Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture #24.

Dairy Marketing

Dr. Roger Ginder

Econ 338

Fall 2009

Lecture #24

DAIRY MARKETING COOPERATIVES

There are three primary forms of organization for business firms

– Proprietorship

– Partnership

– Corporation (C-Corp.)

Note: LLC Limited liability company is a type of corporation that is taxed like a partnership

There are two types of business corporations which serve farmer needs

– Investor oriented corporations of firms (IOF’s)

– Cooperatives (User oriented firms)

THREE DEFINING CHARACTERISTICS OF COOPERATIVES

Cooperatives defined: A cooperative is a user owned, user controlled and user benefit oriented corporation.

*User Owned: Member-patrons of a cooperative provide equity capital to the cooperative. The cooperative is owned by the member-patrons. The cooperative is an extension of the farm business.

THREE DEFINING CHARACTERISTICS OF COOPERATIVES (cont’d)

*User Controlled: Cooperatives are managed on a democratic basis, one member - one vote (or in some cases on the basis of volume delivered) rather than on the basis of stock ownership or other forms of ownership.

*User Benefit: Cooperatives are organized and operated for the mutual benefit of member-patrons. Net margins or savings of a cooperative are allocated to member-patrons on the basis of the amount of patronage (or business done) with the cooperative.

Reason Farmers Form Cooperatives:

1. Gain Market Power (Pool Volume)

2. Benefit from economies of scale (e.g. grain elevator)

3. Capture profits from another level in the value chain

4. Provide missing services (e.g. Processing Plant)

5. Assure access to supplies or markets ( Market Access)

6. Gain from coordination ( Scheduling Deliveries to a plant)

7. Use coop to create competition (Competitive yardstick) by adding a farmer owned firm to the market

DISTINCTIVE OPERATING PRINCIPLES:

1. Operate at market prices

2. Service at cost

3. Financial obligation and benefits proportional to use

4. Democratic control (one member, one vote)

5. Limited return on equity capital (8 percent)

Two Types of Cooperatives: Open Membership and Closed Membership

1. Open Membership Cooperatives are willing to add new members at any time. Example Supply &Commodity Marketing Cooperatives Where there is “strength in numbers “

2. Closed or Defined Membership Cooperatives have a target number of members and will not expand membership beyond that number. Example: Processing cooperative where capacity may be limited. Or marketing cooperatives where differentiated or branded products are involved

COOPERATIVE MANAGEMENT AND DECISIONMAKING

1. The public passes statutes/laws defining the limitations corporations must place on their governance, membership and activities if they are to be called cooperatives. Especially in the following areas:

• Voting• Distribution of benefits• Ownership• Stock/capital/equity• Other bylaw requirements

All remaining decisions, organizational management issues and operations (except as reserved in the legislation) are delegated to membership of cooperatives that are formed.

2. Members-approve bylaws and articles and elect a board of directors. The members delegate the management of the cooperative corporation to the Board of Directors except as reserved in articles and bylaws—usually includes the election of directors, disposal of assets, or dissolution.

COOPERATIVE MANAGEMENT AND DECISIONMAKING

3. Board of directors - is responsible for the overall operation of the cooperative; determine policy; represent the best interest of members; hire management. Typically, the Board hires only one employee - the CEO or general manager. The Board delegates authority for the operations of the coop to management except as reserved by the Board.

4. Hired management - responsible for the day-to-day operations of the cooperative within the guidelines or policy set by the board of directors. It hires, fires, and supervises employees. Typically, the management delegates various authority to employees.

Three major provisions of Capper Volstead Section 1: Providing Anti-Trust Exemption1) The association is operated for the mutual benefit of its members as

producers.

2) The Association conforms to one or both of the following requirements

A) No member is allowed more than one vote because of the amount of stock or membership capital owned, or

B) That the association does not pay dividends on stock or membership capital in excess of 8 percent per year.

3) That the association does not deal in products of non-members to an amount greater in value than such as are handled by it for members -- 50% non-member business limitation.

Cooperatives share of market receipts, 1982-2002

77

36 36

20

11

30

82

4944

1812

27

86

56

35

1914

27

0

10

20

30

40

50

60

70

80

90

100

Milk

Cotton

Grain

/oils

eeds

Fruit

& veg

Lives

tock

& p

oultry

Total

Percent

198220002002

NUMBER OF DAIRY COOPERATIVES AND FARM LEVEL MARKET SHARE

Year Number of Cooperatives Market Share

1950-51 2,072 53%

1960-61 1,609 61%

1969-70 971 73%

1974-75 631 75%

1985-86 394 78%

1990-91 264 82%

1994-96 237 87%

2000-01 204 89%1

______ ______

-90.0% +68%1 1999 figure.

Sources: “Co-ops’ share of farm market, major case expenditures down in ’99, Rural Cooperative Magazine, Jan/Feb 2001; USDA Rural Development press release, “Farmer Co-op Sales, Incomes Climb in 2001,” Oct. 22, 2002.

U.S. Dairy Cooperatives

Year Number of

Dairy Co-ops Market Share of

Milk 1950 2,072 53%

1970 971 61% 1990 264 82% 2001 204 89%

2002 196 86% 2006 172 86%

Top Dairy Coops, U.S., 1992Member Milk

Rank Coop-State Volume (bil. lbs.)

#1 AMPI, San Antonio, TX 16.50#2 Mid-America Dairymen, Springfield, MO 8.61#3 California Milk Producers, Artesia, CA 5.76#4 Farmers Union Milk Mkg. Coop, Madison, WI 5.64#5 Dairgold Farms, Seattle, WA 4.92#6 Land O’Lakes, Minneapolis, MN 4.20#7 Milk Mkg. Inc., Strongsville, OH 3.81#8 Dairymen, Inc., Louisville, KY 3.62#9 Atlantic Dairy Coop, Southhampton, PA 3.53#10 Dairymen’s Coop Creamery Assn, Tulare, CA 3.50#25 Swiss Valley Farms Co., Davenport, IA 1.41

Source: Hoard’s Dairyman, October 10, 1993

Top Dairy Coops, U.S., 2000Member Milk

Rank Coop-State Volume (bil. lbs.)

#1 Dairy Farmers of America, Kansas City, MO 36.40#2 California Dairies, Inc., Artesia, CA 13.60#3 Land O’Lakes, Minneapolis, MN 12.00#4 Northwest Dairy Assoc., Seattle, WA 5.91#5 Dairylea Cooperative, Inc., E. Syracuse, NY 5.50#6 Foremost Farms, USA, Baraboo, WI 5.33#7 Associated Milk Producers, New Ulm, MN 5.25#8 Family Dairies, USA, Madison, WI 5.10#9 Manitowoc Milk Prod. Coop, Manitowoc, WI 3.57#10 MD & VA Milk Producers Coop, Reston, VA 3.10#16 Swiss Valley Farms Co., Davenport, IA 1.70

Source: Hoard’s Dairyman, October 10, 2001

Top 10 Dairy Co-ops: 2007 Co-op: Billion Lbs

of Milk Percent of U.S. Milk Supply

Number of Members

1. Dairy Farmers of America; Kansas City

37.100 20.0 10,587

2. California Dairies; , Inc.,Visalia CA

17.585 9.5 624

3. Land O’Lakes; St Paul, MN

12.467 6.7 3,015

4. Northwest Dairy Assoc.; Seattle, WA

7.800 4.2 566

5. Dairylea Co-op; Syracuse, NY

5.700 3.1 2,250

6. Associated Milk Producers, Inc.

5.500 3.0 3,600

7. Family Dairies USA, Madison, WI

5.149 2.8 3,658

8. Manitowoc Milk Producers; Manitowoc, WI

4.706 2.5 2,890

9. Foremost Farms USA, Baraboo, WI

4.697 25 2,400

10. Select Milk Producers, Inc., Artesia, N.M.

4.363 2.4 83

Totals of the 10 co-ops 105.067 56.6 29,673

Hoards Dairymen, Oct. 2008 Top 50 dairy co-ops had 145.509 billion pounds of milk (78%) and 43,664 members

Volume of Butter Marketed by Co-ops, 1992 ,1997&2002

Year Co-op Share of U.S.

1992 65%

1997 61%

2002 71%

Volume of Packaged Milk Marketed by Co-ops, 1992 , 1997&2002

Year Co-op % of U.S.

1992 13%

1997 14%

2002 7%

Volume of Natural Cheese Marketed by Co-ops

Co-ops' % of U.S. for 1992 1997

Cheddar 75% 70%

Other American

54% 43%

Mozzarella 29% 26%

Other Italian 14% 18%

Other Cheese 8% 9%

Total Cheese 43% 40%

Cooperatives Need to Generate a Positive Net Margin or Profit:

WHY DO COOPERATIVES NEED PROFITS????

1. Cooperatives use resources in the economy (e.g. Capital & Labor)

2. If there is a loss the cooperative has ended up with fewer resources than it started with---resources have been used up unproductively

3. In an open market/ free enterprise economy resources are placed in the hands of private individuals and must be managed so as to receive a positive return

4. In a centrally planned economy they are not

COOPERATIVE FINANCIAL STATEMENTS

The Balance Sheet – Lists the Resources that the Cooperative Owns and Specifies Who Has Claims Against the Resources.

Members

Creditors

Balance Sheet –Lists Resources/Claims

Assets Debt

(Property and (Lender’s Claims)

other items of on the assets

value owned and Equity

controlled by the (Owner’s Claims)

company on the assets

Current Assets Current Liabilities

• Cash • Payables • Inventory • Notes due • Accounts receivable • Long term payment

Fixed Assets Long Term Liabilities

• Land • Long Term debt • Buildings • Contracts • Equipment

Other Assets Equity

• Regional equity • Per unit retains • Minority interest withheld from check

in joint ventures • Allocated to member from profits

• Common stock

Balance Sheet

BALANCE SHEET VS. OPERATING STATEMENT

The Balance Sheet – Lists the Resources that the Cooperative Owns and Specifies Who Has Claims Against the Resources At a Given Moment in Time.

The Operating Statement (P&L, Income Statement)---Summarizes Business Activity Sales Income and Expenses Over Some Period of Time. (Month, Quarter, Year)

Matches Income With Expenses for Some Specified Period of Time to Determine Whether the Firm Has Made a Profit or a Loss.

Income Statement orOperating Statement orProfit/Loss Statements

Sales

Less Cost of good sold

Gross Margin

Plus Service and Other Income

Less Expenses (including)

• Salaries, wages, benefits• Depreciation• Insurance• Utilities• Advertising• Taxes/Licenses

Net savings or profits (Losses)

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances –The loss reduces Equity

PRIVILEGES OF QUALIFIED DIARY COOPERATIVES UNDER FEDERAL MILK

MARKETING ORDERS:1. The cooperative is entitled to block vote for its members on most order

provisions.

2. The cooperative is entitled to blend or pool the proceeds from the sale of member milk. IOF must pay at least the minimum class prices and blend prices under FMMO. BUT still there are limits on how a coop uses this right. Producers must agree. The coop MUST be competitive.

3. The cooperative may collect proceeds for its members from handlers from the sale of member milk.

4. Members of cooperatives that perform marketing services for members are exempt from market services charged non-members.

5. Cooperatives may move or direct milk in a manner not permitted proprietary handlers. Again the coop is farmer controlled.

CRITERIA FOR QUALIFICATIONS AS A CO-OP

1. File its articles of incorporation and bylaws with dairy division to show that it is an association of agric producers marketing milk and operating for mutual benefit of members.

2. Majority in the board must be active dairy farmers.

3. Provide member-producers a monthly market information bulletin.

4. At least 50% of business done must be with members.

REASONS DAIRY FARMERS BELONG TO A COOPERATIVE

1. To be guaranteed a market outlet and a price.

2. To have the best terms possible bargained for in the marketplace.

3. To have milk marketed efficiently from a producer perspective, i.e., balancing, diversion, and assembly.

4. To have the highest quality producer milk possible be shipped to the market.

5. To be effectively represented in legislative, regulatory, and public relations areas.

6. To receive other benefits such as insurance, field services, or market information.

7. To gain information about costs, returns, processes, and industry practices at other levels in the channel.

Dairy cooperatives bargain for “over order premiums” on Class I milk.

• Organize marketing agencies in common, example, CMPC in the Chicago market

• Over-order premiums are applied to the cost of of services and functions performed by the co-op and the balance to their dairy farmer members.

• Example: Co-op has 25% Class I milkCo-op negotiates a $2.00 per Cwt. Over order premium25% X $2.00 = $0.50 per Cwt. On all milkIf $0.25 is needed to cover costs, the $2.00 premium nets $0.25 per Cwt. On the dairy farmer members’ milk check.But, without these services and over-order premiums dairy farmer member milk checks may well be lower.