1. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 1 TRANSPORTATION, STORAGE, RISK MANAGEMENT, FUTURES, AND GOVERNMENT PROGRAMS Transportation costs and consideration Storage needs Futures, contracts, and hedging Government programs

2. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 2 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

3. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 3 Transportation Example WHEAT FARMER LOCAL WHOLESALER TRUCK RAILROAD STATION PROCESSORMANUFACTURER WHOLESALER WAREHOUSE RETAILER WAL-MART DIST CTR WAL-MART STORE WAL-MART STORE OTHER MFGR TRUCK

4. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 4 Major Transportation Modes in the U.S. Railways Trucks Local Long distance Water—cheap but slow and inflexible Air Intermodal

5. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 5 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., “piggy- backing”)

6. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 6 Storage Types Queuing Seasonal food stocks Carryover Reserve (“Buffer”) Stocks Speculative stocks Current inventory Economic order quantity Voluntary vs. involuntary

7. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 7 Storage Issues Cost Quality Title to goods Capacity trends Greater growth among Processors Wholesalers Less growth with retailers

8. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 8 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

9. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 9 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

10. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 10 Futures Trading Parties Sellers of product (e.g., farmers) Users of products (e.g., manufacturers) Speculators Hedgers Margin requirements Eligibility Trading types “Long”: Actually hold what will be exchanged “Short:” Effectively selling assets not held (high leverage and risk) Payment timing

11. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 11 Hedging and Options Types Storage Pre-harvest Premium costs Options Right to buy or sell No obligation

12. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 12 Risks and Return Range of price outcomes“Expected” price Profitable to exercise option to buy if market price exceeds exercise right Farmer ends up better off with futures contract or sell option Cost of option or contract Farmer ends up worse off than without contract. Option cost lost. Party who sold option loses

13. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 13 Why Buy or Sell Options or Futures Contracts Speculation “Bulls” “Bears” Balancing other investments (a buy and sell option can cancel each other out)

14. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 14 Political Philosophies of Agriculture and Government Laissez- faire—no government involvement; purely free market Agriculture as public utility— strong regulation Commu- nism— government control of economy Fiscal policies within market economy (government programs) U.S. Europe China Cuba

15. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 15 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

16. MKTG 442 TRANSPORTATION, STORAGE, RISK, AND GOVERNMENT Lars Perner, Instructor 16 Government Programs GOVERNMENT AGRICULTURE PROGRAMS FOR BENEFIT OF INDUSTRY FOR BENEFIT OF INDIVIDUAL FARMERS RESEARCH ANTI-DUMPING ENFORCEMENT FOREIGN MARKET DEVELOPMENT PRICE SUPPORTS FAIR TRADE REGULATIONS EXPORT ASSISTANCE TAX BREAKS LOAN PROGRAMS EXTENSION SERVICE FOR BENEFIT OF CONSUMERS HEALTH AND SAFETY REGULATIONS WELFARE AND FOOD STAMPS SUPPLY CONTROL (QUOTAS)