Grain

    Supply chain

     

    Supply chain questions
    1. Should a buyer pay more than necessary to secure supply? (Conversely, should consumers accept a reduction in wealth by paying more to keep producers of goods happy?)

    2. Is it sustainable to a pay a higher price than other buyers in the global market?

    3. Where contracts are based on cost plus, whose cost should this be: the cost incurred by 100% of the producers or the top 20% most efficient producers and is this, the cost of production in the UK, Europe or the World?

    4. Why do producers accept such disadvantageous contracts and do they have to?

    5. How should adverse (or favourable) seasonal conditions be managed in the supply chain?

    6. Is there a better way of managing annual/seasonal over- and under-supply?

    7. How can farmers ensure they supply efficient, imaginative, processors?

    8. How can the benefits of greater supply chain efficiency be shared?

    The issues are not new but are becoming more important as farmers have fewer outlets for their production and move to greater specialisation.  

    In many sectors, the processor has to be a monopoly buyer in order to gain scale and minimise cost.  Generally is does not make sense for lorries to make longer journeys than necessary or for a plethora of small processors, all operating below full capacity, to survive. 
    In the arable sector, despite the occasional argument, the relationship between grower and processor is usually better than in the livestock sector because the balance of power is more equally shared.  Sugar beet growers might cease production in their droves, after a difficult year, as for most farmers the cost of growing a different crop will be small.

    It is much easier to substitute one crop for another than a whole enterprise. However, the processor and its employees may suffer enormously and the cost to them will be much higher than for their farmer suppliers.  In the dairy sector both the processor and (in many cases) the farmer goes out of business if the supply chain is not profitable overall.  Furthermore, if there is profit in the supply chain, up stream of the farmer, it is easy for the returns not to be shared equally.  

    In all sectors, over supply will reduce price and profitability for the producer.  Where there is insufficient processing capacity to meet demand, surplus production can result in the farmer receiving a low price AND the consumer paying a high price, leaving a high surplus for the processor (although exposed to the risk of another processor expanding production).  This is rare but has occasionally occurred in the oilseeds market.

    Ironically, the subsidy for sugar beet probably results in more contention because there is surplus profit to be divided, as British Sugar is very efficient. In much of the world, the construction of a processing plant increases farm profits since the capital invested needs a long-term supply of product to be viable.

    Supply chain management and risk should be part of any farm review and there is a lot that can be done where there is the willpower.  It does not suit any party if  there is nothing to sell so ultimately power does not rest at any one single point in the chain.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Keith Preston

    Keith Preston

    Director
    Food & Farming

    Savills Oxford

    +44 (0) 1865 269 170

    +44 (0) 1865 269 170

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786