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

2. 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

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

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

5. 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

6. 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

7. 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

8. 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

9. 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?

10. 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

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

12. Source: USDA, ERS

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

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

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

16. 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.

17. 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

18. # of Milk Produced Average Cost/Cwt. Average Cost Curve

19. Supply  Concludes the Supply Section  QUESTIONS?

20. Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006 Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA

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

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

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

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

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

27. 22% of the Population 34% of the Marketings Source: Federal Milk Market Administrator, Tulsa, May, 1999.

28. 78% of the Population 66% of the Marketings Source: Fereral Milk Market Administrator, Tulsa, May, 1999.

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

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

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

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

33. 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

34. 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

35. 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

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

37. 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

38. 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)

39. 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

40. 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

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

42. Questions?