Chapter 13 Processor Procurement Systems

Processor as Coordinator  Goal: to keep organization running with flow-through that is profitable  Profitable operation requires careful management of volume and margin  Adequate volume: Costs are minimized when a firm and its plants operate at nearly full capacity  Processor’s margin: what he obtains for his services

Procurement Systems  Management decision: Make or buy  Classification of systems: –Spot (current cash) market –Procurement contracts –Production contracts –Labor contracts –Bargaining cooperatives

Marketing-Procurement Alternatives

Procurement in the Spot (Current Cash) Market  Processor achieves advantage by better timing of purchases, anticipating when farmers are anxious to sell  Requires monitoring of both private and public sources of market intelligence

Procurement Contracts  Reduce both flexibility and uncertainties  May give processor “outs” in case of strikes, “acts of God” and so forth  May allow for price discounts or even refusal of delivery if commodity quality does not meet contract specifications  May or may not fix price

Procurement by Production Contract  Agreement between two business entities to produce a good  Put processor in the business of production  Processors select producers largely based on geographical location

Procurement by Labor Contract  Agreement between employer and employee to carry out specific tasks  Processor is producer; assumes production risks as well as profits and losses  Production in one’s own facilities by one’s own employees, representing complete vertical integration

Procurement from a Bargaining Cooperative  Processor bargains with cooperative over price and quantity  Prices paid by all processors likely to be the same  Processors may feel cooperative hinders communication with individual producers  Producers favor cooperatives because of quantity sales, higher prices, and more efficient market timing

Livestock Procurement  Most livestock procured through non-cash methods  Decisions of packer in organizing total procurement based on several factors: –How hard is operation relative to nearby competitors? –Are his purchases large enough to affect market price? –To what extent are supplies available through other producers? and so on

Pork Procurement  Methods have evolved rapidly  Focus on economies of size motivated rapid expansion, management efficiencies, use of production contracts  Processors have integrated vertically

Percentage of Hogs Sold on Cash Market

Cattle Procurement  System involves a staff of cattle buyers  Packers maintain excellent communication system to keep buyers informed  Market information published as Yellow Sheet and Meat Sheet and by AMS division of USDA  Packers buy on carcass grade and yield

Percentage of Cattle Sold Through Non-Cash Market

Vegetable Procurement  Value to be attributed to raw product depends on market factors that are difficult to anticipate  Vegetable processor makes annual price determination  Little direct competition in negotiation of contracts; processor typically procures within 50-mile radius of plant  Processor buys on grade and yield

Wheat, Corn, Soybean Procurement  Grain and soybean channels have considerable vertical integration  Limited organization of processors  Inventory management: –On-track buying –Back-to-back trading  Use of basis pricing and basis trading  Consider convenience yield in determining inventories

Grain M-P Channels and Pricing Points

Class Exercise  Using your assigned commodity, interview a procurement person for one of the agribusinesses that buy the commodity. Suggested questions: –What methods (cash, contract, broker) are used to buy the commodity? –What logistical issues arise? –Is quality an issue in the buying decision? –What does a typical business day involve?