priceMay or may not fix price

Procurement byProcurement byProduction ContractProduction Contract

Agreement between two business Agreement between two business entities to produce a goodentities to produce a good

Put processor in the business of Put processor in the business of productionproduction

Processors select producers largely Processors select producers largely based on geographical locationbased on geographical location

Procurement byProcurement byLabor ContractLabor Contract

Agreement between employer and Agreement between employer and employee to carry out specific tasksemployee to carry out specific tasks

Processor is producer; assumes Processor is producer; assumes production risks as well as profits and production risks as well as profits and losseslosses

Production in one’s own facilities by one’s Production in one’s own facilities by one’s own employees, representing complete own employees, representing complete vertical integrationvertical integration

Procurement from aProcurement from aBargaining CooperativeBargaining Cooperative

Processor bargains with cooperative over Processor bargains with cooperative over price and quantityprice and quantity

Prices paid by all processors likely to be Prices paid by all processors likely to be the samethe same

Processors may feel cooperative hinders Processors may feel cooperative hinders communication with individual producerscommunication with individual producers

Producers favor cooperatives because of Producers favor cooperatives because of quantity sales, higher prices, and more quantity sales, higher prices, and more efficient market timingefficient market timing

Livestock ProcurementLivestock Procurement

Most livestock procured through non-cash Most livestock procured through non-cash methodsmethods

Decisions of packer in organizing total Decisions of packer in organizing total procurement based on several factors:procurement based on several factors:– How hard is operation relative to nearby competitors?How hard is operation relative to nearby competitors?– Are his purchases large enough to affect market Are his purchases large enough to affect market

price?price?– To what extent are supplies available through other To what extent are supplies available through other

producers?producers?

and so onand so on

Pork ProcurementPork Procurement

Methods have evolved rapidlyMethods have evolved rapidly Focus on economies of size motivated Focus on economies of size motivated

rapid expansion, management rapid expansion, management efficiencies, use of production contractsefficiencies, use of production contracts

Processors have integrated verticallyProcessors have integrated vertically

Percentage of HogsPercentage of HogsSold on Cash MarketSold on Cash Market

Cattle ProcurementCattle Procurement

System involves a staff of cattle buyersSystem involves a staff of cattle buyers Packers maintain excellent communication Packers maintain excellent communication

system to keep buyers informedsystem to keep buyers informed Market information published as Yellow Market information published as Yellow

Sheet and Meat Sheet and by AMS Sheet and Meat Sheet and by AMS division of USDAdivision of USDA

Packers buy on carcass grade and yieldPackers buy on carcass grade and yield

Percentage of Cattle SoldPercentage of Cattle SoldThrough Non-Cash MarketThrough Non-Cash Market

Vegetable ProcurementVegetable Procurement

Value to be attributed to raw product Value to be attributed to raw product depends on market factors that are difficult depends on market factors that are difficult to anticipateto anticipate

Vegetable processor makes annual price Vegetable processor makes annual price determinationdetermination

Little direct competition in negotiation of Little direct competition in negotiation of contracts; processor typically procures contracts; processor typically procures within 50-mile radius of plantwithin 50-mile radius of plant

Processor buys on grade and yieldProcessor buys on grade and yield

Wheat, Corn, SoybeanWheat, Corn, SoybeanProcurementProcurement

Grain and soybean channels have Grain and soybean channels have considerable vertical integrationconsiderable vertical integration

Limited organization of processorsLimited organization of processors Inventory management:Inventory management:

– On-track buyingOn-track buying– Back-to-back tradingBack-to-back trading

Use of basis pricing and basis tradingUse of basis pricing and basis trading Consider convenience yield in determining Consider convenience yield in determining

inventoriesinventories

Grain M-P ChannelsGrain M-P Channelsand Pricing Pointsand Pricing Points

Class ExerciseClass Exercise

Using your assigned commodity, interview Using your assigned commodity, interview a procurement person for one of the a procurement person for one of the agribusinesses that buy the commodity. agribusinesses that buy the commodity. Suggested questions:Suggested questions:– What methods (cash, contract, broker) are What methods (cash, contract, broker) are

used to buy the commodity?used to buy the commodity?– What logistical issues arise?What logistical issues arise?– Is quality an issue in the buying decision?Is quality an issue in the buying decision?– What does a typical business day involve?What does a typical business day involve?