Dairy Marketing

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Dairy Marketing

• Dr. Roger Ginder
• Econ 338
• Fall 2007
• Lecture 24

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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 lt350,000 somatic
  cells/liter
• Negative adjustment for gt350,000 somatic
  cells/liter
• Amount of adjustment based on NASS price 40
  block cheese

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Calculating Somatic Cell Adjustments
Assume 1. SSC price adjuster of .0005 2.
Average NASS 40 block price 50.104
(1.2526/) STEP 1 Calculate 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 II Calculate 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


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STEP III Calculate value of higher (lower) milk
quality on revenue from volume marketed during
the period 50 cows _at_ 16,000 /cow If somatic
cell count is 500000 or 150,000 SSC gt Standard
350,000 (a) 8000 cwt. (-9.45 ) (756.00) of
Milk Discount for Marketed Excess cells If
Somatic cell count is 100,000 or 250,000 SSC lt
Standard 350,000 (b) 8000 (15.75
/cwt) 1260.00 Absolute difference in revenue
2016.00 on 8000 cwt. marketed
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Revenue Difference on 200 Cow Herd _at_ 19,000/Head
(a) 38,000 cwt (-9.45 /cwt) (3591) (b) 38,000
cwt (15.75 /cwt) 5985 Absolute
Revenue Diff 9576
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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 Cheese 1.1084 1.1093 Dry
Whey 0.1800 0.1780 Nonfat Dry Milk 1.0104 1.0094
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Advanced Prices Applying to Milk and Milk
Components Under FMMO March 2000 (Reported
February 18, 2000)
Component/Class Price Eq. No. Equation Value
Butterfat 17 (0.9105 0.114)
0.82 0.9713 Protein 18 (1.1084 0.1702) X 1.405
(1.1084 0.1702) X 1.582 0.9713 X
1.28 1.9747 Other Solids 19 (0.1800 0.137)
0.968 0.0444 Nonfat Milk Solids 11 (1.0104
0.137) ? 1.02 0.8563 Class IV Skim Milk Price
Factor 12 9.0 X 0.8563 7.71 Class II Skim
Milk 13 7.71 0.70 8.41 Class II Nonfat
Solids 14 8.41 ? 9.0 0.9344 Class III Skim Milk
Price Factor 20 3.1 X 1.9747 5.9 X
0.0444 6.38 Class I Skim Milk (_at_ Base
Zone) 21 7.71 1.80 9.51 Class I Butterfat (_at_
Base Zone) 22 0.9713 (1.80 ? 100) 0.9893 Class
I _at_ Test (_at_ Base Zone) 23 (0.965 X 9.51) (3.5 X
.9893) 12.64
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March Class III and Class IV Milk and Component
Prices (Announced March ) With Class II Prices
That Involved Butterfat Values Included
Component/ Eq. Equation Value Class Price No.
Butterfat 1 (0.9497 0.114) 0.82 1.0191 Protei
n 7 (1.1093 0.1702) X 1.405 (1.1093
0.1702) X 1.582 1.0191 X 1.28 1.9166 Other
Solids 6 (0.1780 0.137) ? 0.968 0.0424 Nonfat
Milk Solids 2 (1.0094 0.137) ?
1.02 0.8553 Class IV Skim Milk 3 9.0 X
0.8553 7.70 Class IV Milk _at_ Test 4 (3.5 X 1.0191)
(0.965 X 7.70) 11.00 Class III Skim Milk 8 (3.1
X 1.9166) (5.9 X 0.0424) 6.19 Class III Milk _at_
Test 9 (3.5 X 1.0191) (0.965 X 6.19) 9.54 Class
II Butterfat Price 15 1.0191 0.007 1.0261 Class
II Milk _at_ Test 16 (3.5 X 1.0261) (0.965 X
8.41) 11.71
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Location Adjustment

• Difference in Class I differential at receiving
  plant and Class I differential at supply plant or
  at the farm

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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 _at_ 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

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NUMBER OF DAIRY COOPERATIVES AND FARM LEVEL
MARKET SHARE
Year Number of Cooperatives Market
Share 1950-51 2,072 53 1960-61 1,609
61 1969-70 971 73 1974-75 631
75 1985-86 394 78 1990-91 264
82 1994-96 237 87 2000-01
204 891 ______ ______
-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.
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U.S. Dairy Cooperatives
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Top Dairy Coops, U.S., 1992
Member Milk Rank Coop-State Volume (bil.
lbs.) 1 AMPI, San Antonio, TX 16.50 2 Mid-Amer
ica Dairymen, Springfield, MO 8.61 3 California
Milk Producers, Artesia, CA 5.76 4 Farmers
Union Milk Mkg. Coop, Madison, WI 5.64 5 Dairgold
Farms, Seattle, WA 4.92 6 Land OLakes,
Minneapolis, MN 4.20 7 Milk Mkg. Inc.,
Strongsville, OH 3.81 8 Dairymen, Inc.,
Louisville, KY 3.62 9 Atlantic Dairy Coop,
Southhampton, PA 3.53 10 Dairymens Coop
Creamery Assn, Tulare, CA
3.50 25 Swiss Valley Farms Co., Davenport, IA
1.41 Source Hoards Dairyman, October 10,
1993
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Top Dairy Coops, U.S., 2000
Member Milk Rank Coop-State Volume (bil.
lbs.) 1 Dairy Farmers of America, Kansas City,
MP 36.40 2 California Dairies, Inc., Artesia,
CA 13.60 3 Land OLakes, Minneapolis, MN
12.00 4 Northwest Dairy Assoc., Seattle,
WA 5.91 5 Dairylea Cooperative, Inc., E.
Syracuse, NY 5.50 6 Foremost Farms, USA,
Baraboo, WI 5.33 7 Associated Milk Producers,
New Ulm, MN 5.25 8 Family Dairies, USA,
Madison, WI 5.10 9 Manitowoc Milk Prod. Coop,
Manitowoc, WI 3.57 10 MD VA Milk Producers
Coop, Reston, VA 3.10 16 Swiss Valley
Farms Co., Davenport, IA 1.70 Source Hoards
Dairyman, October 10, 2001
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Top Dairy Coops, U.S., 2001
Source National Cooperative Bank Co-op 100,
www.co-op100.com
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Top Dairy Coops, U.S., 2004
Source National Cooperative Bank Co-op 100,
www.co-op100.com
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Utilization of Milk Handled by Dairy
Cooperatives, 1997
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Volume of Butter Marketed by Co-ops, 1992
,19972002
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Volume of Natural Cheese Marketed by Co-ops
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Volume of Packaged Milk Marketed by Co-ops, 1992
, 19972002
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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
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COOPERATIVE FINANCIAL STATEMENTS
The Balance Sheet Lists the Resources that the
Cooperative Owns and Specifies Who Has Claims
Against the Resources. Members Creditors
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Balance Sheet Lists Resources/Claims Assets Debt
(Property and (Lenders Claims) other items of
on the assets value owned and Equity controlled
by the (Owners Claims) company on the assets
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Balance Sheet
Current Assets Current Liabilities Cash
Payables Inventory Notes due
Accounts receivable Long term payment Fixed
Assets Long Term Liabilities Land Long
Term debt Buildings Contracts
Equipment Other Assets Equity Regional
equity Per unit retains Minority
interest withheld from check in
joint ventures Allocated to member
from profits Common stock
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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 (PL, 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.
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• Income Statement or
• Operating Statement or
• Profit/Loss Statements
• Sales
• Less Cost of good sold
• Gross Margin
• Plus Service and Other Income
• Less Expenses (including)
• Salaries, wages, benefits
• Depreciation
• Insurance
• Utilities
• Advertising
• Taxes/Licenses
• Net savings or profits (Losses)

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Balance Sheet Debt Assets Equity Clai
ms must equal assets - the balance sheet balances
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Balance Sheet Debt Assets Equity Clai
ms must equal assets - the balance sheet balances
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Balance Sheet Debt Assets Equity Clai
ms must equal assets - the balance sheet balances
The loss reduces Equity
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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.
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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.
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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.
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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 dont pay are excluded from
  consumingExcludable Public Goods
• Others cannot be offered in a way that excludes
  those who dont share in the cost or producing
  the goodsNon-Excludable Public Goods

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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

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COOPERATIVES PRODUCE BOTH PUBLIC GOODS AND
PRIVATE GOODSFOR MEMBERS

• Private Goods can be produced in optimal
  quantities. Resources are efficiently allocated.
• Public Goods May be produced in suboptimal
  quantitiesespecially non excludable public
  goods. Why?

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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-Excluda
ble benefits once producedcan be consumed by
all producers regardless of whether or not they
pay the costs incurred by the cooperative