Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 7.

Dairy MarketingDairy Marketing

Dr. Roger Ginder

Econ 338

Fall 2009

Lecture # 7

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 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

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S1

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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

DEMAND

MAJOR PRODUCTS

PER CAPITA CONSUMPTION

PRODUCTION REGIONS

U.S. Milk UtilizationU.S. Milk Utilization

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

'04

'06

'08

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 Production and Total Commercial Disappearance, 1980-2008

Total U.S. Milk Production and Total Commercial Disappearance, 1980-2008

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08

Total Milk Production

Total Commercial Disapperance

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

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

190

186

143 15

5

154

156

154

151

151

148

148

144

145

143

144 15

8 163

168

166

170

171

170 17

7

182

0

20

40

60

80

100

120

140

160

180

200

Bill

ion

s o

f lb

s.


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

83,537 81,94588,817 90,559 92,795 93,657

100,356 100,471

109,055

118,891

127,241

123,158

115,269

105,961102,383

95,41791,58592,49392,207

84,738

88,94084,77583,226

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Mill

ion

s o

f lb

s.


Total Milk Available for Fluid Products, U.S.

Total Milk Available for Fluid Products, U.S.

55,796

55,294

54,640

56,40856,674

55,26755,496

55,26255,064 55,140

55,08754,54354,98155,10555,712

56,864

55,328

55,388

55,273

54,411

53,429

52,636

52,014

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: Fereral Milk Market Administrator, Tulsa, Dec, 2007

GENERAL MILK FLOWS DIAGRAM

Path Milk Travels in the Dairy Market Channel

Types of Firms Involved in Marketing Milk

Major Institutions that Impact How Milk is Marketed


Producer

85%-90%?

Coop Handle

r


Producer

10%-15%?

85%-90%?

Coop Handle

r

Independent

Processor


Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor


Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor

Governed by FMMO if Grade A


Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor


Various types of market outlets



Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor




Final consumers

Final consumers


Producer

10%-15%?

85%-90%?

Coop Handle

r

Coop Processo

r

Independent

Processor


Government



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)

Grocery Consolidation Late 1990’s

Kroger

Albertson’s

Safeway Ahold

Super Value Fleming Food Lion Shaws/Sainsbury

Fred Meyer, Smith’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 by 1999

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.

Changing Market Environment:

Top Retail Food CompaniesRank 1980 1990 2000 2001 2007

1 Safeway American Kroger Wal-Mart* Wal-Mart*

2 Kroger Kroger Wal-Mart* Kroger Kroger

3 A&P SafewayAlbertson's

Albertson's Safeway

4 Lucky A&P Safeway Safeway Costco

5Winn-Dixie

Winn-Dixie

Supervalu AholdUSA Supervalu

*Wal-Mart includes supercenters and Sam’s Club wholesale outlets

Source: Supermarket News, 2001

Dramatic Change in the Supermarket Sector During the Past Decade

Dramatic Change in the Supermarket Sector During the Past Decade

Rise of the Walmart “Super Center”&Club Rapid Merger of Supermarket Chains in the

Late 1990’s Concentration of Buying Power in

Supermarkets Consolidation of the Regional Class I and II

Dairy Processing Firms Concentration of Class III & IV Processors

FOOD SERVICE (Products)

• Bulk fluid• Cheeses• Bulk Class II• Individual serving

package• Specialty products• NMP/WMP/BMP• ESL fluid products

FOOD SERVICE CATEGORY SEGMENTS

ApproximateSegments $ Vol. Bil Percent

Restaurants & Bars 75 bil 51%Fast foodFull serviceCafeteria/BuffetBars

Retail hosts 12 9%Travel leisure 10 7%Business institute 12 8%Education institute 10 7%Health care/service 6 4%All other 15 10%

$140 bil

LONG TERM TRENDS IN FOOD SERVICE INDUSTRY

• Consolidation of large number fragmented firms

• Development of low cost supply chains• Partnering with low labor cost

manufacturers with unique products to meet needs

• Food safety important+Manufacturer assurance about production (e.g.,

GMO, Growth Hormones, Micro Organisms)+Product safety+Product wholesomeness

MASS MARKET RETAILERS

• Diet beverages (Slim Fast)

• Evaporated milk

• NMP based products

• Dried cheeses

• Aseptic packaged milk

INGREDIENTS TO FOOD MANUFACTUERS

(Products)

• Cheeses (including dried, sauces, extracts)

• Whey powder/Whey fractions• NMP/WMP/BMP• Buttermilk (fluid)• Class II products• Fluid milk• Casein• Butter/Butter Oil

Changing Cheese Market Environment

Retail39-41%

Foodservice42-44%

Food Processing16-18%

Source: WMMB Cheese Channel Volume Study.

HEALTH FOOD STORES

• Protein supplements

• Mineral supplements

• Other specialty products

INDUSTRIAL USERS/FEED USERS

• Glue and adhesives• Chemical proteins• Calf milk replacers• Starter feeds

Fluid Milk & Cheese ConsumptionFluid Milk & Cheese Consumption

Two General Product Categories Account for the Majority of Per Capita Milk Consumed

Fluid Milk and Cream Account for About 205 lbs. Per Capita

Cheeses Account for About 310 lbs. Per Capita Butter, NMP, Ice Cream, Condensed and

Evaporated Milk, Account for Most of the Remainder of Per Capita Milk Consumption

U.S. Per Capita Consumption of Fluid Milk & Cream

U.S. Per Capita Consumption of Fluid Milk & Cream

180

190

200

210

220

230

240

250

85 87 89 91 93 95 97 99 '01

'03

'05

'07

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Questions?Questions?

Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 7.

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Transcript of Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 7.