The Economics of Cheese

cheese

What every sourcing professional should know

When you read this week’s Wall Street Journal story A Cheese Glut is Overtaking America, after thinking about doing your part to assist with the report that every American would have to eat three extra pounds of cheese this year to work it off, did you think about the economic impact and why this story matters to sourcing, procurement and supply chain? There are many lessons that can be learned from agricultural commodities and understanding the economics, especially in strategy development and managing volatility and risk.

During my career I have managed agricultural commodities and I understand the value and role that economics plays in sourcing. Let’s look at a commodity cycle we’ve experienced in recent years. It’s not difficult understand that after a period of drought, many crops fail and grain prices increase significantly. Farmers then look ahead to a tough winter of feeding cattle with the high cost grain, which will have a negative impact on profitability. As a result, farmers send their cattle to the slaughterhouses and cut their losses. As consumer demand remains steady and exports continue to rise, there is little doubt that the limited supply will force prices to rise. As the weather becomes more stable and grain prices fall, it’s natural for farmers to increase their herds of cattle, production of milk (and cheese!), flocks of poultry and grains. This is the easy to understand supply and demand economic cycle.

In this recent cycle, the opportunity to capitalize on the high prices became apparent to many farmers, however, the failure to understand the impact of the high US dollar on exports and the collapse of the export market, has caused increasing inventory levels, plus the time requirements to flex the size of herds and flocks has built up to the glut of some commodities. Gluts, shortages, currencies, pandemics, weather, labor, regulation and government stability all contribute to agricultural commodity economics and add financial and capacity complexity across supply chains, requiring an increased understanding of the economics to gain control. Today, I’m wondering how many Midwest farmers will switch from planting corn to soybeans, since the USDA projects that soybean production in the US and South America will be tight over the next two years while global demand continues to rise. How much corn is planted, of course, will impact the economics of food supply chains, but it also will impact ethanol, alcohols, building products, plastics and even tires.

Sourcing professionals involved in commodities of any kind can make or break their company’s profitability. The skills required to manage the complexities of commodity sourcing are understanding economics, extensive research of the market, having the right tolerance for risk and volatility, maintaining a calm demeanor and building extremely strong supplier relationships at both the farm (producer) and broker levels. They also need an analytical approach combined with communication and quick decision-making skills to be effective in commodities. We can all learn much from understanding the economics of commodities.

Have you thought about the economics of low-priced Cheddar?

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