Transcript 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
Marketing agreement
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
Cranberry Industry Structure
Imperfectly competitive market
Competition in quantity not in price
Ocean Spray is the dominant firm
Strategic behavior
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
Economic Problems
Supply Side
Oversupply
Low Prices
Demand Side
Juice Market
Seasonality
Ocean Spray's Supply Dilemma
40000
$90.00
38000
$80.00
36000
$70.00
34000
Acres
32000
$50.00
30000
$40.00
28000
$30.00
26000
$20.00
24000
22000
$10.00
20000
$0.00
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Acreage Harvested
Real Price (2001)
Dollars (2001)
$60.00
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
Stabilizing Price
Surplus Control
Freezing
Destruction
Supply Control
Production
Quota
Market
Based Appraoch
Land Easement
Land Retirement
Auction
Tradable Permits
Freezing the Surplus
PROS
Smoothes price
volatility
Temporarily raises
price
CONS
Temporary
Downward pressure
on price
Storage costs
Destroying Production Excess
PROS
Reduction in supply
Raises prices
CONS
Costs of production
still exist
Free riding
Ethical?
Production Quota
PROS
Easy to regulate
If successful the
price will rise
CONS
Grower support
Cheating
Free riding
MARKET BASED APPROACHES
TO SUPPLY CONTROL
Easements
Tradable Permits
Land Retirement
Auction
Easement of Production Land
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
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
Issuing Tradable Permits
PROS
CONS
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
Members can not
capture upside gains
Distribution issues
Annual vs. Permanent
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
Land Retirement Auction
Bidder
Number
581
724
121
676
649
735
644
305
343
366
622
722
44
492
128
60
548
169
795
758
275
582
290
600
557
36
653
71
380
694
Amount per Number
Acre
of Acres
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,504.23
4,715.80
4,695.24
4,285.38
4,741.79
3,386.00
4,700.74
3,584.02
5,268.67
4,828.07
4,342.18
2,964.70
4,123.94
3,761.23
5,148.65
4,059.94
4,992.22
4,200.12
4,630.70
5,021.24
4,433.73
3,168.65
4,763.70
4,937.42
4,481.46
3,999.45
3,802.32
4,188.45
3
4
5
9
18
2
1
5
7
5
9
11
0
3
7
2
1
9
11
2
7
9
3
5
2
7
13
0
7
6
Bidder
Number
44
71
264
690
473
62
722
290
735
305
187
128
380
135
404
653
279
548
123
161
398
492
694
95
676
Amount
per Acre
$
$
$
$
$
$
$ 2,964.70
$ 3,168.65
$ 3,386.00
$ 3,584.02
$ 3,709.00
$ 3,761.23
$ 3,802.32
$ 3,817.29
$ 3,979.94
$ 3,999.45
$ 4,036.94
$ 4,059.94
$ 4,081.89
$ 4,087.23
$ 4,122.16
$ 4,123.94
$ 4,188.45
$ 4,200.12
$ 4,285.38
Total
Number Acres
of Acres Retired
0
0
0
0
0
0
11
11
3
14
2
16
5
21
1
22
7
29
7
36
6
42
8
50
13
63
15
78
1
79
3
82
3
85
9
3
6
11
9
Land Retirement Auction
PROS
CONS
Producers are
compensated for
free rider effects
Market based
Voluntary
Costs
Annual or
permanent
If annual costs to
grower members
Supply Side Verdict
Tradable permits
Lowest cost to the cooperative
Market based
Reduces free rider externalities
Diminishes surplus
Demand Issues
Juice Market
Saturation /
Competition
Seasonal Nature
of Food Product
Demand
Saturation of Juice Market
Elastic demand in
the juice market
Only control 2.3%
of the market
Proc
Company
e
S oB
fine
Othe
rs
Very
le
y
Spra
Gam
b
Ocea
n
tor &
ury
Ariz o
na
C ad b
Triar
c
iCo
r Oat
s
-Cola
P ep s
Quak
e
C o ca
Percntage
Non-Carbonated Beverage
Market Share
Percent Market Share
30
25
20
15
10
5
0
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
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
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
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
Conclusions
+
=
+