Plymouth Rock... or something

There’s an interesting article in the WSJ this week about poultry farmers who grow for Pilgrim’s Pride (PPC). PPC is in bankruptcy and have canceled grower contracts with 400+ poultry growers. In poultry farming the farmers own the chicken houses and provide the labor but the poultry company (Pilgrim’s Pride, Tyson, Perdue, etc) own the birds and provide the feed. The producers get paid for every pound they put on the flock and they get extra bonuses for efficiency. If there is only one poultry company in the area, or if there are multiple companies but they are not taking new growers, then a grower is truly beholden to the poultry processing company. If the processing company cancels a grower’s contract then that grower can end up with hundreds of thousand’s of dollars of capital and/or debt that is going fallow.

One of the jarring annicdotes in the WSJ story is this one:

Last May, a tornado whipped through Center Ridge, population 1,332, demolishing two of the Dixons’ chicken houses. Their $370,000 insurance payment wasn’t enough to rebuild; they grappled with whether to quit.

Mr. Dixon says he received a visit from a Pilgrim’s representative who said, “Build them back as quick as you can and get ‘em rolling again.”

The Pilgrim’s spokesman says, “At the time of the May tornado, the company was in need of square footage for housing…But no one could have foreseen the dramatic changes that occurred in the U.S. chicken industry last summer.”

The Dixons tapped their savings to rebuild. On Aug. 1, a fresh batch of Pilgrim’s chicks took up residence. Ten days later, Pilgrim’s called to say those chicks would be the last.

There are two big business risks mentioned above. Both of these risks are difficult to deal with, but critical. The first is the risk the growers face if the poultry processing company goes bankrupt. The second is the reputational/legal risk faced by the processing company if they encourage growers to expand and then cancel their contract as happened to the Dixon’s.

The risk producers face if the poultry processor goes bankrupt is exactly the type of risk that a credit default swap (CDS) can hedge. Interestingly enough I have not heard a single mention of a poultry farmer or rural bank buying a CDS against a poultry processing company. WTF? Seems like JP Morgan would put their jeans and boots on and head out to the fly-over states and make some money. Too late now. You can’t shut the barn door once it’s on fire.

The other risk, legal/reputational, is much harder to manage. The risk is qualitative not quantitative, like credit risk. The WSJ article mentions a group of farmers who are suing PPC because the farmers think PPC made verbal promises that were not lived up to. I’m not a lawyer, I just sleep with one every night, but if the farmers can make a strong case that PPC was saying ‘go’ with one hand then ’stop’ with the other they might just have a case at which point I guess they line up behind all the other creditors in bankruptcy court. This is a hard risk to avoid and this type of mixed message issue is increasingly more common as a firm gets larger. My guess would be that the probability of a firm employee saying/doing something stupid goes up exponentially as the firm gets larger. At least PPC employees were not blogging about it… we hope.

Sean Park

I’m a reader of Sean Park’s blog, the Park Paradigm. It’s a good blog despite the fact that it has his face in the header and has the word ‘paradigm’ in the title. I know, I know, it’s an alliteration and that’s cool. Yes, if the domain name “MentalMastication.com” were not taken I would have had an alliteration too. But anyway, besides having a pretty face and a fancy blog, Sean’s a good thinker. While I’m trying to remember the difference between a hash in Perl and a data frame in R, he’s pondering the weighty strategic issues around financial service business models. I’m a practitioner of financial models and Sean buys and sells guys like me over a biscotti and venti lowfat decaf vanilla lata with extra sugar and whipped cream. But today I was reminded of Sean when I was on the phone with a colleague. I’ll call the colleague “Kim” because to use her real name, “Betty Sue Williams” would be tacky. So the conversation went like this:

Kim: “JD, I had an interesting conversation with a broker in Paris”

Me: “No kidding? I just bought some more RAM for my computer at Buy.com. Can your broker friend come install it for me, or does he still have a job.”

Kim: “No seriously, he wants to improve his models and would like our South China data.”

Me: “South China data, tell him to go fug himself. What’s he going to give us for that?”

Kim: “France data.”

Me: “Would he like that on a DVD or an FTP site?”

The way this ties back to Sean is he’s been saying for years that one of the currencies of business used to be information (rumors, inside skinny, etc.) and now it’s data.

Here’s a quote from a 2003 report written by Sean while at Dresdner Kleinwort Wasserstein

The ability to store,manage and manipulate data is the single most daunting challenge faced today in the capital markets arena and will ultimately play a determining role in defining leadership in the new era. As financial markets harness the exponentially growing power of information,their reliance on complete,robust and accurate data multiplies accordingly.Unfortunately for most financial institutions and investment banks this is an area that is too often delegated (or relegated) to the dusty corners of operations or IT and does not enjoy either the focus or the understanding by senior management that it deserves.

Sean linked to that article in a blog post this week. I was reminded of the blog post when having the discussion about data with my colleague. You know, this reliance on data and the ability to manipulate said data is why I am a VP and I write code and manipulate data. My boss? The Senior VP? Yeah, he writes code and manipulates data. This isn’t a job for code monkeys, it’s our strategic advantage.

I also got a chuckle when I read the DKW Article and saw the quote Sean used at the top from Pablo Picasso.  Remember those flat book mark pens mentioned last Thursday? They have quotes on them:

JD's Fancy Flat Pen