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Dairy marketing

Dairy marketing

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Dairy marketing

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  1. Dairy marketing James Dunn Pennsylvania State University

  2. Overview • 9.2 million cows in U.S. • 9,600 liters/cow – 21,346 lbs. • Number of Dairy Farms 51,481 (avg 179 cows) • About 7,400 in PA (19,585 lbs./cow/yr) • Population of USA – 312 mil.

  3. Milk markets are very regulated Except New Zealand, everyone is regulated for prices Policies vary Some work better than others Goals of policy important

  4. Common Policy Instruments • Classified pricing – different price according to use • Price supports – artificially keep price high • Quotas – restrict production – not here, but often discussed and in Farm Bill talks • Export subsidies • Import restrictions • Minimum retail prices – PA Milk Marketing Board • Maximum retail prices • Component prices – price depends on butterfat

  5. United States • Classified pricing & pooling – 4 classes • Support prices – not supportive • Tariffs & import quotas • Some export subsidies • Component pricing – butterfat, protein, bacteria, other solids

  6. Example October 2013 Central PA

  7. Classified Pricing • Distortion depends on price difference – Canada is very distorting • Most cost paid by milk drinkers • Raise prices for inelastic demand

  8. Price supports • Without supply control very expensive • With surplus must have subsidized exports which hurts farmers elsewhere • Dairy Cliff

  9. Price Supports • Buy products at the equivalent of support price $9.40/cwt. (21.3 cents/kg.) • Three products cheese, butter, nonfat dry milk • Tilt is how prices of various products are adjusted to keep purchases moderate – usually NFDM too high

  10. Production quotas • Very distorting - Canada • Cheap for government • Keeps farms from expanding • Proposed new regulations have supply controls

  11. Export Subsidies • Expensive • Hurt farmers elsewhere

  12. Component pricing • Helps efficiency • Improves quality • Very good if tied to markets

  13. Import protection • Necessary with price supports • GATT problems

  14. Spatial Price differentials • Assumes deficit milk hauled from Midwest • Adds premium to Class I Midwest price • About $2.45/cwt. in PA (Mt. Holly Springs) • Less in western PA • More in Southeastern PA

  15. 2012 avg. = $20.03 Est 2013 avg = $21.38 Est 2014 = $21.14

  16. Fluid Processors • Dean Foods – result of merger between Suiza and Dean – largest player in fluid market – about 35% • No national brand – lots of local brands • Two processors have most of Boston market – Dean – 80% ?

  17. Why Are Farm Numbers Consolidating? • Production efficiency • Rate of return on capital • Economies of scale • Investment strategies • Retirements • Rising affluence in society • Management, skill levels! • True in all of agriculture

  18. Percent of Dairy Farms by Size and Region

  19. Percent of Milk Produced by Farm Size and Region

  20. Productivity and Farm Consolidation • Productivity advances relentlessly • Fewer cows are needed • Farms get bigger • 100 year trend • Some farmers are always struggling • Need to have some jobs outside of agriculture available

  21. Trade Policy • Dairy Export Enhancement Program • Designed to keep products competitive where we have EU competition • Import restrictions – can’t hold prices up with lots of cheap imports • NAFTA – supposed to get access to Mexico and Canada – slow coming

  22. Exporters of Dairy Products 1995-2008

  23. Concluding comments • Milk pricing is complex • Government very involved • Prices are still about supply & demand