Forward Progress For Food Supply Chains
By Julie Lerner
IF THERE IS one word to advocate for more integrated supply chains today it is horsemeat. I am glad to see more public discussion on how to address food security and other challenges for agriculture companies, but vertical integration alone cannot fully address today’s financial and operational risks. Just before the horsemeat story broke, Rabobank
released a report entitled, Winning through the Supply Chain.1
The report states “The players in the F&A
supply chains are now being asked to do more than ever before: produce more with fewer resources, access new markets, reduce costs, respond to new consumer demands, adapt to new outside influences and prepare for a long-term structural increase in demand.”
Here we discuss: a) How open market trading is much more than that, b) The benefits and challenges of both approaches, c) Why
both must be integrated company’s trading strategy. Figure 1: Combining Supply Chain Integration With Online Open Markets Dedicated Supply Chains
• Guaranteed Trade Flow • Preferred Vendor Status • Access to Capital
• Optionality • Information • LEVERAGE
Online,
Joint ventures (JVs) along the F&A supply chain and long term contracts (LTCs) are nothing new, and like all supply chains, the level of cooperation among companies ebbs and flows over time. Even before the horsemeat discovery, many companies have already been responding to the increasing grassroots demands for farm-to-table food standards and accountability. This could only be done, of course, with supply chain cooperation. These agreements also increase operating efficiencies, sometimes even eliminating a middleman. Vertical integration through
Open Trading
• Price Discovery • Market Access
• Multiple Trading Partners
each LTC and JV provides bilateral incentives and opportunities; a farmer gets pre-export
financing from a
trade house at better rates than their local bank, the trade house gets a guaranteed supply, avoids broker commissions and often some loyalty in hard times of short supply. As the
I agree with that statement. In fact, those are the
very reasons why we at CMDirect are sure that online open trading is an essential tool for agricultural market participants. Technology has the ability to create more profit opportunities, more liquidity,
establish new
trading partners at nominal cost, and dramatically reduce operating costs.
Open market trading is the only guaranteed outlet where companies can lay off risk – both anticipated and unexpected
Yet the bank suggests that the best way to address
these issues is for F&A companies to collaborate up and down the supply chain (Figure 2). The report succeeds in
describing the many benefits of cooperating
upstream and downstream, showing how it adds value to all participants. However, their position describes open market trading as just “chasing price.”
74 March 2013
Rabobank report describes well, other benefits include reducing supply chain risk, increasing productivity and improving access to capital. In practice, however, these benefits are often difficult
to achieve. Here are a few things that can go wrong and why we cannot simply abandon open market trading.
Inherent Risks of Dedicated Supply Chains
• Increased performance risk and default risk. Of course, participating in more than one dedicated supply chain is wise but still, what happens if a ‘captain’ of a supply chain representing a quarter of your volume goes belly up? If one link breaks, does everyone go down? And if collaboration results in fewer, but significantly larger entities, would that lead us into a situation in which the chain becomes too big to fail?
• Where does the ultimate price risk lie? I agree that LTCs offer a guaranteed trade flow and provides
into an F&A
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