The Agribusiness World Today

Ken Shwedel
Investigador de Agronegocios de Rabobank, México
March, 2-6, 2009

The World

The changing nature of U.S. livestock. That is the conclusion of a recent report by the U. S. Department of Agriculture. Although not much of a surprise, the study points to the increasing industrialization of the livestock industry characterized by primary production operations that are considerably larger in size: between 1987 and 2002, “the production locus (the farm size, in annual sales, at which one half of national production comes from larger farms and half from smaller) increased by 60 percent in broiler, 100 percent in fed-cattle, 240 percent in dairy, and 2,000 percent in hog production.” Driving the growth has been the push to increase productivity and lower “commodity costs of productions”. Production has also become more specialized, raising just one animal species, and in many cases even further specializing in a specific stage of production. Typically farms are dependent on purchased inputs including feed, with the percent of use of onsite grown grains having diminished. At the same time that production units have grown vertical coordination has become more prevalent through “formal contracts, joint ownership of animals, and vertical integration.” Interestingly, in spite of the changing structure, most production operations are still family owned and operated.

Rethinking pricing strategy. You may think that the only pricing option in difficult economic times is to lower prices. Well, that isn’t how Domino’s, the pizza chain, is planning on doing things. They are moving to what they call a “barbell pricing strategy”. Here, “some products are priced lower to appeal to customers searching for a good deal while other more premium products cost more for those customers who are less price-sensitive.” What’s behind the move is that the one-price-fits-all strategy had those raising prices to compensate for increased costs, causing them to lose what they call the “single pizza customer”. That is, the customer who looks for the cheapest meal alternative. At the same time, they are moving away from limited-time-only deals while they will “instead add items to their menu”. We don’t see their new strategy as radical. In fact, we see it, rather, as somewhat conservative. It is the timing that makes their move both interesting and aggressive.

Mexico

Investing for the future. Last week we were mentioning Wal-Mart’s investment plans. Well, they aren’t the only ones looking to expand their presence in Mexico. PepsiCo has announced an ambitious five year three billion dollar investment plan, spread among their different business ventures. Part of their plans includes a dedicated R&D installation. Of course there is investment in infrastructure, including, an investment in the Gamesa-Quaker plant in the city of Celaya in order to expand capacity by 40 percent. That will turn the plant into the world’s largest cookie/cracker producing facility, capable of turning out 135,000 MT a year. While PepsiCo is moving ahead, FEMSA is saying that they will reduce spending by 10 percent this year. This means cut backs in investment and reducing their head count. The company has MX$11.6 billion in debt coming due this year, of which they plan to refinance MX$9.3 billion. Adding to their problems is that they say that they had FX losses in the neighborhood of MX$1.9 billion.