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