How’d you like to be able to tell the customer what to pay for your product?
That’s not generally the situation farmers are in, being for the most part price-takers in the marketplace, but some of the biggest food companies have semi-monopolies on some products and are sometimes able to force prices part of the way towards what they’d like.
Bloomberg was reporting yesterday that General Mills said in a conference call with analysts that it was planning to recoup money paid for expensive grains in the past year by keeping product (like Cheerios) prices high and maybe increasing some prices. That, combined with General Mills’ intention to slash some operating expenses, was enough to send its shares and those of fellow cereal makers like Kellogg and Kraft higher.
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Wouldn’t that be a nice situation: you’ve taken it on the chin from suddenly higher grain prices so you simply push up prices?
Obviously there are limits to how far these companies can go with that approach. Cereals are supposed to be cheap. If companies push cereal prices ridiculously far families will switch to other cheap breakfasts, such as yoghurt and eggs, or embrace expensive breakfast foods that are yummier, like bacon. Mmmmmm, bacon . . .
But if you’re General Mills, you’re the only company selling Cheerios, and lots of people get up to a bowl of that every day and have done forever, so a 20 cents per box price increase isn’t going to change your habits and kill that demand.
Farmers are often annoyed by the supposedly better situation of big companies that make products (and sometimes profits) from their grains, but it doesn’t make any sense to begrudge General Mills its success and market power. The company has a vested interest in promoting oats sales because that’s what Cheerios are made from. Oat growers should want General Mills to make as much money as possible from Cheerios, because then the company will make more and more of the cheery stuff, and give farmers a good and steady market to sell into.
It’s frustrating to see prices for oats tanking, as they have recently done, at the same time as companies like General Mills are raising their earnings forecasts, but year-in and year-out General Mills is a major buyer of Canadian oats and provides much of the basis for the contracts that many farmers use each year to lock in profitable prices before they produce a crop.
It’s pretty scary to think of what would happen to the oat market if General Mills starting making Cheerios out of something else, or Quaker began making oatmeal out of another crop.
And farmers do occasionally have the power to push prices when they somehow unite, like they did this winter by refusing to sell at low prices with huge basis levels. The low prices generally stayed until March, but the basis narrowed a lot, something most analysts said was due to farmers being unwilling to deliver.
Still, it’s a lot harder to get 10,000 farmers to jointly take an action like that than it is for a big company to try something out.
It’s a little scary to think about how much of the oats market relies on a handful of companies and a few products, but fortunately those companies can’t really afford to stick it to the grower because, unlike corn and wheat and soybeans, not everybody grows the stuff. Food oats production is pretty much a creature of a band of the Canadian prairies and as much as farmers are reliant on the big companies to buy their grain, those big companies are terribly dependent on a few thousand farmers in Western Canada to provide their essential feedstock.
A few buyers, a few sellers, a fine balance.
