Dairy marketing

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Dairy marketing

• James Dunn
• Pennsylvania State University

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Overview

• 9.2 million cows in U.S.
• 9,600 liters/cow 21,149 lbs.
• Number of Dairy Farms 62,500 (avg 147 cows)
• About 8,300 in PA
• Population of USA 310 mil.

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• Milk markets are very regulated
• Except New Zealand, everyone is regulated for
  prices
• Policies vary
• Some work better than others
• Goals of policy important

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Common Policy Instruments

• Classified pricing different price according to
  use
• Price supports artificially keep price high
• Quotas restrict production not here, but
  often discussed
• Export subsidies
• Import restrictions
• Minimum retail prices PA Milk Marketing Board
• Maximum retail prices
• Component prices price depends on butterfat

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United States

• Classified pricing pooling 4 classes
• Support prices not supportive
• Tariffs import quotas
• Some export subsidies
• Component pricing butterfat, protein, bacteria,
  other solids

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Example October 2011Central PA
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Classified Pricing

• Distortion depends on price difference Canada
  is very distorting
• Most cost paid by milk drinkers
• Raise prices for inelastic demand

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Price supports

• Without supply control very expensive
• With surplus must have subsidized exports which
  hurts farmers elsewhere

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Price Supports

• Buy products at the equivalent of support price
  9.40/cwt. (21.3 cents/kg.)
• Three products cheese, butter, nonfat dry milk
• Tilt is how prices of various products are
  adjusted to keep purchases moderate usually
  NFDM too high

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Production quotas

• Very distorting
• Cheap for government
• Keeps farms from expanding
• Proposed new regulations have supply controls

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Export Subsidies

• Expensive
• Hurts farmers elsewhere

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Component pricing

• Helps efficiency
• Improves quality
• Very good if tied to markets

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Import protection

• Necessary with price supports
• GATT problems

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Spatial Price differentials

• Assumes deficit milk hauled from Midwest
• Adds premium to Class I Midwest price
• About 2.45/cwt. in PA
• Less in western PA
• More in Southeastern PA

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2010 avg. 18.28 Est 2011 avg 20.98
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Fluid Processors

• Dean Foods result of merger between Suiza and
  Dean largest player in fluid market about 35
• No national brand lots of local brands
• Two processors have most of Boston market Dean
  80 ?

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Why Are Farm Numbers Consolidating?

• Production efficiency
• Rate of return on capital
• Economies of scale
• Investment strategies
• Retirements
• Rising affluence in society
• Management, skill levels!

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Percent of Dairy Farms by Size and Region
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Percent of Milk Produced by Farm Size and Region
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Productivity and Farm Consolidation

• Productivity advances relentlessly
• Fewer cows are needed
• Farms get bigger
• 100 year trend
• Some farmers are always struggling
• Need to have some jobs outside of agriculture
  available

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Trade Policy

• Dairy Export Enhancement Program
• Designed to keep products competitive where we
  have EU competition
• Import restrictions cant hold prices up with
  lots of cheap imports
• NAFTA supposed to get access to Mexico and
  Canada slow coming

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Exporters of Dairy Products 1995-2008
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Concluding comments

• Milk pricing is complex
• Government very involved
• Prices are still about supply demand