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NEW APPROACH TO VALUE CHAINS GAIN EFFICIENCY BY ELLIMINATING FUNCTIONS IN THE CHAIN ELLIMINATE COSTS BETWEEN LEVELS IN THE CHANNEL CONVERT PROFIT CENTERS TO COST CENTERS IMPROVE PERFORMANCE OF THE CHANNEL---- LOWER COSTS
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Dairy Marketing
Dr. Roger GinderEcon 338Fall 2007
Lecture # 9
GRAIN PRODUCER
FEED MILL
LIVESTOCK PROD.
SLAUGHTER PLANT
MEAT PROCESSING PLANT
RETAIL DISTRIBUTION
FINAL CONSUMER
Human Consumption Value Chain for Livestock--Pork
NEW APPROACH TO VALUE CHAINS
• GAIN EFFICIENCY BY ELLIMINATING FUNCTIONS IN THE CHAIN
• ELLIMINATE COSTS BETWEEN LEVELS IN THE CHANNEL
• CONVERT PROFIT CENTERS TO COST CENTERS
• IMPROVE PERFORMANCE OF THE CHANNEL----LOWER COSTS
GRAIN PRODUCER
FEED MILL
LIVESTOCK PROD.
SLAUGHTER PLANT
MEAT PROCESSING PLANT
RETAIL DISTRIBUTION
FINAL CONSUMER
Human Consumption Value Chain for Livestock--Pork
NEW APPROACH TO VALUE CHAINS
• IN OTHER CASES FIRMS SEEK TO IMPROVE QUALITY BY BETTER COORDINATING FUNCTIONS IN THE VALUE CHAIN
• IMPROVE PRODUCT QUALITY BY INFUENCING HOW FIRMS AT OTHER LEVELS OPERATE
• COMMUNICATE CONSUMER PREFERENCES MORE ACCURATELY
NEW APPROACH TO VALUE CHAINS
• SOME FIRMS IN THE CHAIN ARE ATTEMPTING TO BECOME “CAPTAIN” OR LEADER OF THE CHAIN
• CAUSE OTHER FIRMS IN THE CHAIN TO OPERATE IN A WAY THAT CREATES MORE VALUE
• For Example “Low Lin” Soybean Oil
INPUT SUPPLY
PRODUCER
ELEVATOR 1ST HANDLER
GRAIN/OILSEED PROCESSOR
REFINER
FOOD MANUFACTURING
RETAIL DISTRIBUTION
FINAL CONSUMER
Human Consumption Value Chain for Grains and Oilseeds Low Lin. Beans
WHAT DETERMINES WHO WILL BE A CAPTAIN?
• OWNERSHIP/ACCESS TO CAPITAL
• ACCESS TO KEY RESOURCES
• ACCESS TO PROPRIETARY TECHNOLOGY
• ACCESS TO CRITICAL KNOWLEDGE
• ACCESS TO CUSTOMERS
INCENTIVES ARE IMPORTANT• The Incentives At Other Levels in the
Value Chain Must be Aligned
• For Low Lin Soybeans This Was the Case– Food Manufacture Willing to Pay More– Syngenta and Other Genetics Companies
Willing to Develop and Market the Genetics– Producers, Elevators, and Processors Willing to
Segregate and Preserve Identity
• For Other Traits Incentives May Not Be So Well Aligned---Especially for “Input Traits” With No Clearly Visible Consumer Benefit
INCENTIVES ARE IMPORTANT• Problems Can Arise With Input Innovations
That Provide:– Producer or Processor Benefits– But No Visible Consumer Benefit
• At a Minimum Consumers Must Be Indifferent Toward Such Innovations
• If Consumers Oppose These Innovations The Value Chain Can Be In Conflict And Fail to Perform Effectively
INPUT SUPPLY
PRODUCER
ELEVATOR 1ST HANDLER
GRAIN/OILSEED PROCESSOR
REFINER
FOOD MANUFACTURING
RETAIL DISTRIBUTION
FINAL CONSUMER
Human Consumption Value Chain for Grains and Oilseeds—Genetic Mod.
GRAIN PRODUCER
FEED MILL
MILK PRODUCER
COOPERATIVE HANDLER
MILK PROCESSING PLANT
RETAILER
FINAL CONSUMER
Human Consumption Value Chain for Organic Milk--
Drug Manufacturer
Vet. Or Animal Health Supplier
MILK PRODUCER
COOPERATIVE HANDLER
MILK PROCESSING PLANT
FOOD MANUFACTURER
RETAILER
Human Consumption Value Chain for Milk---BST
TASTE
Time
Consumer Value
Hierarchy
Source: Ron Olson, General Mills
Consumer Values in Food Products
1960’s 1990’s1980’s1970’s
TASTE
CONVENIENCE
Time
Consumer Value
Hierarchy
Source: Ron Olson, General Mills
Consumer Values in Food Products
1960’s 1970’s 1980’s 1990’s
TASTE
CONVENIENCE
HEALTH BENEFITS
Time
Consumer Value
Hierarchy
Source: Ron Olson, General Mills
Consumer Values in Food Products
1960’s 1970’s 1980’s 1990’s 2000’s
CONSUMER VALUE TRENDS• IT IS GENERALLY ACCEPTED THAT THE
FOOD MANUFACTURER CANNOT IGNORE THE LOWER ITEMS IN THE VALUE HEIRARCHY
• MUST BE ABLE TO PROVIDE ALL THREE
NEW APPROACH TO VALUE CHAINS
• TRAITS FOR PROCESSORS AND FOOD MANUFACTURERS– HIGHER LEVELS OF DESIRED COMPONENTS
– IMPROVED PROCESSING EFFICIENCY
– IMPROVED FUNCTIONALITY IN FOOD MANUFACTURING
– PRODUCT SAFETY
NEW APPROACH TO VALUE CHAINS• NO LONGER VIEW QUALITY OF PRODUCTS AS
STARTING AT FRONT DOOR OF PLANT 0R STORE
• VALUE CLEARLY DEFINED, SHARED, AND UNDERSTOOD BACK THROUGH THE SUPPLY CHAIN
• SUPPLY CHAIN INTERCONNECTED WITH INFORMATION SHARED FROM RAW PRODUCT SOURCES THROUGH BACK DOOR OF PLANT
NEW APPROACH TO VALUE CHAINS
• REQUIRES RADICAL CHANGES IN RAW PRODUCT PROCUREMENT– CONTRACT SPECIFICATIONS FOR SOME
– UNDERSTANDING SUPPLIER COSTS AND CAPABILITIES
– ESTABLISHING TOLERENCES AND TESTING PROTOCOLS
– ARRIVING AT MUTUALLY ACCEPTABLE SOLUTIONS
GRAIN PRODUCER
FEED MILL
MILK PRODUCER
COOPERATIVE HANDLER
MILK PROCESSING PLANT
FOOD MANUFACTURER
RETAILER
Human Consumption Value Chain for Milk—Food Safety
NEW APPROACH TO VALUE CHAINS
• CHANGES IN WHO SUPPLIES RAW PRODUCT– ESTABLISHING A LIST OF “APPROVED”
SUPPLIERS– INSPECTING SUPPLIER FACILITIES– ESTABLISHING REQUIRED SUPPLIER
DOCUMENTATION– MUCH SMALLER # OF SUPPLIERS
SOME DETERMINANTS OF A VALUE CHAIN’S SUCCESS
• FOCUS ON VALUE CREATION IN FINAL PRODUCT FOR CONSUMERS
• SHARING INFORMATION TO CREATE COST SAVINGS OR ADD VALUE
• EQUITABLE SHARING OF RETURNS FOR VALUE CREATION
• MUTUAL TRUST/COOPERATION AMONG PLAYERS
Pricing Raw Milk At The Farm Level
FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY
• Allocative Function– Direct resources (Land, Labor, Capital) to the
highest and best use, given the values tastes and preferences of consumers
– Rations the use of resources so that the available supply fits the existing demand
• Income Distribution Function– For any given quantity produced of a product or
service, a price increase raises (or a price reduction lowers) the level of the producers’ income
y = price * quantity sold
FUNCTION OF PRICE IN AN OPEN MARKET
ECONOMY– For any given quantity of product or service
consumed, a price increase reduces (or a price reduction increases) the amount of other products the consumer can buy (i.e., income)
If a consumer has $3.00 to spend on milk and strawberries and….Milk = $2.00/gal Strawberries =
$1.00/#Milk = $1.00/gal Strawberries =
$1.00/#
Income Distribution Function Continued
FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY
• Competitive Price– Established by market forces– Supply and demand are dominant– Significant volume– Open access to market for buyers/sellers
• Administered Price– Established by non-market forces– May be legislated– May be set by government agency– May be set by other outside entity with ability
to enforce
FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY
• Formula Price– Established by defining a fixed set of
relationships - a formula– A formula price may include some market
prices (i.e., competitive prices)– A formula price may include some
administered prices (e.g., support)– Specifies relationships among a number of
prices and/or product characteristics
MILK PRICE CONCEPTS12. Grade B price
13. Single basing point price
14. Multiple basing point price
15. Competitive price
16. Formula price
17. Administered price
18. Skim price
19. Butter fat price
20. Over order price
21. Protein Price
22. Prod. Price Differntial
1. M-W price
2. NASS price
3. CME price
4. Basic formula price
5. Support price
6. Blend price
7. Class I price
8. Class II price
9. Class III price
10. Class IV price
11. Grade A price
PRICING MANUFACTURING GRADE MILK
•Grade B prices were a critical component of milk pricing system (least common denominator) until 12-31-99
• Reflect total supply of Grade A and Grade B production available for storable products.
• Basis for federal price support programs• Minnesota-Wisconsin Grade B prices historically used
as the basis for pricing Grade A milk used for Class I & II products in Federal Milk Marketing Orders
• M-W was largely based on open market competitive prices not formula prices or Administered Prices
The Issue of the Minnesota-Wisconsin Price Series (M-W)
•M-W defined: The weighted average of Grade B milk prices paid by Minnesota and Wisconsin butter, milk powder and cheese plants.
•Used From 1961 –1995 (1999) to set minimum producer pay prices for Grade A milk in all federal milk marketing orders.
The Issue of the Minnesota-Wisconsin Price Series (M-W)
•Purpose: To establish a uniform minimum pay price in all federal milk orders for pricing Grade A milk used in manufactured dairy products.
– Butter, non-fat milk powder and cheese are sold on national markets.
– Minnesota and Wisconsin used because of the large percentage of its milk is used for manufacturing.
– It also has the largest supply of Grade B milk, and the most vigorous milk plant competition.
Utilization of Milk, Wisconsin, 1993
• Use Percent of Total
• Cheese 86.5%• Ice Cream 0.6%• Condensed milk 2.0%• Other manufactured 1.3%• Total Manufacturer 90.4%• Fluid (beverage) 6.1%• Shipped out-of-state 2.1% (some to
IA)• Kept on the farm 1.4%
Grade A of Milk, 1993
Grade A Grade B
• Wisconsin 90% 10%• Minnesota 86% 14%• United States 95% 5%
Basis for pricing 95% of U.S.milk
Class III Prices Used As the Class I and Class II Mover
• The Grade B Price Was Used To Set the Class III Price
• The Class I And Class II milk received a fixed Premium Above Class III milk
• When Class III ( a competitive price) Moved Up or Down the Class I and II Prices Moved Up and Down With it
FLUID MILK PRICING(Single Basing Point)
• .002$/mi from basing point• 1. Class I differential reflects the cost of transporting milk from basing point• 2. Usually < hauling cost to prevent interorder movement
500 Miles
$1.00
FLUID MILK PRICING(Single Basing Point)
• .002$/mi from basing point• 1. Class I differential reflects the cost of transporting milk from basing point• 2. Usually < hauling cost to prevent interorder movement
500 Miles
$1.00 $2.00
1,000 Miles
FLUID MILK PRICING(Single Basing Point)
• .002$/mi from basing point• 1. Class I differential reflects the cost of transporting milk from basing point• 2. Usually < hauling cost to prevent interorder movement
500 Miles
$1.00 $2.00
1,000 Miles
1,500 Miles
+$3.00
FLUID MILK PRICING(Single Basing Point)
• .002¢/mi from basing point• 1. Class I differential reflects the cost of transporting milk from basing point• 2. Usually < hauling cost to prevent interorder movement
500 Miles
$1.00 $2.00
1,000 Miles
1,500 Miles
+$3.00
2,000 miles
+4.00
MINNESOTA - WISCONSIN PRICE SERIES
•The major price series used for 35 years to price Grade A milk used for manufacturing
•Average Grade B pay price in two states+ Producing > 50% of B milk+ Based on pay prices+ Reported monthly
• Includes most quality, protein and competitive premiums paid Grade B farmers
+ Does not include deductions for hauling, etc.
+ Heavily influenced by cheese plants
MINNESOTA - WISCONSIN PRICE SERIES
– Declining volume of Grade B milk made National Agricultural Statistics Service (NASS) to discontinue standing behind it
– Replaced in mid 1995 by Basic Formula Price (BFP)
– Really just adjusted M-W -----Stopgap MeasureNo series on BFP - really interim solution
• BFP closely tracks M-W• Professionals will continue to refer to M-W for
next several years• Proposed rule replaced BFP on January 1, 2000
MANUFACTURING MILK PRODUCT MARKETS
• Three major product categories for Grade B milk
– Cheese factories use majority– Butter-powder plants are also important• Butter• Non-fat dry milk
– Production of these hard products creates by-products that also have value
– Cheese plants can recover• whey cream (used to make butter)• whey proteins• lactose– Butter-powder plants produce joint products• cream produces butter and buttermilk powder• skim produces nonfat dry milk
