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Traders + Processors and Retailers

Might be some words incorrect, as heard not clear

1. Understanding Market Competition and Concentration

The idea that competition intensity increases with less numbers of firms in the market. That sounds a bit counter-intuitive to the classical theory, that the potential competition is actually higher the less players there are. But we also looked into that, that there's the issue that at some point you often see the change that there is the actual competition intensity which differs from the potential one because we start seeing collusion if there are less players that need to be coordinated then there is a higher likelihood of collusion and that is the opposite of what we want this is a purely economic perspective we are only looking into competition intensity we are not looking into the social benefits that we have here and there are all kinds of other things that you could look into as a thing that you want to judge a market upon, right? We look at competition intensity for one single reason, because it helps us to actually say there's an efficiency gain by structuring the market in that way. And efficiency is of course also a word that doesn't come without controversies.

We talked about it also from a feeding the world perspective and we look into calories that we provide to humans that by food markets becoming more efficient we have been able to feed more people around the world than ever. Not in a comparison. So we look at different markets, right, and we have these different markets like The input market, if you look at the input providers, where there is often claim that Monsanto, Syngenta or whoever, that they are basically controlling our food supply. That is the claim that is sometimes made, especially I would say from the far left. However, these companies, they are very small. compared to other players in the market, which means that they also have limited control over it in many other ways, which you also see by the kind of merger structures we have in the industry. So, I think I need to give you quickly a glass of water. I'll be back in a second. Thank you. And then we always have these two dimensions. So we'll just restart in here. Two dimensions of marker concentration. One is the region and geographic one. And the other one is the size. the homogeneity of the market.

Because you often see that, for example, Monsanto was quite a monopolist in terms of soybeans, but it was not a monopolist on the seed market, right? And that's a key difference. So how much are they actually controlling? Are they controlling everything? Are they really gatekeepers, or are they just in a niche? But they are controlled, and of course companies use that typically in the way they sell themselves to potential buyers stuff that they say we are market leader in this and that niche. I always try to stress this point that the other side is also important and the other side is that while here we are probably not having so much of a too high market concentration to be to be no longer competitive. It doesn't really matter where we are at the moment in the input market, but for the market of the traders, we're definitely there. Because there we have five companies that basically rule everything related to our food when it comes to trade. There's hardly any trade, so we can say we have some independence of trade, and that holds for many EU countries. It doesn't work for many other parts of the world, right? They have much more trade dependencies in terms of food.

And for them, they are really dependent. They are not even regional powerhouses, but they are global ones. And these global ones, they are active in almost all the markets that are relevant in terms of trade volume in the food world. That's what the ABCD comment is, right? we definitely have also some issues with antitrust laws and them actually doing price fixing and other issues and for this we have seen that actually the potential competition intensity among trainers is not as high I mean the intensity is not as high as it could be because the potential one is much higher than the actual one alright and these antitrust laws They will come up more and will come up today again. I think they are one of three pillars of markets. We often talk about the right to safety, that we have safe food, right? We talk about the right to be informed. These are the three rights that Kennedy has formulated in his very important speech, already one or 50 years ago, but three rights, consumer rights that he said. One is the right to safety, that we get safe food. And you know we have institutions like EFSA and others that try to set standards and everything.

We have the right to be informed, which is about what kind of information are we allowed to claim, making sure that we cannot say anything that's not true. That's why we also have lifetime regulation and so on. And then we have the last one, which is the right to choose. and that's actually a consumer right that we should be able to choose between more than one supplier because that gives us a better structure to fulfill our needs and that means some competition among the suppliers, right? So there is a right to choose officially formulated and we do actually with our regulation a lot to protect that. Already for a while this is very known to economists that we need strong antitrust laws to protect this right to choose. However, in the end you are always playing against financial powerhouses, right? So it's also not the easiest thing to do, these IT trust regulations, to enforce them. You need very strong institutions for that. And even in Germany you could make an easy case that in Germany only since this year we have a registry for lobbyists. That means they go to the parliament or to the ministries, now they at least have to give a footprint there.

0:08:48 Speaker D: That they have to fill out that they were there. Before it was not there. And I don't know how they managed to actually don't have this kind of transparency for lobbyism. But just be aware that there is a lot of lobbyism obviously, but also other ways. And that's why antitrust laws are really hard to enforce around the globe. It doesn't matter which country you look at. Alright, so I emphasize this antitrust legislation. But we need these strong regulations. Sometimes people claim that markets function best without rules or without government interference. That's absolute bullshit. Because markets function best if you have clear, strong rules that are transparent, known to everybody, and not changed a lot of times. That's the important part. Because if you have a strong government, then the market can flourish much better than when you have a government that doesn't do anything, where just the company that does the biggest quality will win. Because that's what the consumer buys in the end, but which might be the worst in terms of social impact, in terms of longevity, in terms of environmental impact, in terms of everything, right?

2. The Role of Traders in Global Food Supply

You're basically making competition to the cheapest and worst product that might even be legally criminal, that you need child labor to make it even cheaper, or whatever we don't want, right? But this is a very important part. If you don't have strong roots, then the market will never flourish towards quality, but only towards Okay, that is a bit the prologue for today. I will go back to the traders, because that's where we left off. And still, you know, the traders, they are doing a very important function for us. I mean, there is a reason why countries are actually choosing to be dependent on us. Because in the end, they are still offering them a chance for for better food supply than we ever had, to feed countries like Egypt that are very dependent on trade. They also utilize the benefits of the world market that has been very efficient in providing food for their consumption. So that's the ABCD companies, right, that we talked about last time. We talked about how they're involved basically in everything upstream. When we talk about the farm sector, they're very involved with the farm sector because they structure it in multiple ways.

They need this information because they're trading and it's important to know what's going on in the farmlands. So they have a central role in decision through providing inputs like fertilizers, extension services, organizing the sales at harvest. We also offer health care to farmers. We also do insurance stuff, mortgages, collaborate with input providers on design of farm packages, for example, that they work together with seed companies like Syngenta or Monsanto to actually create joint packages, what kind of fertilizer is best for these kind of seeds. Things that make sense to have an efficient system, right? They're here in high volumes. where they of course can influence price in the interest. There's no doubt. So they are not price takers. If you consider economic theory, price takers, that's what we assume in an efficient market and they are not price takers. So that means already some monopolistic power. Although you would always talk about oligopoly. They often direct contracts with farmers. They have direct contracts with farmers because especially larger farmers, then they know a bit on what to expect.

Collaborate in certain ways like putting down some money in the front for them to buy some inputs or something like that then they have full control over grain elevators so in terms of shipping capacities you can hardly avoid them if you want to bring something cost effectively out of the country we have a large farm size requirement so this is all from the report that we looked at investigation and I find some interesting findings on that regard but most of it is actually publicly known and just collected by them and put in one report. There are of course very large market entry barriers which is not desirable from an economic point of view because we want new companies like in the tech industry, right? Where you always get new players. That's desirable because it would mean the competition is higher. Here it's not the case, because it's a highly cost-intensive market with a lot of infrastructure that the fixed costs are extremely high. That is for the grain elevators, but also for the ships, for having certain spots at the harbors and so on. And the other thing here, they also have storage. Profitability depends rather on volume than margins.

That's always something that's important. They do not necessarily influence prices in the way that they try to maximize selling prices. Because that's not how they roll. They roll by volume. So they want to influence in a way that most of the stuff is bought. So that can be actually beneficial to prices to some degree, right? because they rather want high volumes to ship because they get money for each volume that they ship. Some profitability factors are not within their control because that's always the issue if you're so global and these traders are probably among the most global companies that are out there in the full domain. exchange rate currency, right? They have to hedge against that and they do that. So there are lots of risks that they take on. And of course that's also to some degree how they argue to policy makers on their relevance. Then governmental trades, like when now Trump is saying something about he will change trade rules by actually putting some sort of tariffs in place. This of course has a huge effect because for them that means a different kind of volume that is shipped. So these are surely among the most purest advocates for global trade.

And we can say that global trade had also bad aspects and good aspects. It certainly has helped us to feed more people around the world, the food trade. It has helped us to utilize certain geographical certainly has also come with some costs, right, that we say maybe we need also globally better markets, stronger regulations on the world market in order to have not only the benefits but also better minimize the costs here. Okay, and of course subsidy policies can also play a role. There are export subsidies, import subsidies,

Because there are only five companies because there is a high barrier to enter their business, trade business, right? And basically after some concentration, market concentration, only five left.

I cannot even show you the history of that because it has been for a while and you have to know these trade companies, they start basically under the commonwealth already. There are some origins of that. And then you have different kind of companies like the large one here that I know the most about is here from Amsterdam that you have Louis Dreyfus which of course when the Dutch were a sea nation then they started to go to their colonies and trade a lot of stuff. And of course that already back then required shipping, harbour access, shipping skills and also in terms of knowing what to, from where to ship, in which conditions, what kind of storage you need on the way or at the harbours. In the end it's a very cost intensive structure and gets a lot of knowledge because what I showed you before, there's a lot of knowledge that they have on the farm sector that is not easy to replace, because they already have this from working so long, they know what certain farmers in the sugar cane region in Brazil are doing this year, so what kind of weather they have been exposed to, so what can you expect in terms of volume to ship from there.

They have the earliest possible information access to the farm sector in many ways, and that gives them, of course, a competitive advantage that the new company is very hard Maybe at some point, right? Maybe the time is right for some new satellite startup from Silicon Valley with lots of money going into that business and revolutionizing it by having actually a way to not need information about farmers but having so detailed cameras that they know specifically what kind of harvest farmers will have in certain regions and they might even be able to transform that sector. But at least for now there is not even a company that dares to enter that market.

Looking back to our weight exchange structures, you would call them a rather unspecialized Yeah, exported in, sorry, I have to sit down a bit, yeah. They are done in a way that many companies actually, yeah, unsplash slash just means that as long as the volume is right, they will definitely be involved in that market. And you also see that all the viewpoints that I had before here. Yeah. They're basically active in all kinds of ways in the food market. In terms of size, you could say that retailers are still bigger, although we do not know, because the kind of value creation that is happening on their level is a different question. How much do the retailers create value? Because they do logistics like the traders, but it might be that processors that actually make the product have more value addition on their part of the value chain. Alright, that's what they said before, storage, transportation, delivery. So this is for you. Here we have a bit the typical ways that what they do. This is the main means by which these firms access land. So that means the farmland, how they actually get to it. They do typically contract farming.

So if you go from one to five, what type of value chain coordination would you suspect do they have when they do contact farming with farms?

It's a vertical value chain coordination, but the question is when do you remember our hybrid value chains? what would you say of our hybrid value chains what do we have here we have this one which is the full integration hierarchical with the market approach on the other side and we have three hybrid ones modular, relational and captive yes you could say they can write it down very well So modular is a good assumption. You could say if these contents are also repeatable, that you would say there is even a relational aspect in that. But that's a good guess. So contract or supply unit is basically the same. What do you say for three? Land leasing. So these are two different points. What would you say for land leasing if they lease land for direct production? What are they actually doing in terms of coordination?

If they produce it, it's not captive. They lease the land and produce it themselves, whatever they want to ship afterwards.

Hierarchical? Yes. Subcontracting so they basically can buy the land but give it to a farmer to produce for them to then give it back to them and ship it

You would call it captive, because you can only sell afterwards to this company. You're basically making a deal that the farm is dependent on selling to you afterwards. They are dependent on you and the land in essence. The rest, land ownership is the same, right? Whether you lease land or buy land for direct production, you're still doing it yourself. And of course combinations are combinations of that. So we see modular, relational aspects, captive and hierarchical things all come into play for the traders. So basically they don't care. That's what you would say for value chain coordination. They do whatever is from their perspective the best option in this specific context. Whatever brings them the highest benefits. If a farmer offers to sell for a good price, they would never say, OK, but no, we want to buy your land. And the farmer wants to do it himself, right? So let them. They do their cost calculations. They calculate the cost on whether they think the farmer being motivated himself and then selling it to them within the contract is much more beneficial than doing it themselves. Or they think, oh, these farmers are so inefficient.

If we do it themselves, we would do it much more efficient. Let's do it ourselves. So they basically do whatever makes the most sense in this kind of context. And that means they only land around the world, but also sometimes selling it again because they think, oh, farmers want to buy it for a very good price. Okay, they buy it, they get their independence. We just make a contract with them, or even if not, we have sufficient produce from that region. So yeah, that's a very, very economic enterprise. Okay, there is direct lobbying with governments. That's another perspective that I talked about with the antitrust things. They definitely do direct lobbying. They also have former staff and decision-makers in government, right? They try to get them in politics. They hire former government officials to strengthen the networks there, that after the Korean politics you can go to these companies, ABC, and lobby on their behalf, operating at national and transnational policy levels. So of course they need to lobby from a very global perspective. And they influence definitely trade production regulations. They also act with stuff like R.S.P.O. Do you know what R.S.P.O. is? Yes?

Roundtable Sustainable Palm Oil. So basically an initiative of different actors in the food value chain around palm oil, including traders, processors, all kinds of companies, but also the farmers or representatives there, thinking about how palm oil production can be made more sustainable with less deforestation and so on. And of course you see them in these kind of initiatives as well, Because in the end, they also want a sustainable business running, right? At least that's how they market their involvement there. Yeah, they of course have a lot of things that they set out, they have a lot of risks that they take on, I already talked about that, like crop failures, political economic shifts, especially if they do direct production, but if they give it to farmers, they're of course also minimizing risks by selling that and not doing everything themselves. They also hedge funds and trade on future markets. This is just risk-minimizing.

That's a good point, a good observation that in general it sounds so easy and I also don't have the depth here to really inform you properly that price fixing

If the companies are monopolies, they can ask for higher prices because of the innovation power. And who are we to actually say, hey, but if they had a competitive market, it would have been much cheaper. And you deny that this competitive market So here we want money back. However, as you rightly said, we actually paid the price to the monopolist back when it was a monopolist, right? From an economic point of view, there is just the judgment that for politics, we should always work. As governments, we should pursue to have competitive markets, because that's how we create the most welfare for society. In these situations where we have monopolists or oligopolists, there we always have the issue that these oligopolists get much, much more of the welfare creation to the disadvantage of other players, like consumers. But in the end it's a philosophical question on how much it's a right for them to get that. It's still BS2S (?). Societies globally always pursue that. We want antitrust legislation.

Depending on the strength of government, you have actually a lot of cases like that, antitrust legislation cases run against certain companies in order to pursue a more competitive market.

An informant, like in a spy movie from the 70s, 60s, where only these telephone things that you can basically have a look into whether somebody has secret information there. I don't know. I think it's a great movie to show in the end that we know for a long time that ABCD communist traitors have too much market power and are abusing it. And from an economic point of view, I think we shouldn't, but that's just an observation that we could gain more out of this market. Just as somebody says, we are always striving towards better economies, and this is all definitely a step forward. All right, that's all for the traders. Of course, closing with this movie recommendation.

3. Processors and Retailers: Market Dynamics and Antitrust Issues

Processors and retailers. What do you think? How relevant are our antitrust, our cartel laws for this sector? Processors, retailers. Do we have more or less cartels in that sector compared to others? Part of the value chain. Any guesses?

We have much more regional market concentration going on, which also leads to, because of the size of the firms, too often to the catalogs being applied here. much more than they are in the small input sector or in the trader sector where you basically have these companies that are too small to control properly. They are not enough traders to properly control them, right? You need these kind of performance structures to get any information out there. And that's very difficult right now. So here we have always that these laws are applied to much more. Do retailers try to coordinate the value chain to gain advantages over competition? We already have this. It's just a question on whether you remember that, because we actually read a small article on that. do retailers not use the market-based approach but rather coordinate because they want to have a competitive advantage of higher quality over competitors?

We read about the food market in the UK where they import from Kenya, I think. Yeah. Alright, let's start. So, because there are so many, I try to have a little bit of perspective, but I will also dive into a more German-focused analysis in the end. Like you said, there are mostly original concentrations. The other thing is the the size homogeneity of markets. If you look into retailers, they usually control it all. There is no food retailer that only does muesli. There are probably, but it's not relevant to the food market. There used to be some countries that you have food and vegetable stores, that this is actually a separate market, but this is usually very much an independent, domestic-fueled market for fruits and vegetables. But in the EU, you often have retailers controlling all food or no food. I mean, there's not no sub-market like we had when Santo was controlling soy, but not maize or something like that. Okay, globally you see there are lots of larger companies, right, and they emphasize them in reports often. JBR2 is very relevant in Brazil for the meat market, so the red bubbles here are meat markets.

You have again Cargill that actually is also active as meat processor. because the business model gave them competitive advantage and they said before they seize opportunities around the world. And they would also give them up again if there's somebody who pays them a good price for them in a different way. We have here Friesland Campina, probably the most relevant one here close to us that could be visited. It's the one in Food Valley, close to Wageningen. But you also have the Tönnies Group, which is very known in Germany, and the Meat Post itself also had quite some scandals over labour conditions and other things. But Tönnies was very successful, even as an exporter of meat in Germany, because in Germany we would think that our costs are too high to actually export a large quantity of meat, but no. Apparently, Tunis has managed with people from East Europe that they get in bad labor conditions to process it. They have had very competitive and cheap production of meat.

This together with subsidized EU market on the farm side plus imports for soybeans and stuff that were cheap from Brazil and so on meant that actually Germany could be a competitive exporter of meat for quite some time. And this is actually coming to an end now, that we see that we can no longer compete, that China's demand, which was fueling that lot, because they have more and more people becoming sufficiently rich to buy more and more meat, they are more and more actually supplied by their domestic production, because China has built up capacities of, they have like a farm, one farm of one million pigs, something in terms of size, that Germany does not allow their structures in any way. So these future for competitive prices in meat from Germany are not good, but what they could do of course is to go to higher animal welfare standards and try to fulfill that demand. All right, but you see the companies in Germany, Tennis Group and there are a few others, but they are very limited meat producers that you can go to as a farmer. That was for pigs and there is no cap. And then we go to cartels. There are two examples from Germany. That is a meat cartel.

4. Cartels and Regional Concentration in the Meat Industry

And there you have actually lots of very small meat companies that actually collaborated. And this is a very interesting cartel case because here you still have quite some players in the German meat market being active. And they colluded to actually ask the retailer for certain prices. And you see here, this is just a list of the companies. And it's not easy to have these kind of many companies being involved. I keep that a secret, right? There's very likely an informant or somebody that hears about it and understands how much this goes against the law, the antitrust law in Germany or in the EU. And this happened also at some point, but for quite some years they had gotten extra prices from retailers. We began looking into how we started to say that meat has much more external costs than other food products. Maybe it was a good thing that they made prices higher, that maybe less consumption of it. You could always find an angle here. But still from a competition point of view it was a disaster. This one is also interesting because this is a regional cartel. That was the so-called Nord-Sugar and Süd-Sugar, which are two sugar processing companies in Germany.

And they basically were active and had an agreement that whenever a company asks you whether you can supply them with sugar, you're only supplying them if they are within your region. in Germany, right? They basically divided Germany into North and South and said like, if you're factories in that part of the country, you have to ask North so far, right? And when they had too much sugar, what they would do, they would export it. So they could still export it outside of Germany, outside the EU later on, but even within the EU, most of the parts were basically divided by who of them should supply it. And that of course meant they could ask for much better prices, because they were sure that the other one was not a competitor. They would not even give an offer to companies. If companies like Maas or smaller companies, let's say German companies like Brandt, would ask for sugar from Germany, would ask for more sugar, then there's no way they could get Südsugar to actually make them an offer on sugar. And that goes again to our two dimensions, right? We have regional cutouts and we have the heterogeneity. But in the end there was not much heterogeneity in sugar.

There was no company that claimed our sugar as the best. Okay, question for you guys. Maybe that's a good question to ask here. You see here on the right, the pork industry and how much we produce pigs in Germany, where we produce them, where we produce more than 300 hectares. No, 300,000 hectares. And this one here is for cattle. So what you notice on that German map is that there are certain regions where we produce much more of a certain type, right? Any idea on why we have this regional concentration? Why do we have regional concentration?

the meat preferences are not that different. They slightly vary from rural to urban area with a bit higher consumption in rural areas, but it's nothing that even closely resembling that. That's a good guess. Any other ideas? Why do we have regional concentration in production? Because, you know, from British point of view, it doesn't make sense, right? Why would you not try to grow into an area where there's no other person, no other farm that they can buy from? Are you producing pigs here? Or here? Or here? Or here?

You have infrastructure in these regions. You have veterinarians. You have slaughterhouses. And of course, you don't want to ship the pigs all around the country for 300 kilometers or something. That's not desirable, not just from animal welfare, but also from a cost perspective. It's good to have also the ones that build the animal housing, right? These kind of industries, input providers for that specific industries. It's an advantage if they are locally available. So you see that farmers often actually do what the neighbors do. And that's also something we said at the beginning. Farms, there are so many, they are not competing in any way with farmers. They are rather here at the very end because there are so many. And then you would see that these farmers that are not competing actually do the opposite. They are collaborating. They are collaborating in a way that they look to what the neighbor does and say, OK, you have expertise for that if you tell me stuff early.

Thing or two about it i might be able to copy some of it right it has a very different approach it's not ideal for competition point of view but of course comes with some benefits and that's why we see this regional concentration and region concentration can see it's not bad but even in the big farm we also see already some issues for that because what you will see is the diameter side really have issues with groundwater because of too much nitrogen coming from the feces. And farmers actually now having to spend a lot on logistics just to get the feces in a different region where the soil actually still needs the nitrogen, which has a value, right? But that's because of too much nitrogen, you actually have higher costs of sanitation, of preparing the water, the drinking water, because you need to filter out a lot of the nitrogen, which is not a cheap process. And that means that costs for water preparation are higher than we need. We are creating external costs, very much economic external costs. And this is not everything, but you can talk about more. There is of course natural resources that often limit these regional concentrations. There is also the market thing to do.

We prefer to have actually stuff from our region in terms of meat. We don't want stuff being shipped to us from somewhere else. Many consumers believe in the regional value chain or the local value chain. And of course it would be nice for this kind of goods where this is possible to have such regional independent value chains that are not dependent on global trade and what this and that dictator thinks. You know how Putin, for example, used wheat as a negotiation point in the Ukraine war to work with neighboring countries by just letting the Ukraine wheat being shipped to the Mediterranean Sea only very carefully and very selectively. But yeah, it comes also with benefits. Maybe a benefit that we overlooked. bar technology, picture suppliers, I will talk about most of them. Have you seen this picture before? Yeah. Have you? Yeah? Yeah, it's quite a popular one actually. It's also used a bit like, these companies rule our world. Because they are just a few processors that actually own a lot of the consumer brands. Again, it's true, globally there are a few processors that own a lot globally in terms of what we eat, what we actually buy in the supermarket.

5. Retail Market Dynamics and Brand Competition

However, they are typically, same as Nestle, much smaller than the retailers and what you see in the last decade is that retailers start their own brands. They say like, oh, they have abused their monopolies. which they say, okay, companies like Coca- Cola, Mars, they say, like, we invested a lot in advertising, building brands, and this investment has to be repaid. While retailers say, hey, this product is so much cheaper to produce, why don't we start just our own brand that is very similar to yours and push that in the market, and the trans-conscious consumers will go for that. Let them experience some of the benefits or the utility from your goods. So you see that for many companies, for many retailers, they start home-branded products. You can't reprocess a product from these. And it gives them quite some competition. Still, they are probably not on the verge of extinction because they have really strong brands. There are people that believe Coca-Cola is the best cola by far, right? Or Pepsi-Cola. And that these home-branded supermarkets taste shit. And they might be right. I mean, who am I to judge quality here? I just want to tell you that they're definitely overcharged.

They're not necessarily an oligocoin (?) in the market because there are so many sub-markets. They may just have strong brands in the sub-markets, right? And these brands have been built up. So maybe they are just, how you say, making the car, the cash car. Because after building up it for many years, it might just be hard for a competitor to change preferences and habits of consumers and therefore you can really ask a price that is clearly about what it costs you to produce the product. But to some degree it might also be still a repayment of building up the brand. Still, thanks to e-tanners actually going to that market, they are not without competition. Yeah, probably any of you would find a brand you like from this portfolio. These are the retailers here in Germany. And it looks similar in other countries that you often have like a couple, not one, but mostly a handful of companies that are basically in control of the regional retail market. Again, for a picture, this is good because potential competition goes up. However, this also might lead to pollution. And of course, we also have seen issues among retailers.

In general, the German retail market is considered really competitive. So we might actually be at very much an opening point here or here with a bit of collaboration, but hardly still quite competitive. So at the moment, consumers are benefiting from that structure. But we do not know if it will be like that forever. And this is the effort. I just put the example of the Schwarz Group, which is of course Lidl and Kaufland. And they start, of course, their brands, as you can see. They start their brands for bakery products, for chocolate products, for beverage products, for ice cream products. You could say it's the same with Rewe. Rewe Feine Welt, it's called. They also start kind of products where they rip off existing processor products and produce them in a cheaper way. Sometimes they even try to build a brand and in the long run, if they're successful, they even ask for the same kind of price like the branded products or even a higher price if they think that they succeeded in making an even better product. You don't know, right? would be in even more cost trouble, because what we see is that retailers also live very much on volume that they sell, not on margins in products.

Of course, there's also a role, more role than to the traders, but still they need to sell volume. The average margin is not too high, while the margin for the home brands is usually a bit higher, because there they It's much easier, right? Lever has the store, they can advertise in their store, they do not need to invest as much as a big processor company that has to run TV ads, I don't know, social media campaigns and so on.

But do they have their own production, processing plants or they just like a contract, they have a contract with somebody?

It in a way that let's do subcontracting, that another company produces it in their name. That's the most common one you see at the moment. Basically, you put out a demand. You want this and that product to be produced and tell us for which price you can produce that. And if they're happy, they are giving out this task to a certain company that can then And this company, in the contracts, is then basically denied their right to put their own name as producer on the product. But the product will then be property of the one that actually bought it up. This means, of course, they can make their own demands on how they balance price and quality here, or what they do. And you see that there are quite some processes, companies like Mars would not go for that. Because for them, why would they sell their considered high quality product for a cheaper price under a different brand? This also exists even, right? We have that for, it was shown for beer companies. That they said like, ah, people will not notice. So why not sell more volume by making another brand that's actually the same beer in it than in our properly build brand products. Is that clear?

I'm not sure. As a company like Prigema, it's a novel example from a food company, it's actually a German producer of clothes, I think the last one, because, you know, it's a labor intensive work to build clothes, so that's why most of them have been moved to Asia, right? but Trigema is a German supplier for the fashion industry and they have produced for Aldi and the Schwarz group so Lidl they have produced clothes under their brand of Aldi and Lidl and they have produced clothes for themselves that they set under the Trigema brand so Trigema and Aldi so in it was basically the same product They might have used different fabrics, but they still are in there somewhere noticeable with their name. And they also left this contract because they said, oh, they were asking too low prices. And then you said, no, we cannot do it. They have to go to Asia again, right? So then now it's again from Asia. If you buy clothes in these food retails, then they are mostly coming from Asia because that's where they have the better contracts. But it can be a good thing for a company, because it means, first of all, more that they can produce, right?

It can also come with benefits, but it's a tricky decision. Because if you are selling it at Trigema, you are less dependent, of course. And here you are dependent, and you can say, yeah, this year it was fine, but next year you sell it to me for two years less, and you say, I cannot do it, right? And then your whole business, let's say half of your production is no longer on board. Right, that's why we often talk about retailers as having captive value chains. They do also have different ones, relational ones as well as others, but many of them are also captive value chains, very different from cooperatives like Friesland Campina, that are still farmer-owned and actually buy the milk from the farms to become then dairy processors. There's of course a totally different paradigm in this, why we always talk about relational value chains for cooperatives. Processing companies are not really behaving much different to inhalers. That's what I wanted to highlight, going back to the sources of carbon. Here to also write a short article for you. All right. Content-wise, that's all. Occasionally, you can even see that they try to build up their own companies.

They see there's a market that they really want to engage with. But because of so much volume that they typically need, it's much easier for them to just put out. I'm not sure how that is called in English, but you basically say, I need that offering at a certain price, and then other companies can apply for that contract. Do you know what it's called in English?

Patenta.

6. Exam Preparation and Theoretical Understanding

The best recommendation is always to go to the last years if you have access to them and ask them once they've wrote the exam. It will be open questions that's for sure so it means there will be texts to write so you need to have a bit of understanding on So it will be open-ended questions, meaning that you need to be able to write down some ideas on what is asked there, right? Most of it will be on the slides. From my part, it can only be the reading tasks that we have and the slides. That is all the stuff I gave you. So it would also not be that for the serious, secret report serial secret report that we didn't have here. That will not be the case. The same for the carbon one with about vertical value chains. Yeah, of course it's very easy to ask about these different types of value chains, something, but it will not be something from that report that wasn't within our reading task. So it must be on the slides or in the reading task.

It's something I cannot tell you, because that's in his hands, whether he gives out like a, yeah, we call it a Jobprobeklausur, which is a trial exam, which is quite similar to an old exam, but of course just something where he compiles how these questions can look like. Maybe one thing you should know, which is probably time for me telling you, is that It can also be that there are graphics in the exam, right? That we also have graphics here, so that of course is something that can also be part of it, and that they are somewhat included. Typically, we have the option with concept notes that you can write something on the side so that you don't have to write everything in the exam. a full and flat example of how you want to prepare it.

So for the part of value chains, for example, we will have some reading material. Just for example, maybe we need to explain different forms of integration and understand which company in this value chain is what kind of integration or something like that?

Yeah, I would say maybe okay, because I can say it's only for my part. One thing you can be certain that it will not be about something like exact dates or not even about So it would always be on sector level or on theory level. Like we talked a lot about the basic theories we have here, for example, are workable and you can look into them. Here we have basically the transaction cost theory, right? And we have the levels of integration, which is the coordination theory, where we talk about so this of course can be linked as well as that you need to be aware of these theories and for the other one for horizontal integration we talk at length and we have it here again about competition intensity that always came up during this debate workable competition and competition intensity as a theoretical background and these of course are things that that are always that will stay relevant because they It doesn't matter which company is big now. But just what I wanted to say is that I will not ask, for example, the sales volume of a certain company at some point in time that I put on the slides. That's not what I want to teach, right? I want to teach you the general dynamics of these markets.

Yeah, it definitely is a need to have these concepts and theories clear. I mean, there are not a lot and we try to apply them a lot. And you need to have a basic understanding of the economic sectors, like the overall income sector, farm sector, trading sector.

In a sense, we could say Monsanto is almost a monopolist for the soybean seed market. This is an absolute correct statement that you can take away from this course, and I'm happy if you take correct statements away from the course. If you make it more general, say that Monsanto is a monopolist of the seed market, then of course this is a wrong statement, right? If you now imagine we would have multiple choice, then of course this ain't true. would be a right one. And of course, on how much actually the soybean market means that we have dependencies, that's fully qualitative questions. You can come to the conclusion that because I'm a farmer in Brazil in the soybean region, we are fully dependent on them, and this is not good. They overcharge me because of that, right? It may be that from a global perspective, they say, okay, Monsanto is relatively small. This is not our top priority. We have higher priorities to worry about. But that's a political debate that comes afterwards. That's not something I would ask of you. Unfortunately, we do not give you the room to have extensive time for judgments in that sense, right?

So yeah, there won't be very deep questions because it's a time constraint, so there will be open-ended questions, but maybe that requires some kind of concept, knowing of the concept theory, behind, but not writing a huge amount of text.

When I asked on the dynamics of the seed market, then you should be able to state something like this here. And when we asked on the idea of workable competition, you should be able to understand the basic graph that was here in the slides. When we talk about transaction cost theory, you should be able to talk about the general ideas about why transaction cost influences the way we organize our value chains. These are all things that matter here, but the other thing, which is I think the more interesting part, which comes of course later, if you have the basic knowledge, then it would be brilliant to have basically an essay or something about it. This you don't do an exam, right? You basically formulate a position or something on what to take, what to do about the situation, We'd rather find explanations for why the problem exists in a certain way than actually doing any step to solving it. So this cannot be part here. So your opinion is unfortunately not much asked within an exam. Which might not be a good thing because opinions are hard to judge. Take a lot of justification, that's the only thing you can judge in the end.

Absolutely. I mean, there's a reason why for processors and retailers, we have these competition laws. These are all German companies, not even very big ones. And we're still really clear about that. We have to break the laws, because it's hurting our consumers. It's hurting the way we organize our food value chain. So regional monopolies can be just as harmful as global ones. Because the global ones are much harder to control in the end, because you do not even have the national legislation, the political force against them. But it might be that the original monopoly is abusing their power much more than the other one for whatever reason. It can be the most of the issue. All right.

Now have a look again. It's close to the slides. I can only recommend that. That will remind you a bit of what we talked about. If you were here, I think it's really easy to get the priorities of what questions are more likely to expect about.

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