Dairy Marketing

Dr. Roger GinderEcon 338Fall 2007

Lecture #24

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

Calculating Somatic Cell AdjustmentsAssume: 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

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 Milk Discount for

Marketed Excess 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

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

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

Advanced Prices Applying to Milk and Milk Components Under FMMOMarch 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 (@ Base Zone) 21 7.71 + 1.80 9.51

Class I Butterfat (@ Base Zone) 22 0.9713 + (1.80 100) 0.9893

Class I @ Test (@ Base Zone) 23 (0.965 X 9.51) + (3.5 X .9893) 12.64

March Class III and Class IV Milk and Component Prices (Announced March )* With Class II Prices That Involved Butterfat

Values Included

Component/ Eq. Equation ValueClass Price No.

Butterfat 1 (0.9497 – 0.114) : 0.82 $1.0191

Protein 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 @ 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 @ 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 @ Test 16 (3.5 X 1.0261) + (0.965 X 8.41) 11.71

Location Adjustment

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

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

Cooperatives' Share of Farm Products Marketed, 1982 & 1998

77%

11%

30%

20%

36%36%

14%

30%

86%

19%

40%43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Milk Cotton Grain Fruit & Veg Livestock Total

Perc

ent o

f Cas

h R

ecei

pts

19821998

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 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.

U.S. Dairy Cooperatives

Year Number of

Dairy Co-ops Market Share of

Milk 1950 2,072 53% 1970 971 61% 1990 264 82% 2001 204 89%

2002 196 86%

Top Dairy Coops, U.S., 1992Member Milk

Rank Coop-State Volume (bil. lbs.)

#1 AMPI, San Antonio, TX 16.50#2 Mid-America 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 O’Lakes, 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 Dairymen’s Coop Creamery Assn, Tulare, CA 3.50#25 Swiss Valley Farms Co., Davenport, IA 1.41

Source: Hoard’s Dairyman, October 10, 1993

Top Dairy Coops, U.S., 2000Member 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 O’Lakes, 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: Hoard’s Dairyman, October 10, 2001

Top Dairy Coops, U.S., 2001

Rank Cooperative Headquarters 2001 Revenue (in millions)

2001 Assets (in millions)

Rank among Top 100 Coops

#1 Dairy Farmers of America Kansas City, MO $7,999 $2,079 #2

#2 Land O'Lakes St. Paul, MN $5,973 $3,091 #4

#3 California Dairies Artesia, CA $2,242 $482 #12

#4 Foremost Farms USA Baraboo, WI $1,332 $344 #26

#5 Associated Milk Producers New Ulm, MN $1,185 $218 #29

#6 WestFarm Foods Seattle, WA $1,116 $339 #32

#7 Prairie Farms Dairy Carlinville, IL $1,105 $413 #33

#8 MD & VA Milk Producers Reston, VA $810 $90 #42

#9 Dairylea Cooperative E. Syracuse, NY $803 $80 #43

#10 Agri-Mark Methuen, MA $626 $172 #59

#11 Michigan Milk Producers Novi, MI $521 $88 #71

#12 Swiss Valley Farms Davenport, IA $473 $131 #77

#13 Alto Dairy Cooperative Waupon, WI $404 $78 #88

#14 United Dairymen of AZ Tempe, AZ $383 $69 #91

Source: National Cooperative Bank Co-op 100, www.co-op100.com

Top Dairy Coops, U.S., 2004

Rank Cooperative Headquarters 2004 Revenue (in millions)

2004 Assets (in millions)

#1 Dairy Farmers of America Kansas City, MO $8,494 $2,408

#2 Land O'Lakes St. Paul, MN $7,676 $3,200

#3 California Dairies Artesia, CA $2,536 $ 588

#4 Foremost Farms USA Baraboo, WI $1,443 $ 352

#5 Associated Milk Producers New Ulm, MN $1,319 $ 249

#6 WestFarm Foods Seattle, WA $1,297 $ 316

#7 Prairie Farms Dairy Carlinville, IL $1,184 $ 480

#8 Dairylea Cooperative E. Syracuse, NY $ 963 $ 131

#9 MD & VA Milk Producers Reston, VA $ 822 $ 116

#10 United Dairymen of AZ (14) Tempe, AZ $ 787 $ 71

#11 Agri-Mark (10) Methuen, MA $ 762 $ 265

#12 Michigan Milk Producers(11) Novi, MI $ 565 $ 86

#13 Swiss Valley Farms (12) Davenport, IA $ 525 $ 146

#14 Alto Dairy Cooperative (13) Waupon, WI $ 518 $ 78

Source: National Cooperative Bank Co-op 100, www.co-op100.com

Utilization of Milk Handled by Dairy Cooperatives, 1997

Utilization Percent of Co-op Milk

Sold as raw milk 61%

Processed or manufactured 39%

Total 100%

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

Year Co-op Share of U.S.

1992 65%

1997 61%

2002 71%

Volume of Natural Cheese Marketed by Co-ops

Co-ops' % of U.S. for 1992 1997

Cheddar 75% 70% Other American

54% 43%

Mozzarella 29% 26% Other Italian 14% 18% Other Cheese 8% 9% Total Cheese 43% 40%

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

Year Co-op % of U.S.

1992 13%

1997 14%

2002 7%

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

COOPERATIVE FINANCIAL STATEMENTS

The Balance Sheet – Lists the Resources that the Cooperative Owns and Specifies Who Has Claims Against the Resources.

Members

Creditors

Balance Sheet –Lists Resources/Claims

Assets Debt

(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

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

Balance Sheet

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.

Income Statement orOperating Statement orProfit/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)

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances –The loss reduces Equity

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.

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.

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.

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

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

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?

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