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
Relatively Elastic Supply
Quantity
# of milk
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
167,895
163,145
158,004
156,259
154,191
155,437
153,811
150,714
151,025
147,697
147,721
143,893
145,034
142,960
180,000
143,389
200,000
143,651
U.S. Milk Utilization
160,000
Millions of lbs.
140,000
120,000
100,000
80,000
60,000
40,000
20,000
Manufactured Products
Source: Agricultural Statistics, NASS, USDA
Fluid Products
Used On-Farm
'0
8
'0
6
'0
4
'0
1
99
97
95
93
91
89
87
85
0
Residual
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
Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA
'08
'06
'04
'02
'00
98
96
94
92
90
88
86
84
82
80
110,000
Source: Agricultural Statistics, NASS, USDA
7
5
3
140
120
100
80
60
40
20
0
190
186
182
177
171
170
170
166
168
200
'0
'0
'0
1
163
158
156
154
155
154
151
151
148
148
144
145
180
'0
99
97
95
93
91
89
143
144
143
160
87
85
Billions of lbs.
Total U.S. Milk Supply
Total Manufactured Dairy Products, U.S.
123,158
140,000
115,269
118,891
120,000
102,383
92,493
Millions of lbs.
100,000
92,207
88,940
83,226 84,775
90,559
88,817
84,738
83,537
81,945
95,417
100,356
93,657
91,585
92,795
127,241
105,961
109,055
100,471
80,000
60,000
40,000
20,000
Source: Agricultural Statistics, NASS, USDA
'0
8
'0
6
'0
4
'0
1
99
97
95
93
91
89
87
85
0
Total Milk Available for Fluid
Products, U.S.
58,000
56,864
57,000
56,000
Millions of lbs.
56,408
55,388
55,273
55,000
55,712
55,328
55,796
55,294
55,267
55,105
55,496
54,981
54,543
55,262
54,640
54,411
54,000
56,674
55,087
54,524
55,064
5
'0
7
'0
53,429
52,636
53,000
52,014
52,000
51,000
50,000
49,000
85
87
89
Source: Agricultural Statistics, NASS, USDA
91
93
95
97
99
1
'0
3
'0
55,140
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
Processor
Independent
Processor
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop
Handler
Coop
Processor
Independent
Processor
Governed
by FMMO if
Grade A
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop
Handler
Coop
Processor
Various types
of market
outlets
Independent
Processor
Various types
of market
outlets
Governed
by FMMO if
Grade A
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop
Handler
Coop
Processor
Various types
of market
outlets
Final consumers
Independent
Processor
Various types
of market
outlets
Final consumers
Governed
by FMMO if
Grade A
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop
Handler
Coop
Processor
Government
Various types
of market
outlets
Final consumers
Independent
Processor
Various types
of market
outlets
Final consumers
Governed
by FMMO if
Grade A
Government
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
n
Acquisition, Expansion & Format Variations
Kroger
n
n
n
n
n
Albertson’s
n
Safeway
Ahold
n
n
n
n
n
n
n
Super Value
Fleming
Food Lion
Shaws/Sainsbury
n
n
n
n
Fred Meyer, Smith’s, QFC & Hughes
Ralph’s & Food 4 Less
Albertson’s: Buttrey, Smitty’s, Seessel’s +
Brunos
American Stores: Jewel, Ames, Lucky
Von’s, Dominicks, Randalls
Bi-Lo, Tops, Stop & Shop, Edwards, Finast,
Giant, Giant & U.S. Foodservice, Peapod
(Online Grocery)
Wetterau, Richfoods
Scrivner
Kash N’ Karry, Hannaford
Star Markets
Top Grocery Firms by 1999
Firm
Kroger/ Fred Meyer
Albertson's
Wal*mart
Safeway
Ahold
Winn-Dixie
Publix
A&P
Food Lion
Meijer
Sub-Total "Top 10" Retail Chains
Super Valu
Fleming
Sub-Total "Top 2" Wholesalers
Total Top Firms
Total Grocery ACV
Estimated Sales
($ Billions)
% of U.S.
Grocery ACV
43.1
35.7
32.0
25.0
23.5
13.9
12.1
10.5
10.2
8.6
214.6
20.8
15.1
35.9
250.5
443.0
9.7
8.1
7.2
5.6
5.3
3.1
2.8
2.4
2.3
1.9
48.4%
4.7
3.4
8.1
56.5
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
5
Winn-Dixie Winn-Dixie Supervalu
*Wal-Mart includes supercenters and Sam’s Club wholesale outlets
Source: Supermarket News, 2001
Safeway
Costco
AholdUSA
Supervalu
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
Segments
Restaurants & Bars
Fast food
Full service
Cafeteria/Buffet
Bars
Retail hosts
Travel leisure
Business institute
Education institute
Health care/service
All other
Approximate
$ Vol. Bil
Percent
75 bil
51%
12
10
12
10
6
15
9%
7%
8%
7%
4%
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
Retail
39-41%
Food Processing
16-18%
Source: WMMB Cheese Channel Volume Study.
Foodservice
42-44%
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
Pounds
230
220
210
200
190
Source: Agricultural Statistics, NASS, USDA
7
'0
5
'0
3
'0
1
'0
99
97
95
93
91
89
87
85
180
Questions?