AAEA Graduate Case Study 2003

1
AAEA Graduate Case Study 2003

• Lawton Lanier Nalley
• John Michael Riley

2
Background On Ocean Spray

• 900 member cooperative (750 cranberry growers)
• Produce cranberries grapefruits
• 80 control of the industry

3
Ocean Spray as a Cooperative

• Management
• Grower members
• Implementing changes
• Marketing agreement

4
Ocean Sprays Dilemma

• Stagnant fresh market
• Saturation of the juice market
• Seasonality of cranberries
• Large increase in acres planted has adversely
  affected the overall price

5
Cranberry Industry Structure

• Imperfectly competitive market
• Competition in quantity not in price
• Ocean Spray is the dominant firm
• Strategic behavior

6
Initial Recommendation

• Given Ocean Sprays history it looks to be in
  their best interest to merge with another company

• However, grower member reluctance to this causes
  this option to not be feasible
• Therefore, other options will be explored
  from both the supply and demand sides

7
(No Transcript)
8
(No Transcript)
9
Price Flexibility

• At the mean for total acres harvested and price
  the price flexibility is 1.07
• Using the 2001 data the price flexibility is
• 3.30
• Therefore a 1 decrease in acres harvested will
  lead to a 3.30 increase in price

10
(No Transcript)
11
Freezing the Surplus

• PROS
• Smoothes price volatility
• Temporarily raises price

• CONS
• Temporary
• Downward pressure on price
• Storage costs

12
Destroying Production Excess

• PROS
• Reduction in supply
• Raises prices

• CONS
• Costs of production still exist
• Free riding
• Ethical?

13
Production Quota

• PROS
• Easy to regulate
• If successful the price will rise

• CONS
• Grower support
• Cheating
• Free riding

14
(No Transcript)
15
Easement of Production Land

• PROS
• You would retire land so that the supply
  diminishes
• Industry as whole benefits
• Offsets free riding problem

• CONS
• If yield increases supply may still go up
• Costly

16
Issuing Tradable Permits

• Tradable permits are issued to growers at the
  beginning of the growing season based on last
  seasons price flexibility and a set target price
  
• Number of permits are predetermined
• Growers can trade permits
• Amount of production is targeted at the beginning
  of the season using price flexibility

17
Issuing Tradable Permits

• PROS
• Permits can be traded between members
• With a fixed number of permits supply is
  regulated
• Market controlled
• Growers are compensated for free riding
• No costs to Ocean Spray

• CONS
• Members can not capture upside gains
• Distribution issues
• Annual vs. Permanent

18
Land Retirement Auction

• Auction based mechanism
• Willingness to accept bids are submitted by each
  grower
• Expected demand is assessed prior to growing
  season
• Producers offer supply reduction by bidding
• Lowest bids are excepted until targeted acreage
  reduction is achieved

19
Land Retirement Auction
20
Land Retirement Auction

• PROS
• Producers are compensated for free rider effects
• Market based
• Voluntary

• CONS
• Costs
• Annual or permanent
• If annual costs to grower members

21
Supply Side Verdict

• Tradable permits
• Lowest cost to the cooperative
• Market based
• Reduces free rider externalities
• Diminishes surplus

22
(No Transcript)
23
Saturation of Juice Market

• Elastic demand in the juice market
• Only control 2.3 of the market

24
Non-Carbonated Beverage Market Share
25
The Juice Solution

• Alliance with Coca-Cola / Minute Maid with the
  possibility of expanding juice market thus
  creating marketing synergy and economies of scope
• Provides access to premium shelf space in grocery
  markets without high cost

26
Seasonality of the Industry

• Demand spikes during the holiday season
• Cranberries tend to be linked with Thanksgiving
  and turkey
• Demand for fresh cranberries falls after the New
  Year

27
Curtailing Seasonal Demand

• Feed off of goods such as turkey to make
  cranberries more common throughout the year
• Product bundles maybe created with non seasonal
  products
• Pillsbury

28
Curtailing Seasonal Demand

• Product development that increases demand
  throughout the year
• Strategic alliance with Starbucks creating a
  synergetic association
• Bundling the Ocean Spray name in a muffin with a
  cup of Starbucks Coffee

29
Conclusions
Tradable Permits
Alliances


Bundling

Price