Milk Supplies and Cheese Plants

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Milk Supplies and Cheese Plants

• Chuck Nicholson
• Cornell Program on Dairy Markets Policy

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Milk Supply and Cheese Plants

• Milk supplies are important
• For the competitiveness of cheese plants
• Milk is the key input cost
• Cost can vary with regional supply demand
  (premiums)
• Manufacturing plants important
• For competitiveness of dairy farms
• Location influences milk price
• Plants and farms need each other

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Changes

• In milk supply influence good places
• For plants to be located
• In plant locations influence milk price
• New plants, expansions or closures

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National Markets, National Policy

• Manufactured dairy product markets
• National market
• 0.05 / lb to ship cheese to NYC from CA
• Limits the differences in price that can exist
• Minimum prices for milk used in cheese
• Same nationally, but premiums
• Based on product (butter, cheese) prices
• Limits price-setting ability

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Two Questions

• Have recent changes in milk supply locations
  decreased the competitiveness of cheese plants in
  NNY?
• How would a closure of a cheese plant affect
  other NY plants or farm prices?

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How to Answer?

• Use a model of the dairy value chain
• Geographical locations of milk supplies, plants,
  and product demand
• Costs of moving milk to plants, processing and
  distributing products
• Choose the processing locations to minimize the
  overall costs

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Whats a Model?

• Simplified version of reality
• Doesnt include all the detail
• Just the things we think most important
• Makes assumptions known
• Usually with math
• Generates numbers that our brains couldnt
• Complements our mental models

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USDSS Model
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The USDSS Model

• Given
• Milk supplies at a few hundred locations
• Processing plants at a few hundred locations
• Demand at a few hundred locations
• Calculate least-cost product movements
• Costs of milk assembly at plants
• Costs of product distribution from plants
• (Processing costs also)

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US Milk Supply Locations
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NE Milk Supply Locations
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US Cheese Plant Locations
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NY Cheese Plant Locations
Chateaugay
Canton
Adams
Utica
Albany
Rochester
Buffalo
Elmira
Friendship
Goshen
New York
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Model Solutions Represent

• The work of an imaginary Dairy Dictator
• Solution is least-cost for entire system
• No emotion about keeping plants in business
• Insights about some incentives for a plant to be
  at a location
• Not actual outcomes
• Many important factors omitted
• Uses data for one month (May)

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Question 1

• Have recent changes in milk supply locations
  decreased the competitiveness of cheese plants in
  NNY?

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Change in Milk Marketings
Actual May 1995 to May 2001
North Country Up, Western NY Up
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Cheese Plants Processing
Example of Solution for May 2001
Many Current Plant Locations in Optimal Solution
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Change in Cheese Processing
Model Results May 1995 Compared to May 2001
Shifts in Production Demand Affect Optimal
Processing Locations
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Change in Cheese Processing
Model Results May 1995 Compared to May 2001
Shifts have some effect on plants Two plants down
gt 10 NY processing 6 No plants close
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Question 1 Key Points

• Changes in milk supply and product demand
  location affect cheese plants
• Some plants may become less attractive
• Some plants will become more attractive
• Model shows pressures, not outcomes
• Swimming against the current?
• NY cheese plants not harmed overall
• But NY share down slightly

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Question 2

• Have recent changes in milk supply locations
  decreased the competitiveness of cheese plants in
  NNY?
• How would a closure of a cheese plant affect
  other NY plants or farm prices ?

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Assessing Plant Closure

• An experiment with the model
• Dont allow cheese production at one plant
• Max 10 increase in production at others
• Canton, NY plant chosen for analysis
• 15 of NY production in May 2001 (model)
• Compare model predictions for
• Processing location
• Milk value at plant and farm

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Effect of Canton Closure
Shift from Canton to other plants Wide
redistribution of milk in NE NY Cheese -9
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Change in Plant Milk Value
Difference With and Without Canton plant, May 2001
Milk value -0.55/cwtnear Canton Decreases
throughout NE
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Change in Farm Milk Value
Difference With and Without Canton plant, May 2001
Milk value -0.45/cwtnear Canton Small decreases
throughout NE
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Question 2 Key Points

• Closing a plant can reduce milk value
• Largest near the Canton plant
• Some effects throughout Northeast
• Help competitiveness of remaining plants?
• Increases distribution costs (and hauling)
• Reduced milk value
• Changes in milk supply and demand balance

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Conclusions

• Geographic location is important
• For the value chain
• Shifts in milk have some impact on plants
• Plants have impact on milk value
• National markets and policy
• Influence the impacts local initiatives to modify
  the value chain