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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.)

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dairy marketing

Dairy Marketing

Dr. Roger Ginder

Econ 338

Fall 2009

Lecture #24

slide3

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)
slide4

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 equitycapital to the cooperative. The cooperative is owned by the member-patrons. The cooperative is an extension of the farm business.

slide5

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.

slide6

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

slide7

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)

slide8

Two Types of Cooperatives: Open Membership and Closed Membership

  • Open Membership Cooperatives are willing to add new members at any time. Example Supply &Commodity Marketing Cooperatives Where there is “strength in numbers “
  • 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
slide9

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.
slide10

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.

slide11

Three major provisions of Capper Volstead Section 1: Providing Anti-Trust Exemption

1) 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.

slide13

NUMBER OF DAIRY COOPERATIVES AND FARM LEVEL MARKET SHARE

YearNumber of CooperativesMarket 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.

slide15

Top Dairy Coops, U.S., 1992

Member 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

slide16

Top Dairy Coops, U.S., 2000

Member 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

slide22

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

slide23

COOPERATIVE FINANCIAL STATEMENTS

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

Members

Creditors

slide24

Balance Sheet –Lists Resources/Claims

AssetsDebt

(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

slide25

Balance Sheet

Current AssetsCurrent Liabilities

• Cash • Payables

• Inventory • Notes due

• Accounts receivable • Long term payment

Fixed AssetsLong Term Liabilities

• Land • Long Term debt

• Buildings • Contracts

• Equipment

Other AssetsEquity

• Regional equity • Per unit retains

• Minority interest withheld from check

in joint ventures • Allocated to member from profits

• Common stock

slide26

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.

slide27

Income Statement or

  • Operating Statement or
  • Profit/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)
slide28

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

slide29

Balance Sheet

Debt

Assets

Equity

Claims must equal assets - the balance sheet balances

slide30

Balance Sheet

Debt

Assets

Equity

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

slide31

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.

slide32

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.

slide33

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
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 milk

Co-op negotiates a $2.00 per Cwt. Over order premium

25% X $2.00 = $0.50 per Cwt. On all milk

If $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.