Agroindustrial project analysi

THE PROCESSING FACTOR 151example, in grains, orange juice, livestock, potatoes) to hedgeagainst the inventory price risk. 41 Although there are budding futuresmarkets in some developing countries, most of the developingworld lacks the conditions for futures markets (standardized productgrades, ability to deliver, highly developed information systems,and large pools of speculative capital). Commodity exporters in thedeveloping nations can, however, use the futures markets of theindustrialized nations to obtain some price protection for their exports.There are alternative approaches to price management. If theprocessor buys from wholesalers and the product does not haveto be processed as soon as it is harvested, the processor can buythe product as it is needed and minimize inventories. The tradeoffis that, to save inventory carrying costs and the investment inphysical facilities and to reduce price risk, the processor may haveto pay the distributor premium prices for providing these servicesand carrying the risk. If the harvest is short, inadequate storagefacilities for stocking up at harvest time can leave a processor withproduct shortages, production stoppage later, or with high pricesfrom the wholesaler. If the processor does carry the inventory, itmay use forward contracts as a surrogate for the futures market:the factory's expected output would be sold in advance at a fixedprice expected to cover costs and preserve a margin. A fixed pricemight be favored by retailers or further processors because it isstable. Both seller and buyer reduce their uncertainty, although thebuyer still carries the end-market price risks.Salient points for project analysisIn examining the project's inventory management,should consider the following questions.the analystWhat will be the best storage capacities for raw materials andfinished goods?* Product perishability?* Effect of processing on storability?41. Henry Arthur, Commodity Futures as a Business Management Tool (Boston:Harvard University, Graduate School of Business Administration, Divisionof Research, 1971).