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Dairy Marketing
Dr. Roger Ginder
Econ 338
Fall 2007
Lecture # 6
Elasticity of SupplyElasticity of Supply
Percent change in quantity supplied that results from a 1% change in price
Determines how much more producers will put on the market when price increases
Determines how much less producers will put on the market when price falls
Po
P1
Qo Q1
SupplyPrice$/#
Quantity# of milk
Relatively Inelastic Supply
Po
P1
Qo Q1
Supply
Price$/#
Quantity# of milk
Relatively Elastic Supply
Shifts in the Supply CurveShifts in the Supply Curve
If we relax the assumption that all else is equal the supply curve can shift
For example assume that input costs decrease for all producers – Producers will be willing to supply more
product at all points on the supply curve– The supply curve will shift downward and to
the right
P1
Q1
So
Price
Quantity
Do
S1
Po
Qo
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
Shifts in the Supply CurveShifts 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
P1
Q1
So
Price
Quantity
Do
S1
Po
Qo
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
Production Costs By RegionProduction Costs By Region
How do the different regions in the U.S. compare with respect to production costs and net returns?
What effects are the differences in cost structure likely to have on where U.S. production takes place?
Statistical RegionsStatistical Regions
MILK:NORTHEAST: New York, Pennsylvania and VermontSOUTHEAST: Florida and GeorgiaUPPER MIDWEST: Michigan, Minnesota and WisconsinCORN BELT: Iowa, Missouri and OhioSOUTHERN PLAINS: TexasPACIFIC: Arizona, California and Washington
Source: ERS, USDA
Production Costs & Returns Per Cwt., 2000
Production Costs & Returns Per Cwt., 2000
Source: ERS, USDA
Region
Gross Value of
Production
Total Cash
Expense
Net Cash
Return
Non-Cash Fixed
Expense
Total Economic
Cost
Return to Management
& Risk
U.S. $13.92 $12.69 $1.23 $3.71 $16.40 -$2.48
Corn Belt $13.81 $13.44 $0.37 $4.88 $18.32 -$4.51
Upper Midwest $13.65 $12.66 $0.99 $4.10 $16.76 -$3.11
Northeast $14.67 $14.40 $0.27 $4.26 $18.66 -$3.99
Pacific $13.03 $10.58 $2.45 $1.85 $12.43 $0.60
Southeast $16.21 $13.21 $3.00 $3.83 $17.04 -$0.83
Southern Plains $14.73 $11.89 $2.84 $3.10 $14.99 -$0.26
Source: USDA, ERS
Regional Production Returns Per Cwt., 2003
Regional Production Returns Per Cwt., 2003
Source: ERS, USDA
RegionMilk
PriceCattle Value
Other Income
Gross Value of
Production
U.S. $12.86 $1.17 $0.69 $14.72
Heartland $12.93 $1.65 $0.97 $15.55
Northern Crescent $13.41 $1.28 $0.75 $15.44
Prairie Gateway $12.62 $0.88 $0.37 $13.87
Eastern Uplands $13.78 $1.41 $0.59 $15.78
Southern Seaboard $13.99 $1.48 $1.46 $16.93
Fruitful Rim $11.92 $0.81 $0.53 $13.26
Production Costs & Returns Per Cwt., Heartland Region
Production Costs & Returns Per Cwt., Heartland Region
Source: ERS, USDA
Item 2002 2003Milk Value $12.33 $12.93Cattle Value $1.41 $1.65Other Income $0.82 $0.97 Total Value of Production $14.56 $15.55
Feed Expense $8.54 $8.45Other Variable Cash Expenses $2.92 $2.99Fixed Expenses $12.24 $12.36 Total Expenses $23.70 $23.80
Value of prod. - total costs ($9.14) ($8.25)
Value of prod. - operating costs $3.10 $4.11
Production Costs & Returns Per Cwt., Pacific Region
Production Costs & Returns Per Cwt., Pacific Region
Source: ERS, USDA
Item Vs. M'west 2002 2003Milk Value Lower $11.62 $11.92Cattle Value Lower $0.70 $0.81Other Income Lower $0.46 $0.53 Total Value of Production Lower $12.78 $13.26
Feed Expense Lower $6.71 $6.78Other Variable Cash Expenses Lower $2.14 $2.19Fixed Expenses Lower $4.91 $4.90 Total Expenses Lower $13.76 $13.87
Value of prod. - total costs Higher ($0.98) ($0.61)
Value of prod. - operating costs $3.93 $4.29
Production Costs & Returns Per Cwt., Pacific Region
Production Costs & Returns Per Cwt., Pacific Region
How is it possible for the operations in California to have lower feed costs than the Heartland operations?
It costs $.30 to $.40 per Bushel ( or about $10 to $12 per ton) to ship corn to West Coast users.
FEED COST PER CWT – IMPACT OF VOLUME Of Milk Per Cow
California = $145.00/mo to feed/cow prod @ 23,000#
Iowa = $135.00/mo to feed/cow prod @20,000#
Average Annual Feed Cost / CWT.CA = $145/mo * 12 mo = $1740 23,000# =
$7.56/cwt
Iowa = $140/mo * 12 mo = $1560 20,000# = $8.40/cwt
Iowa = $135/mo * 12 mo = $1200 20,000# = $8.10/cwt
Iowa = $130/mo * 12 mo = $1140 20,000# = $7.80/cwt
Iowa = $125/mo * 12 mo = $1080 20,000# = $7.50/cwt
# of Milk Produced
AverageCost/Cwt. Average Cost Curve
Supply
Concludes the Supply Section
QUESTIONS?
Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006
Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06
Total Milk Production
Total Commercial Disapperance
Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA
DEMAND
MAJOR PRODUCTS
PER CAPITA CONSUMPTION
PRODUCTION REGIONS
U.S. Milk Utilization (Excl. Exports)U.S. Milk Utilization (Excl. Exports)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
85 87 89 91 93 95 97 99 '01
'03
'05
Mill
ion
s o
f lb
s.
Manufactured Products Fluid Products Used On-Farm Residual
143,
389
143,
651
142,
960
145,
034
143,
893
147,
721
147,
697
151,
025
150,
714
153,
811
155,
437
154,
191
156,
259
158,
004
163,
145
167,
895
Source: Agricultural Statistics, NASS, USDA
Total U.S. Milk SupplyTotal U.S. Milk Supply
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Mill
ion
s o
f lb
s.
'06
Source: Agricultural Statistics, NASS, USDA
U.S. MILK UTILIZATION (DEMAND)
Manufactured milk products Milk lbs.Butter 24,459 14.4%Cheese
American 36,917 21.7%Other 27,597 16.2%Canned and condensed milk 1,259 0.7%
Dry whole milk 349 0.2%Ice cream/frozen 16,692 9.8%Other misc. mfg. uses 706 0.4%
Total manufacturing uses 105,961 62.3%
Fluid milk products 55,262 32.5%Used on farm 1,141 0.7%Residual 7,709 4.5%
Total Manufactured Dairy Products, U.S.Total Manufactured Dairy Products, U.S.
83,537 81,945 84,73890,559 92,795 93,657
100,356 100,471105,961
114,305115,255
121,369
102,383
95,41791,58592,493
92,20788,940
88,81784,77583,226
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05
Mill
ion
s o
f lb
s.
Source: Agricultural Statistics, NASS, USDA
Total Milk Available for Fluid Products, U.S.
Total Milk Available for Fluid Products, U.S.
52,014
52,636
53,429
54,411
55,273 55,294
54,640
56,40856,674
55,26755,496
55,105
54,543
55,06454,981
55,328 55,71255,26255,388
55,796
56,864
54,524
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
Mill
ion
s o
f lb
s.
Source: Agricultural Statistics, NASS, USDA
22% of the Population
34% of the MarketingsSource: Federal Milk Market Administrator, Tulsa, May, 1999.
78% of the Population
66% of the Marketings
Source: Fereral Milk Market Administrator, Tulsa, May, 1999.
GENERAL MILK FLOWS DIAGRAM
Producer
85%-90%?
Coop Handle
r
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Independent
Processor
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Coop Processo
r
Independent
Processor
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Coop Processo
r
Independent
Processor
Governed by FMMO if Grade A
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Coop Processo
r
Independent
Processor
Governed by FMMO if Grade A
Various types of market outlets
Various types of market outlets
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Coop Processo
r
Independent
Processor
Governed by FMMO if Grade A
Various types of market outlets
Various types of market outlets
Final consumers
Final consumers
GENERAL MILK FLOWS DIAGRAM
Producer
10%-15%?
85%-90%?
Coop Handle
r
Coop Processo
r
Independent
Processor
Governed by FMMO if Grade A
Government
Various types of market outlets
Various types of market outlets
Government
Final consumers
Final consumers
The Milk Flow Diagram Oversimplifies A Very Complex System
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)
SUPERMARKETS & C-STORES (Concentration)
• The Structure of the Supermarket Industry Has Changed Radically in the Past Decade
• The Industry Has Become Very Concentrated Since the Late 1990’S
• This Has Had and Continues to Have Significant Implications for Producers
Grocery Store Consolidation in the Late 1990’s
Kroger
Albertson’s
Safeway Ahold
Super Value Fleming Food Lion Shaws/Sainsbury
Fred Meyer, Smith’s, Smitty’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
Grocery Acquisition, Expansion & Format Variations
Top Grocery Firms
Firm Estimated Sales
($ Billions) % of U.S.
Grocery ACV Kroger/ Fred Meyer
43.1 9.7 Albertson's 35.7 8.1 Wal*mart 32.0 7.2 Safeway 25.0 5.6 Ahold 23.5 5.3 Winn-Dixie 13.9 3.1 Publix 12.1 2.8 A&P 10.5 2.4 Food Lion 10.2 2.3 Meijer 8.6 1.9 Sub-Total "Top 10" Retail Chains 214.6 48.4% Super Valu 20.8 4.7 Fleming 15.1 3.4 Sub-Total "Top 2" Wholesalers 35.9 8.1 Total Top Firms 250.5 56.5 Total Grocery ACV 443.0 100%
Sources: Wall Street Journal, 8/4/98 Customer Estimates, 1998 Marketing Guidebook, SuperMarket News, 6/14/99.
Questions?Questions?