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AAEA Graduate Case Study 2003

AAEA Graduate Case Study 2003. Lawton Lanier Nalley John Michael Riley. Background On Ocean Spray. 900 member cooperative (750 cranberry growers) Produce cranberries & grapefruits 80% control of the industry. Ocean Spray as a Cooperative. Management Grower members Implementing changes

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AAEA Graduate Case Study 2003

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  1. AAEA Graduate Case Study 2003 Lawton Lanier Nalley John Michael Riley

  2. Background On Ocean Spray • 900 member cooperative (750 cranberry growers) • Produce cranberries & grapefruits • 80% control of the industry

  3. Ocean Spray as a Cooperative • Management • Grower members • Implementing changes • Marketing agreement

  4. Ocean Spray’s Dilemma • Stagnant fresh market • Saturation of the juice market • Seasonality of cranberries • Large increase in acres planted has adversely affected the overall price

  5. Cranberry Industry Structure • Imperfectly competitive market • Competition in quantity not in price • Ocean Spray is the dominant firm • Strategic behavior

  6. Initial Recommendation • Given Ocean Spray’s history it looks to be in their best interest to merge with another company • However, grower member reluctance to this causes this option to not be feasible • Therefore, other options will be explored from both the supply and demand sides

  7. Price Flexibility • At the mean for total acres harvested and price the price flexibility is –1.07 • Using the 2001 data the price flexibility is – 3.30 • Therefore a 1% decrease in acres harvested will lead to a 3.30% increase in price

  8. PROS Smoothes price volatility Temporarily raises price CONS Temporary Downward pressure on price Storage costs Freezing the Surplus

  9. PROS Reduction in supply Raises prices CONS Costs of production still exist Free riding Ethical? Destroying Production Excess

  10. PROS Easy to regulate If successful the price will rise CONS Grower support Cheating Free riding Production Quota

  11. PROS You would retire land so that the supply diminishes Industry as whole benefits Offsets free riding problem CONS If yield increases supply may still go up Costly Easement of Production Land

  12. Issuing Tradable Permits • Tradable permits are issued to growers at the beginning of the growing season based on last season’s price flexibility and a set target price • Number of permits are predetermined • Growers can “trade” permits • Amount of production is targeted at the beginning of the season using price flexibility

  13. PROS Permits can be traded between members With a fixed number of permits supply is regulated Market controlled Growers are compensated for free riding No costs to Ocean Spray CONS Members can not capture upside gains Distribution issues Annual vs. Permanent Issuing Tradable Permits

  14. Land Retirement Auction • Auction based mechanism • Willingness to accept bids are submitted by each grower • Expected demand is assessed prior to growing season • Producers offer supply reduction by bidding • Lowest bids are excepted until targeted acreage reduction is achieved

  15. Land Retirement Auction

  16. PROS Producers are compensated for free rider effects Market based Voluntary CONS Costs Annual or permanent If annual costs to grower members Land Retirement Auction

  17. Supply Side Verdict Tradable permits • Lowest cost to the cooperative • Market based • Reduces free rider externalities • Diminishes surplus

  18. Saturation of Juice Market • Elastic demand in the juice market • Only control 2.3% of the market

  19. Non-Carbonated Beverage Market Share

  20. The Juice Solution • Alliance with Coca-Cola / Minute Maid with the possibility of expanding juice market thus creating marketing synergy and economies of scope • Provides access to premium shelf space in grocery markets without high cost

  21. Seasonality of the Industry • Demand spikes during the holiday season • Cranberries tend to be linked with Thanksgiving and turkey • Demand for fresh cranberries falls after the New Year

  22. Curtailing Seasonal Demand • Feed off of goods such as turkey to make cranberries more common throughout the year • Product bundles maybe created with non seasonal products • Pillsbury

  23. Curtailing Seasonal Demand • Product development that increases demand throughout the year • Strategic alliance with Starbucks creating a synergetic association • Bundling the Ocean Spray name in a muffin with a cup of Starbucks Coffee

  24. Conclusions Tradable Permits + Alliances + Bundling = Price

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