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					Dairy Marketing


  Dr. Roger Ginder
      Econ 338
      Fall 2009
     Lecture # 7
Price             Supply
 $/#

  P1

  Po




        Qo   Q1                       Quantity
                                      # of milk

        Relatively Inelastic Supply
Price
 $/#




                                     Supply

   P1

   Po




                      Qo        Q1      Quantity
                                         # of milk

        Relatively Elastic Supply
          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
     Price

                                            S1


                                           So


        P1
        Po




                                            Do


                       Q1   Qo                           Quantity

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 Utilization




                                                                                                                                                                              158,004


                                                                                                                                                                                        163,145

                                                                                                                                                                                                  167,895
                                                                                                                          150,714




                                                                                                                                              155,437




                                                                                                                                                                    156,259
                                                                                                                                                        154,191
                                                                                                                                    153,811
                                                                                          147,721

                                                                                                     147,697
                       200,000

                                            143,389




                                                                                                               151,025
                                 143,651




                                                      142,960


                                                                145,034


                                                                               143,893
                       180,000

                       160,000

                       140,000
    Millions of lbs.




                       120,000

                       100,000
                        80,000

                        60,000
                        40,000

                        20,000
                            0
                            85

                                           87

                                                      89

                                                                          91

                                                                                         93

                                                                                                     95

                                                                                                                         97

                                                                                                                                    99


                                                                                                                                                    1

                                                                                                                                                                     4

                                                                                                                                                                                 6

                                                                                                                                                                                                8
                                                                                                                                                 '0

                                                                                                                                                                  '0

                                                                                                                                                                              '0

                                                                                                                                                                                             '0
                                 Manufactured Products                                              Fluid Products                            Used On-Farm                              Residual
Source: Agricultural Statistics, NASS, USDA
                                Total U.S. Milk Production and Total
                               Commercial Disappearance, 1980-2008
      200,000
                             Total Milk Production
      190,000
                             Total Commercial Disapperance
      180,000

      170,000

      160,000

      150,000

      140,000

      130,000

      120,000

      110,000



                                                                               '00

                                                                                       '02

                                                                                             '04

                                                                                                   '06

                                                                                                         '08
             80

                    82

                          84

                                 86

                                        88

                                              90

                                                     92

                                                           94

                                                                  96

                                                                        98



Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA
                                                                          Billions of lbs.




                                                                                100
                                                                                      120
                                                                                             140
                                                                                                    160
                                                                                                           180
                                                                                                                  200




                                                       0
                                                           20
                                                                40
                                                                     60
                                                                           80
                                              85
                                                                                                   143
                                              87                                                   144
                                                                                                   143

                                              89                                                   145

                                                                                                   144

                                                                                                    148




Source: Agricultural Statistics, NASS, USDA
                                              91
                                                                                                    148

                                              93                                                    151

                                                                                                     151

                                              95                                                     154

                                                                                                     155

                                              97                                                     154

                                                                                                     156

                                              99                                                     158
                                                                                                          163
                                              '0                                                           168
                                                   1
                                                                                                          166
                                              '0                                                           170
                                                   3
                                                                                                           170
                                                                                                                        Total U.S. Milk Supply




                                              '0                                                           171
                                                   5
                                                                                                            177
                                              '0                                                                182
                                                   7
                                                                                                                 186

                                                                                                                  190
    Total Manufactured Dairy Products, U.S.
                       140,000                                                                                                    123,158
                                                                                                                         115,269        127,241
                                                                                                                              118,891
                       120,000                                                                                  105,961
                                                                                                     102,383
                                                                                             95,417                  109,055
                                                                         92,493    91,585         100,356   100,471
                                                                92,207
                       100,000        83,226 84,775
                                                      88,940
                                                                     90,559    92,795    93,657
                                                           88,817
                                                 84,738
    Millions of lbs.




                                 83,537   81,945
                        80,000


                        60,000


                        40,000


                        20,000


                            0




                                                                                                          1


                                                                                                                    4


                                                                                                                             6


                                                                                                                                      8
                            85


                                       87


                                                89


                                                         91


                                                                  93


                                                                              95


                                                                                        97


                                                                                               99


                                                                                                        '0


                                                                                                                  '0


                                                                                                                           '0


                                                                                                                                    '0
Source: Agricultural Statistics, NASS, USDA
                                  Total Milk Available for Fluid
                                         Products, U.S.
                       58,000                                                        56,864

                       57,000                                                              56,674
                                                        55,388                   56,408              55,712   55,105
                                                                                                                       54,981   54,543     55,087
                                                             55,796    55,328
                       56,000                      55,273                                                55,496
                                                                  55,294                       55,267             55,262                       55,140
                                                                                                                           54,524   55,064
                       55,000                 54,411                       54,640
    Millions of lbs.




                       54,000            53,429

                                    52,636
                       53,000
                                52,014
                       52,000

                       51,000

                       50,000

                       49,000


                                                                                                            1


                                                                                                                     3


                                                                                                                              5


                                                                                                                                           7
                           85


                                         87


                                                  89


                                                            91


                                                                   93


                                                                                95


                                                                                          97


                                                                                                    99

                                                                                                          '0


                                                                                                                   '0


                                                                                                                            '0


                                                                                                                                         '0
Source: Agricultural Statistics, NASS, USDA
Source: Fereral Milk Market Administrator, Tulsa, Dec, 2007
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
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                   Independent
   Processor                 Processor
GENERAL MILK FLOWS DIAGRAM

                 Producer
                               10%-15%?
           85%-90%?
                   Coop
                  Handler

     Coop                   Independent   Governed
   Processor                              by FMMO if
                             Processor    Grade A
GENERAL MILK FLOWS DIAGRAM

                   Producer
                                  10%-15%?
           85%-90%?
                    Coop
                   Handler

     Coop                     Independent     Governed
   Processor                                  by FMMO if
                               Processor      Grade A

   Various types              Various types
     of market                  of market
      outlets                    outlets
GENERAL MILK FLOWS DIAGRAM

                    Producer
                                   10%-15%?
            85%-90%?
                     Coop
                    Handler

     Coop                      Independent       Governed
   Processor                                     by FMMO if
                                Processor        Grade A

    Various types              Various types
      of market                  of market
       outlets                    outlets


  Final consumers              Final consumers
        GENERAL MILK FLOWS DIAGRAM

                               Producer
                                              10%-15%?
                       85%-90%?
                                Coop
                               Handler

                Coop                      Independent       Governed
              Processor                                     by FMMO if
                                           Processor        Grade A

               Various types              Various types
Government
                 of market                  of market       Government
                  outlets                    outlets


             Final consumers              Final consumers
     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
    Grocery       Acquisition, Expansion & Format Variations

   Kroger               Fred Meyer, Smith’s, QFC & Hughes
                         Ralph’s & Food 4 Less
   Albertson’s          Albertson’s: Buttrey, Smitty’s, Seessel’s +
                          Brunos
                         American Stores: Jewel, Ames, Lucky
   Safeway
                         Von’s, Dominicks, Randalls
   Ahold
                         Bi-Lo, Tops, Stop & Shop, Edwards, Finast,
                          Giant, Giant & U.S. Foodservice, Peapod
                          (Online Grocery)
   Super Value          Wetterau, Richfoods
   Fleming              Scrivner
   Food Lion            Kash N’ Karry, Hannaford
   Shaws/Sainsbury      Star Markets
             Top Grocery Firms by 1999
                                                     Estimated Sales                        % of U.S.
                    Firm                               ($ Billions)                        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 Companies
Rank     1980                   1990                  2000          2001        2007

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

 2       Kroger                 Kroger                Wal-Mart*     Kroger      Kroger

 3       A&P                    Safeway               Albertson's Albertson's Safeway

 4       Lucky                  A&P                   Safeway       Safeway     Costco

 5       Winn-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

   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
                        Approximate
Segments                 $ Vol. Bil   Percent

Restaurants & Bars        75 bil        51%
     Fast food
     Full service
     Cafeteria/Buffet
     Bars
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
                                            Foodservice
                Retail                        42-44%
               39-41%




                      Food Processing
                         16-18%
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 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
              250

              240

              230
     Pounds




              220

              210

              200

              190

              180
              85

                       87

                                  89

                                              91

                                                   93

                                                        95

                                                             97

                                                                  99

                                                                        1

                                                                             3

                                                                                  5

                                                                                       7
                                                                       '0

                                                                            '0

                                                                                 '0

                                                                                      '0
Source: Agricultural Statistics, NASS, USDA
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