Dairy Marketing

Dr. Roger Ginder

Econ 338

Fall 2007

Lecture # 6

Elasticity of SupplyElasticity of Supply

Percent change in quantity supplied that results from a 1% change in price

Determines how much more producers will put on the market when price increases

Determines how much less producers will put on the market when price falls

Po

P1

Qo Q1

SupplyPrice$/#

Quantity# of milk

Relatively Inelastic Supply

Po

P1

Qo Q1

Supply

Price$/#

Quantity# of milk

Relatively Elastic Supply

Shifts in the Supply CurveShifts in the Supply Curve

If we relax the assumption that all else is equal the supply curve can shift

For example assume that input costs decrease for all producers – Producers will be willing to supply more

product at all points on the supply curve– The supply curve will shift downward and to

the right

P1

Q1

So

Price

Quantity

Do

S1

Po

Qo

Factors that can shift supply:

1. New technology

2. Changes in input costs

3. Raw material or resource availability

4. Legal or government program constraints on production

Shifts in the Supply CurveShifts in the Supply Curve

If we relax the assumption that all else is equal the supply curve can shift

For example assume that the cost of feed to all producers increases– Producers will reduce the amount of milk they

are willing to produce for any given price– The supply curve will shift upward and to the

left

P1

Q1

So

Price

Quantity

Do

S1

Po

Qo

Factors that can shift supply:

1. New technology

2. Changes in input costs

3. Raw material or resource availability

4. Legal or government program constraints on production

Production Costs By RegionProduction Costs By Region

How do the different regions in the U.S. compare with respect to production costs and net returns?

What effects are the differences in cost structure likely to have on where U.S. production takes place?

Statistical RegionsStatistical Regions

MILK:NORTHEAST: New York, Pennsylvania and VermontSOUTHEAST: Florida and GeorgiaUPPER MIDWEST: Michigan, Minnesota and WisconsinCORN BELT: Iowa, Missouri and OhioSOUTHERN PLAINS: TexasPACIFIC: Arizona, California and Washington

Source: ERS, USDA

Production Costs & Returns Per Cwt., 2000

Production Costs & Returns Per Cwt., 2000

Source: ERS, USDA

Region

Gross Value of

Production

Total Cash

Expense

Net Cash

Return

Non-Cash Fixed

Expense

Total Economic

Cost

Return to Management

& Risk

U.S. $13.92 $12.69 $1.23 $3.71 $16.40 -$2.48

Corn Belt $13.81 $13.44 $0.37 $4.88 $18.32 -$4.51

Upper Midwest $13.65 $12.66 $0.99 $4.10 $16.76 -$3.11

Northeast $14.67 $14.40 $0.27 $4.26 $18.66 -$3.99

Pacific $13.03 $10.58 $2.45 $1.85 $12.43 $0.60

Southeast $16.21 $13.21 $3.00 $3.83 $17.04 -$0.83

Southern Plains $14.73 $11.89 $2.84 $3.10 $14.99 -$0.26

Source: USDA, ERS

Regional Production Returns Per Cwt., 2003

Regional Production Returns Per Cwt., 2003

Source: ERS, USDA

RegionMilk

PriceCattle Value

Other Income

Gross Value of

Production

U.S. $12.86 $1.17 $0.69 $14.72

Heartland $12.93 $1.65 $0.97 $15.55

Northern Crescent $13.41 $1.28 $0.75 $15.44

Prairie Gateway $12.62 $0.88 $0.37 $13.87

Eastern Uplands $13.78 $1.41 $0.59 $15.78

Southern Seaboard $13.99 $1.48 $1.46 $16.93

Fruitful Rim $11.92 $0.81 $0.53 $13.26

Production Costs & Returns Per Cwt., Heartland Region

Production Costs & Returns Per Cwt., Heartland Region

Source: ERS, USDA

Item 2002 2003Milk Value $12.33 $12.93Cattle Value $1.41 $1.65Other Income $0.82 $0.97 Total Value of Production $14.56 $15.55

Feed Expense $8.54 $8.45Other Variable Cash Expenses $2.92 $2.99Fixed Expenses $12.24 $12.36 Total Expenses $23.70 $23.80

Value of prod. - total costs ($9.14) ($8.25)

Value of prod. - operating costs $3.10 $4.11

Production Costs & Returns Per Cwt., Pacific Region

Production Costs & Returns Per Cwt., Pacific Region

Source: ERS, USDA

Item Vs. M'west 2002 2003Milk Value Lower $11.62 $11.92Cattle Value Lower $0.70 $0.81Other Income Lower $0.46 $0.53 Total Value of Production Lower $12.78 $13.26

Feed Expense Lower $6.71 $6.78Other Variable Cash Expenses Lower $2.14 $2.19Fixed Expenses Lower $4.91 $4.90 Total Expenses Lower $13.76 $13.87

Value of prod. - total costs Higher ($0.98) ($0.61)

Value of prod. - operating costs $3.93 $4.29

Production Costs & Returns Per Cwt., Pacific Region

Production Costs & Returns Per Cwt., Pacific Region

How is it possible for the operations in California to have lower feed costs than the Heartland operations?

It costs $.30 to $.40 per Bushel ( or about $10 to $12 per ton) to ship corn to West Coast users.

FEED COST PER CWT – IMPACT OF VOLUME Of Milk Per Cow

California = $145.00/mo to feed/cow prod @ 23,000#

Iowa = $135.00/mo to feed/cow prod @20,000#

Average Annual Feed Cost / CWT.CA = $145/mo * 12 mo = $1740 23,000# =

$7.56/cwt

Iowa = $140/mo * 12 mo = $1560 20,000# = $8.40/cwt

Iowa = $135/mo * 12 mo = $1200 20,000# = $8.10/cwt

Iowa = $130/mo * 12 mo = $1140 20,000# = $7.80/cwt

Iowa = $125/mo * 12 mo = $1080 20,000# = $7.50/cwt

# of Milk Produced

AverageCost/Cwt. Average Cost Curve

Supply

Concludes the Supply Section

QUESTIONS?

Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006

Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06

Total Milk Production

Total Commercial Disapperance

Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA

DEMAND

MAJOR PRODUCTS

PER CAPITA CONSUMPTION

PRODUCTION REGIONS

U.S. Milk Utilization (Excl. Exports)U.S. Milk Utilization (Excl. Exports)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

85 87 89 91 93 95 97 99 '01

'03

'05

Mill

ion

s o

f lb

s.

Manufactured Products Fluid Products Used On-Farm Residual

143,

389

143,

651

142,

960

145,

034

143,

893

147,

721

147,

697

151,

025

150,

714

153,

811

155,

437

154,

191

156,

259

158,

004

163,

145

167,

895

Source: Agricultural Statistics, NASS, USDA

Total U.S. Milk SupplyTotal U.S. Milk Supply

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Mill

ion

s o

f lb

s.

'06

Source: Agricultural Statistics, NASS, USDA

U.S. MILK UTILIZATION (DEMAND)

Manufactured milk products Milk lbs.Butter 24,459 14.4%Cheese

American 36,917 21.7%Other 27,597 16.2%Canned and condensed milk 1,259 0.7%

Dry whole milk 349 0.2%Ice cream/frozen 16,692 9.8%Other misc. mfg. uses 706 0.4%

Total manufacturing uses 105,961 62.3%

Fluid milk products 55,262 32.5%Used on farm 1,141 0.7%Residual 7,709 4.5%

Total Manufactured Dairy Products, U.S.Total Manufactured Dairy Products, U.S.

83,537 81,945 84,73890,559 92,795 93,657

100,356 100,471105,961

114,305115,255

121,369

102,383

95,41791,58592,493

92,20788,940

88,81784,77583,226

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05

Mill

ion

s o

f lb

s.

Source: Agricultural Statistics, NASS, USDA

Total Milk Available for Fluid Products, U.S.

Total Milk Available for Fluid Products, U.S.

52,014

52,636

53,429

54,411

55,273 55,294

54,640

56,40856,674

55,26755,496

55,105

54,543

55,06454,981

55,328 55,71255,26255,388

55,796

56,864

54,524

49,000

50,000

51,000

52,000

53,000

54,000

55,000

56,000

57,000

58,000

Mill

ion

s o

f lb

s.

Source: Agricultural Statistics, NASS, USDA

22% of the Population

34% of the MarketingsSource: Federal Milk Market Administrator, Tulsa, May, 1999.

78% of the Population

66% of the Marketings

Source: Fereral Milk Market Administrator, Tulsa, May, 1999.

GENERAL MILK FLOWS DIAGRAM

Producer

85%-90%?

Coop Handle

r

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Independent

Processor

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

Governed by FMMO if Grade A

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

Governed by FMMO if Grade A

Various types of market outlets

Various types of market outlets

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

Governed by FMMO if Grade A

Various types of market outlets

Various types of market outlets

Final consumers

Final consumers

GENERAL MILK FLOWS DIAGRAM

Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

Governed by FMMO if Grade A

Government

Various types of market outlets

Various types of market outlets

Government

Final consumers

Final consumers

The Milk Flow Diagram Oversimplifies A Very Complex System

The Milk Flow Diagram Oversimplifies A Very Complex System

Numerous Manufacturing Processes

Numerous Products

Numerous Distribution Channels

MARKET OUTLETS FOR PROCESSED MILK

• Traditional Supermarket and Convenience-store retailers

• Food service and restaurants

• Ingredients to food manufacturers

• Mass market retailers

• Health food stores

• Animal feed

• Industrial users

SUPERMARKETS & C-STORES (Products)

• Fluid products (Class I)

• Extended Shelf Life (ESL) fluid product

• Cheeses

• Class II products

• NMP based products

• Specialty products (eg. Frappuccino)

• Diet beverages (Slim Fast)

SUPERMARKETS & C-STORES (Concentration)

• The Structure of the Supermarket Industry Has Changed Radically in the Past Decade

• The Industry Has Become Very Concentrated Since the Late 1990’S

• This Has Had and Continues to Have Significant Implications for Producers

Grocery Store Consolidation in the Late 1990’s

Kroger

Albertson’s

Safeway Ahold

Super Value Fleming Food Lion Shaws/Sainsbury

Fred Meyer, Smith’s, Smitty’s, QFC & Hughes

Ralph’s & Food 4 Less Albertson’s: Buttrey, Smitty’s, Seessel’s +

Brunos American Stores: Jewel, Ames, Lucky Von’s, Dominicks, Randalls Bi-Lo, Tops, Stop & Shop, Edwards, Finast,

Giant, Giant & U.S. Foodservice, Peapod (Online Grocery)

Wetterau, Richfoods Scrivner Kash N’ Karry, Hannaford Star Markets

Grocery Acquisition, Expansion & Format Variations

Top Grocery Firms

Firm Estimated Sales

($ Billions) % of U.S.

Grocery ACV Kroger/ Fred Meyer

43.1 9.7 Albertson's 35.7 8.1 Wal*mart 32.0 7.2 Safeway 25.0 5.6 Ahold 23.5 5.3 Winn-Dixie 13.9 3.1 Publix 12.1 2.8 A&P 10.5 2.4 Food Lion 10.2 2.3 Meijer 8.6 1.9 Sub-Total "Top 10" Retail Chains 214.6 48.4% Super Valu 20.8 4.7 Fleming 15.1 3.4 Sub-Total "Top 2" Wholesalers 35.9 8.1 Total Top Firms 250.5 56.5 Total Grocery ACV 443.0 100%

Sources: Wall Street Journal, 8/4/98 Customer Estimates, 1998 Marketing Guidebook, SuperMarket News, 6/14/99.

Questions?Questions?