1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture #24

2. The Somatic Cell Adjustment Applies to Class II & Class III & Class IV but not Class I fluid milk Excluded Class I for several reasons –Possible reduction in shelf life – no definitive data –High somatic cell count may increase rancidity/off flavor - no definitive data –70-80% of milk pooled goes to Class II, III and IV uses in some orders and if quality of that portion is adjusted adequate incentive exists Price is adjusted for each 1,000 somatic cells in relation to a base level of 350,000 somatic cells Positive adjustment for <350,000 somatic cells/liter Negative adjustment for >350,000 somatic cells/liter Amount of adjustment based on NASS price 40# block cheese

3. Calculating Somatic Cell Adjustments Assume:1. SSC price adjuster of.0005 2. Average NASS 40# block price = $50.104 (1.2526/#) STEP 1Calculate discount (premium) adjuster value per 1000 cells.0005 x $1.2526/lb = $.0006263 =.063 ¢ / 1000 cells Adjuster * NCE cheese per # = Premium (discount) per 1000 cells STEP IICalculate the dollar premium (discount) per cwt (a) If SSC tests 500,000.063 (350-500) = -9.45 ¢ / cwt. Discount for excess cell count (b) If SSC tests 100,000.063 (350-100) = +15.75 ¢/cwt Premium for lower cell count Premium (disc) / 1000 x (Standard - Actual) = Premium for low count SSC SSC

4. STEP III Calculate value of higher (lower) milk quality on revenue from volume marketed during the period 50 cows @ 16,000 #/cow If somatic cell count is 500000 or 150,000 SSC > Standard 350,000 (a)8000 cwt.(-9.45 ¢)=($756.00) of MilkDiscount for MarketedExcess cells If Somatic cell count is 100,000 or 250,000 SSC < Standard 350,000 (b)8000(15.75 ¢ /cwt)=1260.00 Absolute difference in revenue = $2016.00 on 8000 cwt. marketed

5. Revenue Difference on 200 Cow Herd @ 19,000#/Head (a)38,000 cwt (-9.45 ¢/cwt)=($3591) (b)38,000 cwt (15.75 ¢ /cwt)=$5985 Absolute Revenue Diff=$9576

6. Calculating Class Prices for FMMOs Under New Component System - March Averages for NASS Survey Prices 2-Week Monthly (February) (March) Butter$0.9105$0.9497 Cheese1.10841.1093 Dry Whey0.18000.1780 Nonfat Dry Milk1.01041.0094

7. Advanced Prices Applying to Milk and Milk Components Under FMMO March 2000 (Reported February 18, 2000) Component/Class PriceEq. No.EquationValue Butterfat17(0.9105 – 0.114) : 0.82$0.9713 Protein18(1.1084 – 0.1702) X 1.405 + {[(1.1084 – 0.1702) X 1.582] – 0.9713} X 1.281.9747 Other Solids19(0.1800 – 0.137) : 0.9680.0444 Nonfat Milk Solids11(1.0104 – 0.137)  1.020.8563 Class IV Skim Milk Price Factor129.0 X 0.85637.71 Class II Skim Milk137.71 + 0.708.41 Class II Nonfat Solids148.41  9.00.9344 Class III Skim Milk Price Factor203.1 X 1.9747 + 5.9 X 0.04446.38 Class I Skim Milk (@ Base Zone)217.71 + 1.809.51 Class I Butterfat (@ Base Zone)220.9713 + (1.80  100)0.9893 Class I @ Test (@ Base Zone)23(0.965 X 9.51) + (3.5 X.9893)12.64

8. March Class III and Class IV Milk and Component Prices (Announced March )* With Class II Prices That Involved Butterfat Values Included Component/Eq. EquationValue Class PriceNo. Butterfat1(0.9497 – 0.114) : 0.82$1.0191 Protein7(1.1093 0.1702) X 1.405 + {[(1.1093 – 0.1702) X 1.582] – 1.0191} X 1.281.9166 Other Solids6(0.1780 – 0.137)  0.9680.0424 Nonfat Milk Solids2(1.0094 – 0.137)  1.020.8553 Class IV Skim Milk39.0 X 0.85537.70 Class IV Milk @ Test4(3.5 X 1.0191) + (0.965 X 7.70)11.00 Class III Skim Milk8(3.1 X 1.9166) + (5.9 X 0.0424)6.19 Class III Milk @ Test9(3.5 X 1.0191) + (0.965 X 6.19)9.54 Class II Butterfat Price151.0191 + 0.0071.0261 Class II Milk @ Test16(3.5 X 1.0261) + (0.965 X 8.41)11.71

9. Location Adjustment Difference in Class I differential at receiving plant and Class I differential at supply plant or at the farm

10. Transportation and Assembly Credits Subtracted from pool proceeds used to calculate PPD Transportation credits –Help cover cost of moving milk to Class I markets –Applied to shipments from supply plants to distribution plants –Paid to distributing plant @ 28¢/mi/cwt –Adjusted for differences in Class I differential Assembly credits –Paid to all types of pool plants (distributing, supply, coops) –Incentive to move milk to Class I from manufacturing uses –Sometimes called “give-up” charges

12. NUMBER OF DAIRY COOPERATIVES AND FARM LEVEL MARKET SHARE YearNumber of CooperativesMarket Share 1950-512,072 53% 1960-611,609 61% 1969-70971 73% 1974-75631 75% 1985-86394 78% 1990-91264 82% 1994-9623787% 2000-01 204 89% 1______ -90.0% +68% 1 1999 figure. Sources: “Co-ops’ share of farm market, major case expenditures down in ’99, Rural Cooperative Magazine, Jan/Feb 2001; USDA Rural Development press release, “Farmer Co-op Sales, Incomes Climb in 2001,” Oct. 22, 2002.

13. U.S. Dairy Cooperatives

14. Top Dairy Coops, U.S., 1992 Member Milk RankCoop-StateVolume (bil. lbs.) #1AMPI, San Antonio, TX16.50 #2Mid-America Dairymen, Springfield, MO8.61 #3California Milk Producers, Artesia, CA5.76 #4Farmers Union Milk Mkg. Coop, Madison, WI5.64 #5Dairgold Farms, Seattle, WA4.92 #6Land O’Lakes, Minneapolis, MN4.20 #7Milk Mkg. Inc., Strongsville, OH3.81 #8Dairymen, Inc., Louisville, KY3.62 #9Atlantic Dairy Coop, Southhampton, PA3.53 #10Dairymen’s Coop Creamery Assn, Tulare, CA 3.50 #25Swiss Valley Farms Co., Davenport, IA 1.41 Source: Hoard’s Dairyman, October 10, 1993

15. Top Dairy Coops, U.S., 2000 Member Milk RankCoop-StateVolume (bil. lbs.) #1Dairy Farmers of America, Kansas City, MP36.40 #2California Dairies, Inc., Artesia, CA13.60 #3Land O’Lakes, Minneapolis, MN 12.00 #4Northwest Dairy Assoc., Seattle, WA5.91 #5Dairylea Cooperative, Inc., E. Syracuse, NY5.50 #6Foremost Farms, USA, Baraboo, WI5.33 #7Associated Milk Producers, New Ulm, MN5.25 #8Family Dairies, USA, Madison, WI5.10 #9Manitowoc Milk Prod. Coop, Manitowoc, WI3.57 #10MD & VA Milk Producers Coop, Reston, VA 3.10 #16Swiss Valley Farms Co., Davenport, IA 1.70 Source: Hoard’s Dairyman, October 10, 2001

16. Top Dairy Coops, U.S., 2001 Source: National Cooperative Bank Co-op 100, www.co-op100.com

17. Top Dairy Coops, U.S., 2004 Source: National Cooperative Bank Co-op 100, www.co-op100.com

18. Utilization of Milk Handled by Dairy Cooperatives, 1997

19. Volume of Butter Marketed by Co-ops, 1992,1997&2002

20. Volume of Natural Cheese Marketed by Co-ops

21. Volume of Packaged Milk Marketed by Co-ops, 1992, 1997&2002

22. Cooperatives Need to Generate a Positive Net Margin or Profit: WHY DO COOPERATIVES NEED PROFITS???? 1. Cooperatives use resources in the economy (e.g. Capital & Labor) 2. If there is a loss the cooperative has ended up with fewer resources than it started with---resources have been used up unproductively 3. In an open market/ free enterprise economy resources are placed in the hands of private individuals and must be managed so as to receive a positive return 4. In a centrally planned economy they are not

23. COOPERATIVE FINANCIAL STATEMENTS The Balance Sheet – Lists the Resources that the Cooperative Owns and Specifies Who Has Claims Against the Resources. Members Creditors

24. Balance Sheet –Lists Resources/Claims AssetsDebt (Property and(Lender’s Claims) other items of on the assets value owned and Equity controlled by the (Owner’s Claims) company on the assets

25. Current AssetsCurrent Liabilities Cash Payables Inventory Notes due Accounts receivable Long term payment Fixed AssetsLong Term Liabilities Land Long Term debt Buildings Contracts Equipment Other AssetsEquity Regional equity Per unit retains Minority interest withheld from check in joint ventures Allocated to member from profits Common stock Balance Sheet

26. BALANCE SHEET VS. OPERATING STATEMENT The Balance Sheet – Lists the Resources that the Cooperative Owns and Specifies Who Has Claims Against the Resources At a Given Moment in Time. The Operating Statement (P&L, Income Statement)---Summarizes Business Activity Sales Income and Expenses Over Some Period of Time. (Month, Quarter, Year) Matches Income With Expenses for Some Specified Period of Time to Determine Whether the Firm Has Made a Profit or a Loss.

27. Income Statement or Operating Statement or Profit/Loss Statements Sales LessCost of good sold Gross Margin Plus Service and Other Income LessExpenses (including) Salaries, wages, benefits Depreciation Insurance Utilities Advertising Taxes/Licenses Net savings or profits (Losses)

28. Balance Sheet Debt Assets Equity Claims must equal assets - the balance sheet balances

29. Balance Sheet Debt Assets Equity Claims must equal assets - the balance sheet balances

30. Balance Sheet Debt Assets Equity Claims must equal assets - the balance sheet balances –The loss reduces Equity

31. PRIVILEGES OF QUALIFIED DIARY COOPERATIVES UNDER FEDERAL MILK MARKETING ORDERS: 1.The cooperative is entitled to block vote for its members on most order provisions. 2.The cooperative is entitled to blend or pool the proceeds from the sale of member milk. IOF must pay at least the minimum class prices and blend prices under FMMO. BUT still there are limits on how a coop uses this right. Producers must agree. The coop MUST be competitive. 3.The cooperative may collect proceeds for its members from handlers from the sale of member milk. 4. Members of cooperatives that perform marketing services for members are exempt from market services charged non-members. 5.Cooperatives may move or direct milk in a manner not permitted proprietary handlers. Again the coop is farmer controlled.

32. CRITERIA FOR QUALIFICATIONS AS A CO-OP 1.File its articles of incorporation and bylaws with dairy division to show that it is an association of agric producers marketing milk and operating for mutual benefit of members. 2.Majority in the board must be active dairy farmers. 3.Provide member-producers a monthly market information bulletin. 4.At least 50% of business done must be with members.

33. REASONS DAIRY FARMERS BELONG TO A COOPERATIVE 1.To be guaranteed a market outlet and a price. 2.To have the best terms possible bargained for in the marketplace. 3.To have milk marketed efficiently from a producer perspective, i.e., balancing, diversion, and assembly. 4.To have the highest quality producer milk possible be shipped to the market. 5.To be effectively represented in legislative, regulatory, and public relations areas. 6.To receive other benefits such as insurance, field services, or market information. 7.To gain information about costs, returns, processes, and industry practices at other levels in the channel.

34. COOPERATIVES PRODUCE BOTH “PUBLIC GOODS” AND “PRIVATE GOODS” FOR MEMBERS Private Goods have the characteristic that once consumed by one person they cannot be consumed by another Public Goods have the characteristic that once produced they can be consumed by others at little or no marginal cost –Some public goods can be offered so that those who don’t pay are excluded from consuming—Excludable Public Goods –Others cannot be offered in a way that excludes those who don’t share in the cost or producing the goods— Non-Excludable Public Goods

35. COOPERATIVES PRODUCE BOTH “PUBLIC GOODS” AND “PRIVATE GOODS” FOR MEMBERS Private Goods: can be consumed by only one person –Food –Clothing –Barber Services –Cars –Houses –Flu Shot Public Goods once produced can be consumed by others at little or no marginal cost –Play or Novel--- –Sporting Event –Live Concert –National Park –Movie Download –Beneficial Legislation

36. COOPERATIVES PRODUCE BOTH “PUBLIC GOODS” AND “PRIVATE GOODS”FOR MEMBERS Private Goods: can be produced in optimal quantities. Resources are efficiently allocated. Public Goods: May be produced in suboptimal quantities—especially non excludable public goods. Why?

37. COOPERATIVES CREATE BOTH EXCLUDABLE BENEFITS AND NON-EXCLUDABLE BENEFITS FOR MEMBERS Excludable benefits can be offered in a way that they can be consumed only by members. Those members who use the benefits pay the cost of producing them and only they benefit. Non-Excludable benefits –once produced—can be consumed by all producers regardless of whether or not they pay the costs incurred by the cooperative