Dairy Marketing

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Dairy Marketing

• Dr. Roger Ginder
• Econ 338
• Fall 2007
• Lecture 25

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REASONS DAIRY FARMERS BELONG TO A COOPERATIVE
1. To be guaranteed a market outlet and a
price. 2. To have the best terms possible
bargained for in the marketplace. 3. To have milk
marketed efficiently from a producer perspective,
i.e., balancing, diversion, and assembly. 4. To
have the highest quality producer milk possible
be shipped to the market. 5. To be effectively
represented in legislative, regulatory, and
public relations areas. 6. To receive other
benefits such as insurance, field services, or
market information. 7. To gain information about
costs, returns, processes, and industry practices
at other levels in the channel.
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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS FOR MEMBERS

• Private Goods have the characteristic that once
  consumed by one person they cannot be consumed by
  another
• Public Goods have the characteristic that once
  produced they can be consumed by others at little
  or no marginal cost
• Some public goods can be offered so that those
  who dont pay are excluded from
  consumingExcludable Public Goods
• Others cannot be offered in a way that excludes
  those who dont share in the cost or producing
  the goodsNon-Excludable Public Goods

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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS FOR MEMBERS

• Private Goods can be consumed by only one person
• Food
• Clothing
• Barber Services
• Cars
• Houses
• Flu Shot
• Public Goods once produced can be consumed by
  others at little or no marginal cost
• Play or Novel ---
• Sporting Event
• Live Concert
• National Park
• Clean Air
• Beneficial Legislation

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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODSFOR MEMBERS

• Private Goods can be produced in optimal
  quantities. Resources are efficiently allocated.
• Public Goods May be produced in suboptimal
  quantitiesespecially non excludable public
  goods. Why?

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COOPERATIVES CREATE BOTH EXCLUDABLE BENEFITS AND
NON-EXCLUDABLE BENEFITS FOR MEMBERS
Excludable benefits can be offered in a way that
they can be consumed only by members. Those
members who use the benefits pay the cost of
producing them and only they benefit. Non-Excluda
ble benefits once producedcan be consumed by
all producers regardless of whether or not they
pay the costs incurred by the cooperative
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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS FOR MEMBERS

• Private Goods can be consumed by only one person
• Food
• Clothing
• Barber Services
• Cars
• Houses
• Flu Shot
• Public Goods once produced can be consumed by
  others at little or no marginal cost
• Play or Novel ---
• Sporting Event
• Live Concert
• National Park
• Clean Air
• Beneficial Legislation

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EXAMPLES OF EXCLUDABLE COOPERATIVE BENEFITS

• Reliable Access to a market for milk produced
• Field Services, Insurance , Market Information
• Knowledge about industry costs, returns, and
  practices in the industry
• Access to value added margins from dairy
  processing activities
• Representation and input into the legislative
  process at low cost
• Negotiation of Over-Order Premiums

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EXAMPLES ON NON-EXCLUDABLE COOPERATIVE BENEFITS
1. Balancing milk supplies among milk
handlers. 2. Operating balancing
plants. 3. Transporting milk to locations where
needed. 4. Providing fluid milk to deficit areas
seasonally. 5. Affecting policies and trade
practices in the market place in a way that is
beneficial to producers. 6. Providing leadership
for effective legislation that benefits all
producers.
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COOPERATIVES CREATE BOTH EXCLUDABLE BENEFITS AND
NON-EXCLUDABLE PUBLIC GOODS OR BENEFITS FOR
MEMBERS
The Excludable benefits can be offered in a way
that they can be consumed only by members and
do not present a problem for the
cooperative BUT.. The Non-Excludable benefits
can be consumed by all producers regardless of
whether or not they help to pay the costs
incurred by the cooperative --A free rider
problem can hurt the coop --Non-Excl. benefits
may be underprovided --Producers need to
understand these goods
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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS

• Some public goods have the characteristic that
  they become less valuable to those consuming them
  as the number of consumers increases.
• Some public goods do not become less valuable to
  individual consumers as the number of consumers
  increase and in fact the value may increase with
  more users.

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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS

• Whether or not the value of the public and
  private goods a cooperative produces Increase or
  Decrease with additional users affects its
  organizational structure
• In particular the membership structure adopted
  when the coop is formed may differ

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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODS

• Congestible Public Goods have the characteristic
  that they become less valuable to those consuming
  them as the number of consumers increases. (e.g.
  Stage Play, Live Concert, Stadium or Arena
  Sporting Event, National Park, Highway, Pass.
  Train, Swimming Pool)
• Non Congestible Public Goods do not become less
  valuable to individual consumers as the number of
  consumers increase (Over the air TV or Radio,
  Napster Music Download, Consumer Protection Law,
  Written Play or Novel)

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EXAMPLES ON NON-CONGESTIBLE COOPERATIVE BENEFITS

• Gaining Critical Mass to serve customers who
  demand very large volume
• Merchandising and hedging most commodity products
• Purchasing inputs or supplies from large
  manufacturers
• Bargaining for over order milk premiums

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EXAMPLES OF CONGESTIBLE COOPERATIVE BENEFITS

• Access to limited processing capacity for a raw
  product
• Access to limited raw materials
• Access to limited markets for value added
  products (e.g. branded products)
• Gains from intellectual property or RD
  investments made by the coop

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CONGESTIBLE VS. NON- CONGESTIBLE COOPERATIVE
BENEFITS
Where the cooperative is providing a
non-congestible public good a Traditional or Open
Membership Cooperative may work best These
Cooperatives are the most common type of
cooperatives in the Midwest and Plains
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CONGESTIBLE VS. NON- CONGESTIBLE COOPERATIVE
BENEFITS
Where the cooperative is providing a congestible
public good a Closed or Defined Membership
Cooperative may work best Sometimes called
New Generation Cooperatives in the midwest, but
they have been around on the West Coast for
nearly a century
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New Generation Cooperatives
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New Generation Cooperatives

• Closed membership cooperatives known as new
  generation cooperatives have become more popular
  in the mid-western and plains states
• Not really new but different from typical open
  membership cooperatives in mid-west
• Sun Maid Raisons
• Diamond Walnuts
• Blue Diamond Almonds
• American Crystal Sugar
• Sunsweet Prunes

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New Generation Cooperatives

• Closed membership cooperatives have been formed
  in a number of Iowa Agricultural activities
• Southwest Iowa Egg Cooperative
• West Liberty Foods--Turkeys
• A number of ethanol cooperatives
• Sow farrowing cooperatives
• Wine cooperatives
• Specialty meat cooperatives
• Ostriches
• Emu
• Fallow Deer

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New Generation Cooperatives

• Number shares issued in the cooperative are
  limited by the capacity of the cooperative
• Maximum membership is defined or limited by the
  number of shares issued
• Capital investment is required in direct
  proportion to business done with coop - up front
• There is a volume requirement or commitment to
  use the coop
• Member control
• The distribution of benefits is based on use of
  the coop
• Share may be sold to other qualified members
• Valuation of shares is at market price after they
  have been issued

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New Generation Cooperatives

• Key Characteristics
• Shares in the cooperative limited by capacity. In
  other words the total number of shares is based
  on the total capacity of the coop
• May place an upper limit on shares owned by one
  member
• Each share must be held by an eligible member
• Shares may be transferred among existing members
• Shares may be transferred to eligible non-member
• The bylaws may place certain limits on share
  transfers
• who may participate
• competitors
• legal limitations

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New Generation Cooperatives

• Membership is defined or limited by the total
  shares
• The member must meet statutory qualifications for
  membership
• A member must buy at least one share to join
• Determined by capacity of the coop and
  distribution of shares among members
• Number of members may expand only if capacity
  expands or the distribution of shares among
  existing members changes

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New Generation Cooperatives

• Key Characteristics (contd)
• Investment in direct proportion to business done
• Equity capital requirement is tied to right (and
  the obligation) to deliver or receive product or
  service
• Equity capital requirement is paid up front in
  cash
• Total equity is determined by capital required to
  build plant
• Coop is not expected to or obligated to redeem
  equities

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New Generation Cooperatives

• Key Characteristics (contd)
• Volume commitment to the coop
• Tied to number of shares owned
• Multi-year commitment (3-5 yrs.)
• Member must fulfill commitment or pay the
  liquidated damages to the coop

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New Generation Cooperatives

• Key Characteristics (contd)
• Member control
• Voting as specified in articles/bylaws
• Majority of voting members must be farmers
• Voting may be based on volume or one member - one
  vote

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New Generation Cooperatives

• Key Characteristics
• Distribution of benefits based on use
• Payment of new profits on product
  delivered/received
• Limited return on equity capital (8)
• Strict proportionality between member equity
  provided and the use of the coop
• Value added margins are distributed over raw
  product

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New Generation Cooperatives

• Key Characteristics
• Valuation of shares at market price
• Shares may increase (or fall) in value
• Industry demand for product
• Operational efficiency of the coop
• Financial management of the coop
• Entrepreneurial success

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Key Questions for Farmers Forming A Cooperative

• Who owns it?
• Who controls it?
• Who benefits?
• How are benefits distributed?
• Are the economics sound?
• Production
• Processing
• Marketing

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Limited Liability Company
Invested Assets Voting Power
Invested Assets Voting Power

• INVESTOR ORIENTED FIRM

• CLOSED FARMER COOPERATIVE

Investment
Profits
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FUTURE ROLE OF DAIRY COOPERATIVES
Dairy cooperatives will play an increasingly
important role in the marketing, processing and
distribution of milk, dairy products, milk
by-products and distribution of the milk and
products both domestically and internationally
if they change with the environment and take an
aggressive market oriented and business approach.
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Supplementary Coop Slides will not be included
on 2nd Exam
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ECONOMIC AND POLITICAL ENVIRONMENT FACING DAIRY
COOPERATIVES
1. Fewer, larger and more business oriented dairy
farmers 2. Increased market concentration in
food industry 3. Exit of investor owned firms
and need for more capital 4. Vertical
integration and contracts 5. Environmental
issues and food safety 6. Animal rights and
animal welfare 7. Technical and information
technology
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ECON AND POLITICAL ENVIRONMENT

• 8. Market oriented dairy policy vs. income
  support focus
• 9. Adapting to changes in Federal Market
  Orders
• 10. International trade and competition
• Regional shifts in milk production
• Capital requirements and acceptable operating
  margins
• Joint venture activity
• Increasingly Concentrated Retail Food Sector

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FUTURE ROLE OF DAIRY COOPERATIVES (ACTION
STRATEGIES)

• 1) Membership education
• members need to understand coop objectives,
  goals, reasons behind change, need for equity
  capital, benefits from the coop structure
• members need to feel they have input into their
  coop
• coops will always face the non-excludable
  benefits problems
• members need to see the value in resisting the
  temptation of a few extra pennies today to insure
  higher returns for tomorrow

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STRATEGIES (contd)

• 2) Director education
• dairy coops need visionary directors
• directors need to recognize the need for change
• directors need to be leaders to bring about
  appropriate changes
• directors need a strong financial and business
  understanding
• directors with input from management need to
  develop long range plans
• directors need to hold management accountable

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STRATEGIES (contd)

• 3. Meet production and marketing needs of fewer,
  more diverse, larger, more business oriented
  producers
• price alone will not be sufficient
• services will be important
• herd health
• technical information
• disaster insurance
• health insurance
• producer retirement programs
• consultants on new facilities
• financial planning
• producer contracts (reduced price risk)
• patronage based proportional voting

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STRATEGIES (contd)

• 4) Increased market power
• joint ventures
• other coops
• investor oriented firms (IOFs)
• mergers, consolidations, acquisitions
• marketing agencies-in-common (MACS)
• information sharing arrangements
• increased vertical integration
• value added activities
• move closer to consumer
• establish quality recognition brands
• improved coordination with food companies

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STRATEGIES (contd)

• 5) Market research and development
• 8,000 to 12,000 new dairy based products per year
• consider milk and its component parts as basic
  food ingredients and they are untapped
  opportunities
• industrial uses
• organic chemicals
• binders
• packaging
• domestic and international markets
• different need
• UHT processing

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STRATEGIES (contd)

• 6) Maintain a business philosophy of market
  orientation
• 7) Leaders in innovative producer pricing
• multiple component pricing
• using futures contracts
• cash forward contracts

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STRATEGIES (contd)

• 8) International marketing
• NAFTA
• GATT
• emerging nations in Eastern Central Europe
• Common Wealth of Independent States
• Use of international markets as a price
  stabilizing tool
• Commercial overseas markets
• butter
• commodities
• value added

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STRATEGIES (contd)

• 9) Public relations and political strategies
• state and federal regulations
• environmental issues
• food labeling
• food safety
• animal rights animal welfare
• dairy policy
• international trade issues
• milk pricing issues federal orders

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STRATEGIES (contd)

• 10) Rural development
• Coops have both a vested business and personal
  interest in rural America
• Coops can provide rural development leadership
• work with community leaders
• develop leadership
• young farmers programs
• youth scholarships
• rural leadership programs