PepsiCo has done a deal with 300 small Mexican farmers close to their two factories to buy corn at a guaranteed price. PepsiCo saves transportation costs and the use of local farms assures it access to the type of corn best suited to its products and processes. “That gives us great leverage because corn prices don’t fluctuate so much, but transportation costs do,” said Pedro Padierna, president of PepsiCo in Mexico.
a. How do fluctuations in the price of corn and in transportation costs influence PepsiCo’s short-run cost curves?
b. How does the deal with the farmers to avoid fluctuations in costs benefit PepsiCo?