Taking stock: Supply chain management

Farm to table. It sounds simple and linear when talking about the food supply chain. Complexities in procurement are often challenging, disruptive and costly for those who source commodities which are processed or needed as direct ingredients. When it comes to processors and consumers ebbs and flows in inventory holdings can have a significant impact on producers, processors and end users. The nature of seasonal production means that those fluctuations are to be expected, even if the exact timing can’t be fully anticipated.

Food isn’t the only crucial supply chain, of course. Processors rely on other supply chains to keep goods and services moving on a local, national and global basis, from fuel for transportation to energy for operations.

Inventory throughout supply chains is just one aspect of potential cracks in the feedstock link. In a market squeezed by pandemic-related stressors and other concurrent concerns like potential inflation, market participants may encounter a shortage of working capital. Protecting prices is as much of a priority as getting necessary materials.

Volatility in supply and cost, especially in today’s operating environment, may defer procurement of feedstock that a purchaser needs for their business. Flexibility, then, becomes another priority in a growing list of wants and needs. As in any interlinked system, weaknesses in one area can affect others. To shore up their feedstock supply and stabilize the broader chain comprised of many entities, processors can look at more ways to get the raw material they need, whether it’s corn for ethanol, flour for food or oil for gasoline. With the stakes high in a tight and competitive market, market participants need to examine all tools available to them.

Having more options and reliable business partners is particularly important for small and midsized enterprises. These kinds of organizations don’t have access to the tools, technologies and networks that larger corporations do, as they work to manage materials and costs.

A look at recent headlines underscores the importance of having a strong risk management plan and partner. Rapid price spikes, reduced aggregate inventories and shortages, possibility of the commencement of a new commodity super cycle, logistical log jams, etc. The “What now?” question should be asked beforehand, not after a situation has unfolded.

An enhanced approach to procurment and pricing

Uncertainties in procurement and pricing have a ripple effect across organizations. Executives at a cereal company, for example, might have to answer to shareholders about such issues as fluctuations in the cost of oats. At another level within the same cereal company, the finance team may be contending with ups and downs in cash flow and earnings that impact when, how, and from whom they buy raw materials for processing and production. Over in research and development, supply and pricing influence what products might be coming down the pipe. And in the general marketplace, consumers may balk about paying high prices for their favorite boxes of cereal.

Better management of procurement and pricing can alleviate issues that have implications across the organization and, beyond that, to suppliers and customers.

Just-in-time inventory

On the raw material side, a processor can better control – or at least better manage – their inventory with differing approaches.

For example, by working with an agribusiness service provider like FCStone Merchant Services (FMS), a processor can pay for inventory only when it needs to be used. This just-in-time inventory model more efficiently uses liquidity and capital that can in turn then be used elsewhere within the business.

Similarly in typical grain origination programs, grain is bought from producers through spot cash contracts and forward cash contracts that use a variety of pricing options. Futures, options and OTC markets are used to minimize risk and offset exposure to volatile markets. While this system can work, there are shortfalls, including the need for enough working capital for the marketing year and a required understanding of commodity markets and hedging strategies. By leveraging experts in origination, risk management, hedging and payments and using the latest system and technology platforms offered by a service provider, a producer/processor can instead use an enhanced origination program that offers more benefits and fewer shortfalls.

In this model, purchases are directed through a third-party contracting organization that buys from the grower on a processor’s behalf. In such an example, FMS is the one that owns the inventory that is sold forward to the processor and available for delivery on an as-needed basis.

This way of sourcing grain feedstock is also a flexible type of procurement. Purchasers can manage board prices independently without committing to a supplier. By using FMS’s network, a company can expand its pool of potential suppliers and buyers to expand its pool of counterparties.

Price protections

If teaming up with a service provider works from a practical standpoint with inventory, it also offers a range of financial benefits.

For one thing, processors can get forward procurement and lock in costs, without having to enter a financial contact with a specific supplier.

In addition, using a service provider allows for off balance sheet working capital. With FMS managing the commodity price risk until just before the processor needs the commodity, a processor would not have to use as much capital to fund inventory and hedge margin.

Ultimately, accounting is simplified. Cash contracts are used instead of financial positions. This approach also eliminates the need to employ hedge accounting for those that do not qualify for mark to market treatment. While accounting is simplified, processors have alternatives with a pricing suite that includes various strategies to minimize upside market risk and/ or participate in falling prices.

Going back to the grain origination example, the third party (FMS) can buy from producers at a negotiated basis price. Forward purchases of corn feedstock can be locked in up to 24 months in advance of delivery or any time that market conditions are favorable to lock in feedstock prices.

There are also benefits for growers who supply processors and end users who utilize third party providers like FMS. Producers may have expanded choices to price sales before planting through delivery using a variety of risk management strategies embedded in their cash contracts such as minimum price contracts, accumulators and collars. Alongside those offerings are discretionary or algorithmically based managed pricing programs that allow producers to focus more on producing the crop and worry less about volatility in the market.

Making it personal

In agribusiness, there is no one way of doing things. As they protect their inventory and prices by working with a service provider like FMS, processors can take advantage of customized risk management strategies with advanced tools that help with margin protection on many fronts.

Those tools include sophisticated technologies with flexible, scalable platforms that can scale up or down by need or by company size.

Customizable contract and position reporting are available as well. Processors can reference an online dashboard for all their contract and position reporting to get an in-depth look into positions by shipment month, futures month, pricing type and individual customer detail by shipment and reference futures.

Customer testimonial

“FCStone Merchants Services has been working with us for almost two years with their inventory repurchase program. The program frees up cash by minimizing corn inventory ownership and by eliminating daily margin call requirements. While corn has increased in value by $4.00 per bushel in a short period of time, margin calls on farmer contract corn have not tied up any of our working capital. It has also allowed us to be more aggressive purchasing corn further into the future and it simplified our internal accounting. FCStone Merchant Services also offers our farmer clients services like direct deposit and a wide array of structured pricing contracts that we were not able to offer on our own. There is no doubt that because of FCStone Merchants Services we are a stronger and more competitive company today as a result of their programs and services!”

--The CEO and Commodity Manager of an Ethanol Plant in the Midwest

Case Study: Flexible procurement

FCStone Merchant Services’ Enhanced Origination Program

• All purchases are directed through FMS intermediation with basis bid agreed to by destination.
• FMS is the contracting party that purchases from the grower on your behalf, you control level of involvement with the grower.
• Purchase from producers priced at negotiated basis price with simultaneous sale contract between FMS and you at purchase basis + fees (this establishes new basis ownership level)
• Forward purchases (futures values) may be locked in up to 24 months in advance of delivery or anytime coproducts are priced, or market conditions are favorable to lock in price of feedstock.
• Grower can “price” sales to FMS before planting through delivery to capture favorable market opportunities.
• Allows grower to manage the board price component of the price by utilizing a variety of pricing structures.
• FMS can work with the elevator’s commodity risk manager to provide feedback and pricing for various pricing functionalities to offer to the customers.
• Full reporting is received around all farmer contracts, volumes, structures etc.

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This article was written and published by Sosland Publishing Company. Sosland is solely responsible for its content. StoneX sponsored the paper but is not responsible for its content or any conclusions therein.