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Dairy Marketing

Dairy Marketing. Dr. Roger Ginder Econ 338 Fall 2009 Lecture #17. Brief Post-Midterm Review. Supply and Demand Models. Price. S o. P 1. P 0. D o. Q 0. Q 1. Quantity. Factors that can shift demand : 1. Change in tastes or preferences 2. Change in income

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Dairy Marketing

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  1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture #17

  2. Brief Post-Midterm Review Supply and Demand Models

  3. Price So P1 P0 Do Q0 Q1 Quantity Factors that can shift demand: 1. Change in tastes or preferences 2. Change in income 3. Change in population level 4. Change in the price of substitute or complement products

  4. Price S1 So P1 Po Do Quantity Q1 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

  5. Price So Po P1 D1 Do Q1 Qo Quantity Factors that can shift demand: 1. Change in tastes or preferences 2. Change in income 3. Change in population level 4. Change in the price of substitute or complement products

  6. Mailbox Prices What the producer receives Mailbox prices are typically the product of a number of factors enforced in a FMMO Vary by size of Class I differential in order Vary by percent Class I utilization in order Vary by component and quality factors Major exceptions: Grade B milk Grade A milk not pooled under a FMMO

  7. Source: California Department of Food and Agriculture

  8. Source: California Department of Food and Agriculture

  9. Source: California Department of Food and Agriculture, August, 2000. http://www.cdfa.ca.gov/dairy/mbarchive.html

  10. Source: California Department of Food and Agriculture

  11. Source: California Department of Food and Agriculture

  12. Source: California Department of Food and Agriculture

  13. FEDERAL MILK MARKETING ORDERS • Complex set of rules designed to promote “orderly” marketing and enhance producer prices • First rationale for FMMO’s - • Continuous flow of production on a strict biological cycle (unlike manufacturing) • Highly perishable product with strict sanitary requirements • Second rationale for federal milk market orders • - Wild price swings during season could result in chaotic markets • Unfair treatment of Grade A producers • Higher consumer prices due to uncertainty

  14. HISTORY OF FMMO’S • Farm prices for dairy were strong in 1920’s • Cooperatives bargained effectively with processors, bottlers, and milk dealers • Coops developed a classified pricing system based on use of Grade A milk • paid more for milk that was bottled • paid less for milk that was manufactured • The “blend” was then distributed to member patrons so that all share in fluid premium • Fluid bottlers were very willing to go along with classified pricing in order to prevent price wars in the fluid market • all bottlers paid the same raw milk price • no incentive to engage in retail level price wars at farmer’s expense

  15. DAIRY COOPERATIVE CLASSIFIED PRICING EXAMPLE Coop prices: Class I = $10.00 Class II = $ 8.00 Average use by coop customers: Class I = 50% Class II = 50% Use by Buyer “A”: Used by Buyer “B”: Class I = 90% Class I = 10% Class II = 10%Class II = 90% Average price received by coop and its members = “Blend” price = (.5 x $10.00) + (.5 x $8.00) = $9.00 Price paid by Buyer “A”= Price paid by Buyer “B”= (.9 x $10.00) + (.1 x $8.00) = $9.80 (.1 x $10.00) + (.9 x 7.00) = $8.20 Thus, there was an incentive and opportunity for Buyer “A” to buy milk directly from the producer.

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