Questions:

Part I: Risk:

What environmental risks do you see for Cargill Venezuela? Be specific.

What consequences could they have for the firm in Venezuela.

How would you manage these risks?

Part II: Pricing

What inflation would you anticipate for next year? This affects local costs/

What exchange rate would you anticipate for next year? This rate affects foreign costs.

Assume all costs are constant per kilogram except for inflation and exchange changes

How much will total costs per kilogram be next year?

Just to maintain margins at the same levels as today, how much should Cargill charge per

Kg. to distributors next year (2007) given expected inflation and devaluation?

How much profit would a farmer have per hectare if he purchases seed from Cargill?

How much profit would a farmer have per hectare if he purchases seeds from Pioneer?

Dividing the difference between these figures by the number of kilograms needed per

hectare (20) gives the additional value per kilogram given by Cargill.

Given the above, what is the maximum price that Cargill can charge without losing

customers to Pioneer?

What price would you charge? If it is not much more than the current price, check your

work.

Cargill Venezuela: The Bottleneck

In 2006, Cargill, a multinational commodity trader headquartered in Minneapolis, was the largest

privately held firm in the world. According to Freddy Dunia, sales and marketing manager of Cargill

Venezuelas hybrid seed division, Our seeds produce more corn per hectare than competitive

products and ours, unlike competing products, dont require special care. Even though we charge

high prices, our products have made us the market leader in only three years (see Table 1).

Table 1

Cargill and its competitors

Market

Average

Average Kg.

share

price per Kg. to

of white corn

(in Kg.)

distributors

produced

%

(not farmers)

per hectare

Cargill

30

$3.13

4,000

Himeca

17

$2.00

2,000

Pioneer

13

$2.50

2,800

Others (6 firms)

40

$2.00

2,000

Its important to have a great R&D department, added Mr. Dunia, because these products

have short life cycles. Our competitors will probably develop equally productive products within

five to seven years. The benefits of high technology did not come free to Cargill Venezuela.

Cargill international charges us $1.00 per Kg. of seed that we sell as a license fee.

THE VENEZUELAN ENVIRONMENT

1

To assure a local supply of corn, the Venezuelan government guaranteed farmers a price of 30

cents per Kg. of corn produced. Thus, the local price for corn was much higher than the international

market price of about 20 cents per Kg.). Without this subsidy, farmers would not grow corn in

Venezuela.

THE CYCLE OF PURCHASE, PLANTING, HARVEST AND PAYMENT

Hybrid seeds are a cross of two different species. Hybrids often have different characteristics

than either of their parents and they are generally sterile. As an example, the mule is a mammalian

hybrid. It is stronger and has greater endurance than either of its parents (a donkey and a horse) and

it is sterile. For marketers, the wonderful attribute of hybrid seeds is that farmers cant reproduce

them because they dont have the parent seeds from which the hybrid was obtained. Thus, Cargill

can sell the same farmers seed every season.

FARMERS

Growing corn cost farmers around $360 per hectare (2006), including herbicide, pesticide,

equipment rentals, hired labor, fertilizers, etc. so that seeds were only a small part of their total costs.

Farmers used one 20 Kg sack of seed per hectare.

Table 2

Cargills Market Share by Farm Size

Farm Size

Frequency, Importance

Cargills Market Share

More than 50 hectares

30-35% of farms. 50% of hectares.

64%

Less than 50 hectares

65-70% of farms. 50% of hectares.

5%

When asked why Cargill did so badly with small farmers, Freddy replied, Small farmers (less

than 50 hectares) buy in stores rather than from distributors because they dont have access to bank

or manufacturer financing for their supplies (pesticides, herbicides, seeds and fertilizers). They

depend on the government or on the stores to finance their purchases. They are unsophisticated

(often illiterate) and need technical support. Above all, they value relationships and hate to feel that

someone has taken advantage of them.

THE CHANNEL

Distributors

Almost all of Cargills sales passed through distributors that sold, warehoused and delivered

supplies to farmers. Distributors promote and deliver products, however, the do not offer financing.

The largest farmers obtained a small discount by buying directly from Cargill.

2

COMPETITION

Local retailers supplied the Venezuelan market with seed until two multinationals, Cargill and

Pioneer, arrived. Pioneer had been the leading multinational in Venezuela until Cargill brought out

its improved hybrids in 2003. The other competitors, such as Himeca, offered low prices and

presence in chains of stores that they owned. In the case of Himeca, the chain was Agroislea

Agroislea. Agroislea, offered Himeca seeds in their stores as part of a complete package of

agricultural supplies that included financing and transportation. Cargill and Pioneer only sold seeds

so they could neither offer a complete package nor financing for a complete package.

PRICE

Cargill sold seed to distributors at a price of $3.13 per Kg. and required that distributors

charge farmers at least $3.59 per Kg. This left distributors a margin of between 15 and 20%; the

highest in the industry. Freddy now had to set the price for the coming year. The task was

complicated by the uncertain exchange and inflation rates.

Annex I

Historic Exchange Rates (Bolivars per Dollar)

Year

Rate

2000

56

2001

68

2003

91

2003

148

2004

176

2005

288

2006

495

Annex II:

Inflation

Year

Inflation (%)

2000

40.66

2001

34.20

2002

31.43

2003

38.12

2004

60.82

2005

59.92

2006

99.87

(*) Source: Monthly Bulletins of the Central Bank of Venezuela.

Annex III: Summary of Key Background Figures

1$ = 500 Bolivars

Days to pay: distributors

90

Interest Rate

20%

Number of salesmen

9

% sales through distributors

95%

% direct sales

25%

Salesmen's salary (Bs./month)

900,000

Annex IV: Financial Results 2006

Dollars

$ per Kilogram

Sales

6,726,061

3.13

R&D cost (to headquarters)

2,148,000

1.00

Production cost:

1,503,600

0.70

Warehousing cost

386,40

0.18

3

Financial cost of sales: distributors

85,920

0.04

Financial cost of sales: associations

171,840

0.08

Less Cost of Goods Sold

4,296,000

2.00

Advertising and promotion

128,880

0.06

Sales force

128,880

0.06

Total costs

4,381,920

2.04

Contribution to the division

2,341,320

1.09

All local costs are converted to dollars from Bolivars at 500 Bolivars per dollar.

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