AGRICULTURE SUPPLY CHAINS
the foundation for them to price the other side of the contract. It is unclear from the bank’s report how price should finally be established.
• Dearth of market information. While players gain more intimate knowledge of
their upstream and downstream partners, they lose market signals and activity that would normally be factored into their strategic planning. If you’re not a player in the open market, no one will share his or her current knowledge of the fundamentals simply to satisfy your curiosity.
• Lack of liquidity. The more dedicated supply chains, the more it pulls players
off the open market. Is there anyone who could say that they can afford that loss of liquidity?
Figure 2: Dedicated Supply Chains – A Significant Step Forward in F&A
The defining characteristic of dedicated supply chains is a shared commitment between companies to work closely together, generally from one end of the chain to the other.
This commitment is usually formalised on a medium-term basis, and is based on supply that is ‘dedicated’ to meeting the needs of the ‘captain’ at the downstream end of the chain. The ‘dedication’ is cooperate along the supply chain and should not imply that a company dedicates all of its available supply to just one chain.
Dedicated supply chains involve companies who normally interact but have made the decision to cooperate differently. They do this because they see more value in closer, more formalised cooperation than in working alone. Importantly, they agree that overall business value creation is stronger through this model than a traditional approach to regular negotiations over price.
Rabobank, February 2013
• Lack of innovation. Sure, there may be some creativity in creating vertically integrated
alliances, but who has not seen complacency in businesses that are predominately locked into long- term agreements?
• Equal access to supply chains. Supply chain cooperation tends to occur in the middle of the chain.
Thus, producers and consumers are generally left hanging where one wants to buy as low as possible and the other wants to sell high. This becomes a tug- of-war where the ultimate price risk lies.
If done properly, cooperation and sharing risk is
shrewd. Yet in the real world, there are too many circumstances where the chain can, and will, break down. If one were to solely adopt a dedicated supply chain model, I can only imagine how challenging that would be in hard times. It is the opposite of food security.
Why We Need Open, Online Trading There is no doubt that there are inefficiencies in
today’s open market. Buyers and sellers spend hours siphoning through emails, broker reports, and shopping their book over the phone directly or through a broker. Moreover, F&A markets are so thin that sometimes even an indication of buying or selling interest could push the market away from you before you can get anything done. It’s an inefficient use of a company’s resources. Yet open market trading is essential to all parties
along the supply chain to manage both price risk and the physical flow. Without the definitive information the open market provides, how will the members of the chain determine where to invest their own capital in the long-term agreements? At some point, each company needs to assign a real value to the commodity. No open market trading means no objective point of reference. Open market trading is the only guaranteed outlet where companies can lay off risk – both anticipated
and unexpected. Nothing insures a company’s long- term health better than the liquidity and optionality that an open market provides. As for the inefficiencies of open markets, electronic
trading is the solution. Many entities have tried to use technology to mimic the offline open market, but a successful electronic platform needs to provide more than what phone brokerage and today’s direct negotiations offer F&A companies. If done properly, electronic trading can provide the following:
• Direct market access at a fraction of the cost. An online marketplace is the most efficient place to
find new trading partners and lay off risk.
• Instant price discovery. See the entirety of the market in one location in real time. A day-end broker
report is not actionable market information. Nor are the opinions of your upstream and downstream partners.
• Sophisticated pricing optionality; providing members the confidence that they receive the
absolute best price that the market offers.
• Counterparty management; that provides for anonymous trading.
• A level playing field on any given day. Whether you are a new entrant to the market, at either end
(outside) of the dedicated supply chain, or finding yourself with a broken link in the chain, an open, electronic marketplace will always provide you with the ability to transfer both risk and the physical product.
Combining all of the above, online open market
trading provides much needed market liquidity and optionality. Without it, dedicated supply chains won’t work.
F&A supply chain participants have significant
challenges today managing risks, increasing operating efficiencies and building profits. I agree that joint
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