Category Archives: Region

Global Commodity Outlook: Thriving on the Commodity Tightrope

The recent pain of depressed commodity prices across grain and oilseed markets has left many asking questions like, “What’s the root cause of the falling prices?” and “Will this pain continue or will prices rebound?”.

A simple scan of various news sites for information that could impact commodity markets yields headlines that might be obvious in their market impact and others that are more subtle, but may nonetheless have a large impact on commodity markets overall (Figure 1). As agribusinesses search for insights to try and make sense of commodity markets and where they might be heading, it is important to understand the history/current state of the market as well as identifying possible future trends.

Figure 1: Recent News Headlines
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Over the last ten years, volatility has been rampant across key crops like corn, soybeans and wheat. For example, record prices were seen in 2012 (largely due to the impact of drought conditions) with soybeans reaching $17.90/bu in July and corn reaching a price of $8.49/bu in August. This drought was followed by record crops in 2014 & 2015, depressing prices by almost half to current levels (Figure 2).

Figure 2: Historical US Production and Average Yearly Price Received
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Pulling back the curtain to understand the reasons for recent commodity volatility reveals both obvious and subtle drivers, including:

  • U.S. ethanol mandates, which stoked corn demand and prices for the last 10 years, have not been increased, leading to ethanol-related demand plateauing at around 5B bushels.
  • Weather volatility has led to some years of low production due to drought and therefore record prices, as well as years of record yields (national corn yield of 171/bpa in 2014 and national soybean yield of 48/bpa in 2015) and substantially suppressed prices.
  • The recent strength of the U.S. dollar relative to currencies of many of our trade partners has in some cases cancelled out much of the buying benefit of lower commodity prices, causing exports to stall.
  • Substantial production increases in South America and the Black Sea region continue to erode the U.S. share of world trade. (See Figure 3)
  • China’s economy has had an increasing impact on agriculture commodities, spurring demand for more protein. However, complications due to commodity price protection for domestic production of Chinese crops also skewed international trade and built up Chinese commodity stocks.

Figure 3: 5-Year Regional Exports by Commodity (Million MT)

Corn graphic Global articleSoybean graphic global grain article

While many factors have gotten us to where we are today, key questions still linger: “where will these headwinds take us?” and “are we in a new steady state of lower prices or will there be future volatility creating further swings?”. Long-term baseline projections from the USDA indicate that the current state of farm-level prices for corn, wheat, and soybeans is likely to trend pretty consistently over the next ten years. In addition to the USDA projections, The Food & Agricultural Policy Research Institute (FAPRI) also projects corn prices to remain at or below the $4.00/bu mark through 2020. Even with projections that depict a pretty consistent future state, there are inherent uncertainties impacting the markets. Given the future uncertainties, it is more crucial than ever that agribusinesses dealing directly and indirectly with commodities not only deftly manage pricing risk, but also have the foresight to maximize future opportunities- both domestic and international.

Savvy agribusiness leaders should be asking themselves, “What are potential factors that could impact commodity prices even further?” While no one can predict the future, possible scenarios resulting in a positive impact on prices could include an increased demand for protein by many developing countries turning the corner (i.e., SE Asia and LATAM) or new biofuel mandates domestic or abroad. On the other hand, a global macroeconomic recession or substantial yield boosting technologies without matching demand could cause prices to remain static or even decline. Successful companies should have a well-defined risk management plan with the ability to navigate the impact of different commodity price scenarios.

While navigating periods with headwinds can be turbulent, The Context Network has decades of experience along with in-country expertise throughout the world to identify key trends and factors that could impact our global industry. Context is well positioned to help organizations across the agribusiness value chain to synthesize and understand the myriad of factors, both obvious and subtle, that impact the overall industry and their specific bottom lines. For more than 20 years, Context has helped agribusinesses navigate the price effects of commodity supply and demand, serving as a partner to clients in developing strategic frameworks to capitalize on market opportunities. With our recent acquisition of expertise in commercial and specialty commodity systems and risk management, we are able to uniquely tailor our consulting services to our clients’ specific needs.

For more details about how Context can assist your organization in this space please contact:

Mark Holland  | 870.919.6800 | mark.holland@contextnet.com
Jason Jimmerson | 406.581.9798 | jason.jimmerson@contextnet.com
Kim Kazemi | 406.544.6511 | kim.kazemi@contextnet.com
Tyler Uden | 217.493.2136 | tyler.uden@contextnet.com

Sources
Des Moines Register
Financial Times
The Ethanol Mandate & Corn Price Volatility
Trading Economics
USDA NASS
USDA Foreign Agricultural Service
USDA Grain & Oilseeds Outlook
USDA Agricultural Outlook Forum:
USDA – ‘Slowing Economy: Effect on China’s Agricultural Imports’
US Grains Council – ‘China’s Potential Future Imports of Feedgrains & Oilseeds’
Farm Service Agency – ‘2016 Grains and Oilseeds Outlook’
USDA Agricultural Projections to 2025
FAPRI US Baseline Briefing Book – Projections for Agricultural & Biofuel Markets
Bloomberg Argentinian Peso Article Headline
US News & World Report El Nino Article Headline
USDA Foreign Agricultural Service

Revolutionizing Grain Storage and Logistics

Bagged grain technology has revolutionized grain logistics and storage in Argentina, as well as in other producing countries of the world for the last decade. Since the beginning of agriculture, grain has been stored in oxygen. In a radical change from the past, grain storage in a silo bag is an airtight storage. The grains, associated microorganisms and insects breathe, ingesting O2 and producing CO2, creating a modified atmosphere within the sealed bag. This modified atmosphere creates certain advantages for the conservation of grains.

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There have been several attempts to store grain in a modified atmosphere to improve grain conservation. However, storing silage in airtight bags has provided the first successful results both commercially and on a large scale. In Argentina last year, the adoption scale of bag-stored grain was so large that out of ~100 million tons of grain produced, 55-60 million tons went through silo bags. The many benefits that this technology provides the entire chain easily explain its rapid adoption. Harvest can be accomplished in record time. A bagger can easily store what has been threshed by 4 modern combine harvesters. Silo bags have also allowed grain producers to keep grain at the production site, and thus encourage new businesses that previously were not available.

Finally, silo bags allow the producer to plan logistics in a much more efficient way. Collection companies have expanded their storage capacity, and thus reduced the fixed costs of their facilities. Using silo bags, the lack of capacity silos is no longer a barrier to shipping grain to port at the time of harvest.  

For exporters, silo bags allow them to participate in a much more aggressive grain acquisition policy as very low costs entice grain deposits in places where they had no presence before. In many cases, this has allowed them to double the volume stockpiled. They also manage to have strategic stocks with their crushing plants to stabilize the supply of raw material.

Bagged grain technology preserves grains for long periods of time with no downsides. The use of an excellent quality bag is essential. The cost of a bag is less than 1% of the value of the stored goods, thus an economical approach.

IpesaSilo™, Ipesa-Rio Chico’s trademark, is the leading bag in the Argentine market. IpesaSilo exports to more than 50 countries worldwide. Five years ago, the company created IpesaUSA as a distributor company working with farmers, dealers, and end-users such as co-ops and elevators countrywide. The cost of storage per bushel in silo bags in the U.S. is only $0.07 per bushel compared to traditional storage methods costing ~$1 per bushel.

The company has also expanded into Canada where grains are experiencing strong freight competition from mining, and have found that silo bags allow them to store grains in the field at low cost. In the case of South Africa, the company introduced grain bagging with Louis Dreyfus, and today 10% of the South African grain production is stored in silo bags.

Other countries where IpesaSilo has begun significant developments in the use of silo bags include Russia, Ukraine, Australia, India and China. Sales in Brazil reached the milestone of 45,000 bags and about 9 million tons of grain is stored annually. Brazil’s potential for the product is huge due to the lack of storage infrastructure and long distances between production areas and ports.

Grain bagging has provided the entire agricultural chain with a powerful storage and logistics tool, enabling the steady growth of grain production minus the inevitable bottlenecks typically experienced in traditional storage. Today, we know that agricultural expansion has no limits, and that storage is determined by the revolution of bagged grain.

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More Grain in Silo Bags, Better Quality

Silo bag grain storage is a common alternative for producers, middle-men and the grain processing industry in Argentina. During the last 5 years, roughly 40% of grain production in this country was stored in silo bags, highlighting the importance of this technology in Argentina. Moreover, silo bag technology is being exported to various countries across the five continents.

Silo bags are made of a three to five layers of plastic material (white on the outside and black on the inside) shaped as a 235 microns thick tube. The most typical bags are 60 m (200ft) long and 2.74 m (9ft) in diameter, can hold approximately 200 t (8000 bushels) of grain each. With equipment currently available, handling (loading and unloading) is very simple to perform. The bags can be assembled on the same production lot, or in an especially equipped area in the vicinity of the storage or processing plant.

The effect on grain quality of wheat, corn, soybean, sunflower and barley, on humidity and period of storage, was analyzed by Bartosik et al. (2012). Cardoso et al. (2009) studied the changes in the concentration of phosphine during fumigation of grain in silo bags, and Cardoso et al. (2012) implemented a pressure test to determine the airtightness level of silo bags and their evolution after being stored for four months in the field.

Cost calculation of storage in silo bags requires certain considerations. The equipment needed includes: bagger, extractor, self-unloading hopper car and two tractors enough to carry the hopper car and provide movement to the threads (one for the hopper car and one for the bagger and extractor). In addition to the costs of having ownership of equipment (depreciation, maintenance and interest), other expenses related to labor and fuel are required to be able to operate. The bag is not reusable, so whenever bagging is done it is essential to buy a new bag.

A typical Argentine grain storage operation using silo bags was analyzed. It includes the following sub-steps: 1) transport from harvester in the field to bagger, 2) bagging, and 3) extraction of grain. The subsequent transport of grain to collection, processing industry or port was not considered in the analysis, as this should be done regardless of the period of grain storage in silo bags.

The equipment required for bagging includes a bagger, an extractor, a self-unloading hopper car and two tractors. One of the tractors is also used for grain extraction. The bagger has a capacity of 400 t / h and requires power of at least 60 HP. The extractor has a capacity of 80-110 t / h (depending on the type and condition of grain), and requires power of 90 HP. The self-unloading hopper car has a capacity of 14 t and is equipped with a thread of 360 t / h capacity. To meet the power needs of this equipment two 90 HP tractor were considered, which can be used interchangeably for the bagger, extractor or hopper car.

This is a typical equipment configuration for a contractor that provides the bagging service to producers or middle-men in Argentina.

Table 1. Equipment Configuration for Silo Bag Contractor

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Equipment and supply prices were taken from magazines (Agromercado), and in consultation with suppliers. The equipment was granted a life span of 10 years, except the tractors which were allocated a life span of 20 years. The residual value of the equipment was considered 25% of its value, while the annual maintenance cost was set at 3% of its value (Table 1).

For more details on silo bag technology, or to learn more about Context in Latin America, contact Jim Eckles at Jim.eckles@contextnet.com.

Understanding the Produce Value Chain

Think back several decades and walk into your favorite grocery store. What did you see? Was produce the first department you entered? Did you see a vast array of fruits and vegetables including fresh cut, a dozen or more different types of apples and tomatoes, and fresh berries every day? (Hint: the market for small tomatoes has tripled in just the last decade to now well over $1B). Leap forward to today, and if you don’t see a well-stocked, well merchandised impressive display of fresh produce then you’re probably shopping in a store that won’t be around for long.

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Grocery retailers know that it is the ‘fresh perimeter’ of their store that sets them apart from competition, with produce being the number one point of differentiation. The aromas, colors and vibrancy of so much fresh and wholesome food are a powerful way to greet their customer. It also is a powerful way to grow profitability.

According to the United Fresh Produce Association, fresh produce accounted for 13 percent of store sales in 2013, up from just under 11 percent in 2011. The average produce department in 2013 generated $47,209 in revenue every week, up 4.8 percent from 2012 with most of this gain coming from pricing. Innovation in convenience, variety and flavor helps drive these price gains. Newly popular items like clementines and kale, snack-sized tomatoes and peppers, fresh cut salad and fruit are just examples of categories that have exploded due to innovation.

However, not all innovation is successful. In fact 70-80 percent of new grocery items fail. It is not enough to know only what the consumer wants, or know only how well a product yields on the farm. One also needs to understand cost of production, handling, packaging, distribution logistics, shelf life and challenges faced by the grocery retailer. Bringing forth a new produce item is risky business and is not for the faint of heart.

Context has extensive experience all along the produce value chain, from seed and inputs, through packing/shipping to grocery retail and foodservice. A critical factor in launching any product innovation is to make sure the value chain is lined up beforehand. Growers can’t take the risk to produce a new item unless they know who is buying, and for how much. A packer/shipper may be willing to take some risk, but they need to understand seasonal impacts on supply and product quality, best practices to preserve flavor and shelf life, have some idea as to consumer willingness to purchase the item and retailers willing to carry and promote the product.

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For retailers, shelf space is precious and adding items requires work and often worker training. Retailers need to be comfortable that the product they receive will be consistent in delivering the promised value, dependable in supply, and unique enough to catch the attention of their customers –and of course, grow profits. Regardless of where you are along the chain, Context can link the chain together helping ensure product and financial success.

Provided by Jennifer Garrett, Senior Associate; David Stark, Senior Associate; and Jim Zarndt, Senior Associate.

Defining Price: A Critical Component in the Market Mix

Market researchers have several different techniques for helping manufacturers set prices. Some lead to valuable insights, while others provide only confusion.

Carefully designed and professionally implemented quantitative research and data analysis together provide details that have a significant impact on outcomes.

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Pricing is one of the most critical elements of a product in the marketing mix. Companies have to pay money to design a product, to develop/build a product, and to promote a product. However, a product’s price is the only element in the marketing mix which generates an income for an organization. Pricing strategies based on sound pricing research provide companies with a price that reflects the supply and the demand integrated into the relationship.

The Role of Quantitative Research and Data Analysis in Price

There are many types of research tools that help companies identify and discover various pricing models. A few key techniques, presented below, have their advantages and disadvantages.

For the sake of discussion, let’s consider several pricing strategies and then revisit our example question posed in the sidebar: “How does Apple price their phones so successfully?”

  • Gabor Granger Price Laddering:  If a market researcher comes offering price laddering, politely show him or her the door. This technique asks respondents whether they would buy a product at price x, then whether they’d buy at price y, then at price z and so on. Research shows that once respondents have accepted a given price, they’ll feel cheated by any higher price, while lower prices won’t increase their intent to buy. So after that first price is shown, laddering doesn’t yield any useful information.
  • Van Westendorp Analysis: This is a more sophisticated analysis, but it is built atop a shaky foundation. Respondents are asked four questions about price:
    • At what price does the product become too expensive to consider?
    • At what price is it getting expensive but still within consideration?
    • At what price is it a good value?
    • At what price is it so inexpensive that doubts arise about its quality?

The responses are combined into a pricing curve that provides a range of customer-acceptable values. Two problems become apparent: 1) respondents quickly figure out the approach and give lowball prices, and 2) the range is often so wide as to be useless. For example, a manager might be considering a range of $15-$20/unit. Van Westendorp will often tell them to price it between $5 and $25.

  • Monadic Testing: This is the primary technique used by big volume forecasters like Nielsen, and if the normative database is robust enough it can be useful. Respondents are shown a description of the product at a set price and then asked their likelihood to purchase the product. By testing other prices with other respondents, managers can get a sense of the pricing that will be the most profitable. The trouble with monadic testing is its lack of granularity. It can tell only about the prices actually tested. Sure, managers can test a range of several price points, but each additional price can require hundreds more respondents, which gets really expensive really quickly.

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  • Discrete Choice: This is the best approach to survey-based pricing research. It simulates customers’ real-life purchase decisions by giving them a series of choices between sets of competitive products, each with price, brand, volume, level of service and other important product characteristics. The design can test several individual price points and the analysis can extrapolate the customer appeal for prices between them. Beyond that, though, it can then show the relative importance of each product characteristic and identify the optimal level within each – helping product managers optimize product development and focus resources. Its inclusion of competitive products also makes it a tool many manufacturers and marketers rely on for scenario planning. But discrete choice can be more expensive than other options, and without careful design it can lead respondents to be more rational than they would be in real life. When done well it provides clear insight on a range of issues, pricing included.

So which pricing approach does Apple use? None of the above – not even discrete choice. Apple doesn’t ask consumers for direction; if it did, it would probably hear that prices need to be lower…and yet people still line up to buy the latest iPhone. Apple designs products and systems, calculates the value that they will hold to the customers who will get the most out of them and prices them accordingly. Pricing lower would certainly increase share, but Apple’s focus is on a more important measure: profits.

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Context sees the value of quantitative customer research as an input that, when combined with deep industry understanding, can inform value-based pricing. This approach empowers clients to price strategically for their specific objectives.

Contact us to discuss your market research needs. Context provides a wealth of expertise in quantitative and qualitative market research design and data analysis, R&D, volume forecast modeling, insight generation and deployment, new product development and business plan creation, and competitive intelligence and market intelligence.

Context Senior Associate, John Ritzman has more than 15 years invested in helping Fortune 500 agribusiness and consumer products companies identify, scope, and develop business opportunities. John.ritzman@contextnet.com

Leading Strategic Change – A Key to Change: Deep Organizational Engagement & Involvement

We have the most educated workforce in human history. Younger generations of workers desire an opportunity to use their intellect to create and innovate. Many from the younger generations have grown up in more inclusive and team oriented environments, hence top down decision making and “marching orders” are less warmly received today than in the past. Our workforces are looking for greater degrees of leadership transparency and engagement. We are in a global transformation from command and control to self-organizing networked organizations. 1

Coupled with a changing workforce are our organizations’ cultures. What are cultures? The 1992 classic definition of culture is from Edgar Schein 2 “a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think and feel in relations to those problems.”

We are experiencing three noteworthy and converging forces simultaneously:

  • A significant generational change between the Boomers exiting and a highly-educated work force
  • Cultures that recycle proven steps, methods and processes which have solved problems of the past
  • Highly-dynamic marketplaces that are in constant flux with new products and services needed to maintain the competitive edge.

How does senior leadership implement new strategies and not have their culture eat it for breakfast?  Our first tenet in Leading Strategic Change is “Involvement.” Younger members of today’s workforce wish to be engaged and involved. They want to be connected to:

  • the DECISIONS that affect their customers
  • the TEAMS with whom they work
  • the SUPPLIERS they resource
  • the IMPLICATIONS to their own work habits, preferences and lives.

Ultimately, these highly capable workers wish to contribute their knowledge, experiences and skills to new policies and procedures. They seek full investment in new ideas, concepts and strategies.  

So when does leadership decide and announce versus deeply engage, gather, decide and announce?  It depends. If a rapid competitive situation, supply chain or regulatory issue exists, then senior leadership many need to take the traditional top down approach. If the strategy has deep, long term implications, will create significant change and will result in culture change, we recommend taking a deeper approach of employee engagement. The Context Network has resources to help plan and facilitate employee engagement creating involvement that will make Leading Strategic Change more sustainable and successful.

If you have other “change topics” or questions, please send an email to Senior Associates, Raquel Lacey Nelson at raquel.laceynelson@contextnet.com and Monty Miller at monty.miller@contextnet.com and we will address in future articles.

References

1 The Economist, November 23, 2013, pg. 68

Schein, E. H. (1992). Organizational culture and leadership (2nd ed.). San Francisco: Jossey- Bass

Portfolio Distractions – Figuring Out What to Stop Selling Can be Hugely Important

“General Managers and Portfolio Managers, this article is for YOU.” – Mike Borel, Context Partner

Context conducted a project for a regional business of a global company that identified products and SKUs that were taking more time than they were being charged, and therefore, reducing effort on other products. What did they do? Removed 25% (by number, half that by revenue) of a portfolio! Read on to know the story and the results.

Portfolio distractions cost money, time and opportunity. Let me tell you about a “real life” project we led on this subject. The client was a multi-country region of a major crop protection company with roughly 2000 SKUs which included old and new active ingredients, high margin and mid-range margin, and various formulations and pack sizes. The business was profitable overall and no individual SKUs were losing money – at least they were not losing money based on the accounting done.

Investigating the portfolio for possible distractions was an idea initiated by Context and ultimately driven by the general manager of this region. This manager wanted more time and energy on the newer and higher margin products and commissioned the study/project. The project was decidedly opposed by the Sales Managers and Country Managers – so much so that we talked often during the process about having a target on our front and back (see cartoon).

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We dug deep to find out how much sales and other time was actually going to each product or SKU. This resulted in a new financial summary. We then identified ~500 SKUs (including more than a few AIs) that were taking time and distracting the organization from doing everything possible to sell high margin and new products. We proposed some for sale, others simply for abandonment. The sales organization went crazy trying to stop this. The manager powered through (which was key) and made the changes.

What were the results? In the very next season, sales increased and margin/EBITDA increased even more (on only products that were in the portfolio the prior year). Everyone involved, including the sales team enjoyed a better bonus. The opposition went away.

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The Math:

100% (yr 0) – 12.5% (end of yr 0) = 115% (yr 1)

Context has the experience, knowledge, processes and resources to do this job for you. Interested? Contact us to discuss possible portfolio distractions in your business.

Cartoon © Gary Larson available at http://www.flickr.com/photos/gluv/298864264/lightbox/