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central illinois | It is unlikely that Smithfield or any end user of a national scope could source all their grain needs thru their own elevator system. They still have to worry about a production shortfall in the area around their elevators. Depending on the year they will pull grain from differing locations to satisfy their demand. Smithfield will still need the merchant for a large part of their comsumption. That is what the grain merchant does, whether a coop or private, they make a market for both the buyer and the seller because the timing, price, quality and location of the supply and the demand do not always match. A competent grain merchant who can manage those risks well will survive and a poor one will not.
Companies more up and down the value chain in their industry all the time, expanding from elevator only, to elevator and transportation, adding an e-plant, etc. as they forecast where they think margins and ultimately profits will be best. Again, well managed businesses succeed and poorly managed one's fail. A good recent example is ADM growing from an oilseed processor in the 60's into corn wet milling, transportation (barge,rail,& truck fleets), expanding grain elevator system, then building dry corn mills. Now they want to sell the dry corn mills as they see those margins falling and believe they can use their capital better elsewhere.
Smithfield moving to purchase grain facilities is moving down the value chain one step and the speculation is that they may want to go further down the value chain to control production. The top reasons for such a move would be to capture margins, to control quality, and to reduce volatility (price, quality,and timing) in their supply chain.
Edited by 9kids 12/31/2016 13:38
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smithfield and middlemen
