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

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

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

4. Shifts 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

5. 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

6. DEMAND  MAJOR PRODUCTS  PER CAPITA CONSUMPTION  PRODUCTION REGIONS

7. U.S. Milk Utilization Source: Agricultural Statistics, NASS, USDA

8. Total U.S. Milk Production and Total Commercial Disappearance, 1980-2008 Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA

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

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

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

12. Source: Fereral Milk Market Administrator, Tulsa, Dec, 2007

14. 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

15. GENERAL MILK FLOWS DIAGRAM Producer 85%-90%? Coop Handler

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

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

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

19. 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

20. 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

21. 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

22. The Milk Flow Diagram Oversimplifies A Very Complex System  Numerous Manufacturing Processes  Numerous Products  Numerous Distribution Channels

23. 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

24. 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)

25. Grocery Consolidation 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, 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

26. Top Grocery Firms by 1999 Sources: Wall Street Journal, 8/4/98 Customer Estimates, 1998 Marketing Guidebook, SuperMarket News, 6/14/99.

27. Changing Market Environment: Top Retail Food Companies Rank1980199020002001 2007 1SafewayAmericanKrogerWal-Mart* 2Kroger Wal-Mart*Kroger 3A&PSafewayAlbertson's Safeway 4LuckyA&PSafeway Costco 5Winn-Dixie SupervaluAholdUSA Supervalu *Wal-Mart includes supercenters and Sam’s Club wholesale outlets Source: Supermarket News, 2001

28. 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

29. FOOD SERVICE (Products) Bulk fluid Cheeses Bulk Class II Individual serving package Specialty products NMP/WMP/BMP ESL fluid products

30. FOOD SERVICE CATEGORY SEGMENTS Approximate Segments $ Vol. BilPercent Restaurants & Bars 75 bil 51% Fast food Full service Cafeteria/Buffet Bars Retail hosts 12 9% Travel leisure 10 7% Business institute128% Education institute107% Health care/service64% All other1510% $140 bil

31. 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

32. MASS MARKET RETAILERS Diet beverages (Slim Fast) Evaporated milk NMP based products Dried cheeses Aseptic packaged milk

33. 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

35. HEALTH FOOD STORES Protein supplements Mineral supplements Other specialty products

36. INDUSTRIAL USERS/FEED USERS Glue and adhesives Chemical proteins Calf milk replacers Starter feeds

37. Fluid 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

38. U.S. Per Capita Consumption of Fluid Milk & Cream Source: Agricultural Statistics, NASS, USDA

39. Questions?