Defining economic characteristics of the durum wheat milling and pasta production industry:
According to the case, durum wheat quality criteria continually evolve in response to market pressure and consumer preference. Increasing demand for specific durum wheat quality attributes for different end products requires development of more rapid objective means to grade and classify wheat parcels on the basis of processing potential.
Durum wheat prices rose because of increased demand for pasta. In addition, the increase in milling capacity in the late 1990's had helped increase demand for durum wheat, which increased durum prices.
Industry's standout features:
ability to meet customer specifications with consistent quality
Value added in the durum wheat milling and pasta production industry:
Value-added processing allows farmers to retain most of the profits that are captured by processors who buy raw goods from independent farmers, prepare them according to consumer demand, and sell them to supermarkets at a high markup. The approach makes it possible for farmers to appeal to niche sectors that demand specialty or prepared foods that, at one time, only international or larger corporations could offer. In 1990, 1,084 North Dakota durum wheat farmers paid for a feasibility study of building an integrated durum milling/pasta manufacturing plant. After receiving positive results and realizing the potential for increased earnings by processing wheat into pasta locally, the farmers went ahead with the project. Their venture met with almost instant success, demonstrating the benefit of turning their raw wheat into marketable pasta. The economic consequences of processing their crop were clear. Selling durum wheat by the bushel generates $4.65, which translates into $7.76 per 100 pounds. Semolina flour milled from durum wheat sells for $12.60 per 100 pounds. Pasta sells at retail for about $1.25 per pound, or $125 per 100 pounds. The tremendous price difference between raw durum wheat and processed pasta illustrates the extent to which value is added to a product as it moves from the farm to the store. Recognizing the relatively few steps it takes to turn raw durum wheat into profitable pasta, the farmers formed the Dakota Growers Pasta (DGP) cooperative in 1991 and became one of the nation's most successful NGCs. It hired a general manager and national sales manager later in the year, and formed a board of directors to oversee all functions. DGP's facilities now consist of a grain elevator, a mill, four pasta production lines and a warehouse. Two of the production lines make short goods, such as macaroni, and two produce long goods, such as spaghetti. http://kaic.psu.edu/news/121904valueadded.htm
Industry value chain looks like:
Pg C-121 pasta value chain
How strong is competition in the industry:
The pasta industry is extremely competitive and has undergone various changes within the past decade. Globilisation and increasing competition in the pasta industry are making it more important that processors produce pasta products with quality that is consistent over time. Customers are becoming more discriminating in their quality requirements, and variability in product quality is becoming less acceptable, particularly for premium products. http://www.grainscanada.gc.ca/Pubs/confpaper/Dexter/trends/qualreq1-e.htm What competitive forces make industry attractive?
Buyers demand for high quality product, having buyer seller strategic partnerships
High level of competition
Threat foreign competitors and new entrants
Overall effect of the industry's five competitive forces:
Substitutes: other types of food
Suppliers: buyer seller strategic partnerships
Buyers: demand for constant high quality product
Potential new entrants: threat foreign competitors and new entrants Rivalry among competitors: high price competition