Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture # 6

Elasticity of Supply n Percent change in quantity supplied that results from a 1% change in price n Determines how much more producers will put on the market when price increases n Determines how much less producers will put on the market when price falls

PoPo P1P1 QoQo Q1Q1 Supply Price $/# Quantity # of milk Relatively Inelastic Supply

PoPo P1P1 QoQo Q1Q1 Supply Price $/# Quantity # of milk Relatively Elastic Supply

Shifts in the Supply Curve n If we relax the assumption that all else is equal the supply curve can shift n 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

P1P1 Q1Q1 SoSo Price Quantity DoDo S1S1 PoPo QoQo 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 Curve n If we relax the assumption that all else is equal the supply curve can shift n 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

P1P1 Q1Q1 SoSo Price Quantity DoDo S1S1 PoPo QoQo 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 Region n How do the different regions in the U.S. compare with respect to production costs and net returns? n What effects are the differences in cost structure likely to have on where U.S. production takes place?

Statistical Regions MILK: NORTHEAST: New York, Pennsylvania and Vermont SOUTHEAST: Florida and Georgia UPPER MIDWEST: Michigan, Minnesota and Wisconsin CORN BELT: Iowa, Missouri and Ohio SOUTHERN PLAINS: Texas PACIFIC: Arizona, California and Washington Source: ERS, USDA

Production Costs & Returns Per Cwt., 2000 Source: ERS, USDA

Source: USDA, ERS

Regional Production Returns Per Cwt., 2003 Source: ERS, USDA

Production Costs & Returns Per Cwt., Heartland Region Source: ERS, USDA

Production Costs & Returns Per Cwt., Pacific Region Source: ERS, USDA

Production Costs & Returns Per Cwt., Pacific Region n How is it possible for the operations in California to have lower feed costs than the Heartland operations? n 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 23,000# Iowa = $135.00/mo to feed/cow 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 Average Cost/Cwt. Average Cost Curve

Supply  Concludes the Supply Section  QUESTIONS?

Total U.S. Milk Production and Total Commercial Disappearance, Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA

DEMAND  MAJOR PRODUCTS  PER CAPITA CONSUMPTION  PRODUCTION REGIONS

U.S. Milk Utilization (Excl. Exports) Source: Agricultural Statistics, NASS, USDA

Total U.S. Milk Supply Source: Agricultural Statistics, NASS, USDA

Total Manufactured Dairy Products, U.S. Source: Agricultural Statistics, NASS, USDA

Total Milk Available for Fluid Products, U.S. Source: Agricultural Statistics, NASS, USDA

22% of the Population 34% of the Marketings Source: 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 Handler

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Independent Processor

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Coop Processor Independent Processor

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Coop Processor Independent Processor Governed by FMMO if Grade A

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Coop Processor Independent Processor Governed by FMMO if Grade A Various types of market outlets

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Coop Processor Independent Processor Governed by FMMO if Grade A Various types of market outlets Final consumers

GENERAL MILK FLOWS DIAGRAM Producer 10%-15%? 85%-90%? Coop Handler Coop Processor Independent Processor Governed by FMMO if Grade A Government Various types of market outlets Government Final consumers

The Milk Flow Diagram Oversimplifies A Very Complex System n Numerous Manufacturing Processes n Numerous Products n 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 n Kroger n Albertson’s n Safeway n Ahold n Super Value n Fleming n Food Lion n Shaws/Sainsbury n Fred Meyer, Smith’s, Smitty’s, QFC & Hughes n Ralph’s & Food 4 Less n Albertson’s: Buttrey, Smitty’s, Seessel’s + Brunos n American Stores: Jewel, Ames, Lucky n Von’s, Dominicks, Randalls n Bi-Lo, Tops, Stop & Shop, Edwards, Finast, Giant, Giant & U.S. Foodservice, Peapod (Online Grocery) n Wetterau, Richfoods n Scrivner n Kash N’ Karry, Hannaford n Star Markets Grocery Acquisition, Expansion & Format Variations

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

Questions?