Kevin will be speaking at our upcoming event, Commodity/PROcurement EDGE.
MetalMiner: In the industrial metals buying world, buying organizations have a few headline ways that they can mitigate metal price risk (hedging, forward-buying, etc.) Can you give us (an) example(s) of a corollary in the food world, as far as mitigating risk goes?
Kevin Brooks: In the food industry, you have to separate the commodities exchange products like corn, wheat and soybeans from the fruits and vegetables that don’t typically have that kind of market structure. Entire PhD theses have been written about commodities pricing strategies, so I’m not going to try and provide advice there.
Risk in the food industry is usually about food safety, and your ability to quickly isolate and remove tainted product from the supply chain. It is an exercise in data forensics, but also of market communications. When the spinach industry took a hit in 2006 with a terrible outbreak of E. coli it took too long to identify the source. As a result, people stopped eating all spinach and many leafy greens altogether. In fact, spinach consumption has only recently returned to a level comparable to what it was then. So you had eight years of significant industry impact.
As for price risk, it isn’t as much a factor in produce as availability risk.
Research from many sources confirms that people choose where to shop based largely on the produce section – it is why it is the showcase department in so many grocery stores. Price is also a factor, but if a shopper goes to the store and they see an empty shelf where bananas or tomatoes or lettuce should be, you not only have a lost sale, but also a lost customer for everything else in the store. So availability tends to be more important to the buyer for certain categories. What I’ve seen is that availability risk is often mitigated by a balance of contract and spot buying arrangements with trusted suppliers, and by flexibility with regard to buying excess inventory when unneeded in exchange for a supplier securing supply when market constraints occur.
Where price is a factor [as in the metals world] is with transportation costs. About half the time, suppliers are tasked with arranging and paying for transportation to the retailer’s distribution center. If a buyer can leverage their overall spend for improved transportation rates on behalf of their suppliers, that’s where you can have some significant potential impact.
MM: What do you hope conference attendees will walk away with from your presentation?
KB: Obviously this session is somewhat tangential to the metals industry – but I think you can often learn best by taking a step outside your day-to-day view of the world. I hope they find the session helpful in framing solutions to the business challenges they are facing.
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