PORTER ANALYSIS OF THE WHEAT PROCESSING INDUSTRY: The Porter model is used to analyze the determinants of competitiveness in the

wheat processing sector. Porter uses barriers to entry, bargaining power of suppliers and buyers and the threat of substitutes to explain the rivalry in the wheat processing industry.

Rivalry
y Concentration and volume of competitors- If competing wheat millers are more concentrated and if the larger portion of the market share is owned by only a few large wheat millers the competitive landscape is less competitive.

y Industry growth rate and capacity utilization and expansion- A slow industry growth rate results in wheat mills fighting for market share. If a market is still growing wheat mills can easily increase revenues by expanding in the market.

y High wheat storage costs (silos), high input costs in the wheat production and processing industries and perishability of wheat products increases rivalry in the wheat milling sector.

y Low switching costs and low levels of product differentiation increase rivalry in the wheat milling sector.

y High exit barriers, especially regarding expensive equipment bought in the wheat milling industry to run a wheat milling plant, make it pricy to abandon a particular product. .

Entry Barriers (Threat of new Entrants) y Economies of scale- Larger wheat millers have economies of scale as the cost per unit decreases as the size of the milling plant increases or expands.

y Cost advantages- Large milling companies can bargain for better prices or discounts due to the fact that they buy more equipment or products.

y Product differentiation- A reduction in cost and economies of scale of larger wheat millers enable these companies to cut costs and invest these savings in producing differentiated products.

y Switching cost- Switching cost is the cost of switching suppliers. This is a relatively high barrier to entry as small and large millers are faced with this barrier.

y Capital requirements- Starting wheat mill is a very capital intensive procedure and the capital requirements are frequently the strongest barrier to entry.

y Access to distribution channels- Access to distribution channels to get wheat from the farmer to the mill and to get the processed wheat form the mill to the bakeries and consumers is often hampered by high transportation costs and poor logistical management.

y Governmental policies- Governmental policies regarding health and safety, traceability, the use of GM products and other standards and policies is another barrier to enter the wheat milling industry.

Bargaining power of Buyers:

y Buyer concentration, volume and information- The concentration and volume of the buyers as well as the information that they have regarding a specific product often influence the power that they have to influence the demand and thus prices of milled wheat products.

y Ability to backward integrate- The ability of the buyer to buy directly from the miller instead of through supermarkets or from other sources that sell the same product at a cheaper price increases the buyers ability to bargain.

y Availability of substitutes and product variety- The buyers bargaining power will increase as the amount of substitutes increase but also if the variety of products available increase.

y Price sensitivity- Buyers are less sensitive to price changes in inferior or normal goods, like bread, than to price changes in luxury goods.

y Brand identification- Different brands of a variety of wheat products are available and buyers will typically choose to buy those products that satisfy their needs the best in terms of quality, quantity and price.

Bargaining power of Suppliers y The more wheat millers there are in a certain region the higher the rivalry and the lower the bargaining power of one miller. y Suppliers knowledge of products value to the buyer- An increased knowledge of what the buyer requires from a specific product increases the millers ability to bargain for higher prices. y The bargaining power of millers decreases as soon as products become standardized. y Threat of forward integration- Millers that deal directly with consumers have an advantage and increased bargaining power to millers that lack this.

Threat of Substitutes y Relative price performance of substitutes and price elasticitys. As more substitutes become available the demand for the product becomes more elastic. y Cheaper substitutes for certain wheat products will be preferred especially if quality are not given up on. y Millers who produce wheat products cheaper will thus have a competitive advantage to those millers who cannot afford to produce wheat products more cheaply. y Buyer propensity to substitute - The success of cheaper substitute products however does not only depend on the product itself but also on the buyer or consumers ability and willingness to substitute the one product for the other.

Porters diamond model: Factor Conditions:

The production factors needed for a miller to be successful in the wheat milling industry includes: y y y y y y y y Cost of capital Input cost Water and land availability Productivity, cost and availability of labour Access to finance Infrastructure and operational infrastructure Cost and agreement on traceability Distance to the market

Demand Conditions

The demand conditions capture the nature and degree of demand within the nation regarding processed wheat products. These conditions are: y y y y Purchasing power Changing consumer trends Growth of informal market Size and growth of market

Related Industries: Related industries include the continuation, degree and the international competitive power of various other industries in a country that aid the wheat milling industry. The factors that influence this matter are: y Logistics y Quality and availability of imported and local inputs as well as reliability of input suppliers y State of technology, training and skills development y State of research and development and the availability of quality of information in the industry Corporate Strategy, Structure and Rivalry: Corporate strategy, structure and rivalry entail the circumstances in the home market that influence the ways in which corporations are created to grow with proper management. Generally local wheat mills that fight for survival locally have a better chance to compete internationally. y y y y y y y y y Relationships and networks Supply chain coordination Regulations and standards Level of competition Business behavior Nature of barriers to entry Nature and activities of industry organizations Pricing strategies Diversification strategies

The role of Government in the model Governments role in the Porter diamond is to act as a contender and medium to push companies to increase their goals and move to higher levels of competitive performance, thus government should: y Encourage millers in the wheat milling industry to raise their performance by implementing strict standards. y Create early demands for superior processed wheat products. y Focus on unique factor formation. y Stimulate domestic competition by restraining direct cooperation and implementing anti-competitive strategies.

The role of chance Chance events are events that have nothing to do with current situations and that cannot be controlled or influenced by a nation, government or firms such as decreases in demand, political decisions by foreign governments, shifts exchange rates, input demands and various other factors Chance can destroy or create new sources of competitive advantage

CURRENT GLOBAL INDUSTRY

CHALLENGES

FACED

BY

THE

WHEAT

The global wheat industry is faced with numerous challenges and issues that affect the effectiveness of the industry and the movement of wheat through the supply chain from the producer to the consumer. Listed below are challenges brought about by the recent economic crisis, challenges faced by farmers on farm level, challenges due to a changing market as well as more recent issues and challenges. Economic challenges Financial crisis The number of undernourished people is estimated at 1.02 billion (FAO, 2009), increasing up due to the recent economic crisis. Under nourishment is due to unemployment, a reduction in disposable income as well as unstable commodity prices and limited access to food. The economic crisis might also impact negatively on agricultural productivity and investment which will further hamper food security and nutrition especially in developing countries. During times of economic crises banks immediately reduce the availability of credit. This will prevent farmers and millers from obtaining loans to invest in production of agricultural products. Farmers and millers that obtained loans before the crisis will struggle to repay these loans possibly resulting in farmers and millers possible going bankrupt. High interest rates also constrain the farmers ability to lend money or to make decent profits to invest or reinvest in his production process. This reduction in production will result in higher dependence on imports to counter the decrease in production (Suresh, 2009). Exchange rate volatility Volatility in the exchange rate poses a major threat to producers, millers, bakers and consumers of wheat internationally. As wheat importing country, wheat prices in South Africa is highly affected by exchange rate volatility. However exchange rates not only influence the price of wheat but also have an impact on the volumes of exchange imported and exported and the destined countries.