Transcript Lecture 17 (Mkt Orders)

Dairy Marketing
Dr. Roger Ginder
Econ 338
Fall 2009
Lecture #17
Brief Post-Midterm Review
Supply and Demand Models
Pric
e
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
Price
S1
So
P1
Po
Do
Q1
Qo
Quantity
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
Pric
e
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
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
Source: California Department of Food and Agriculture
Source: California Department of Food and Agriculture
Source: California Department of Food and Agriculture, August, 2000.
http://www.cdfa.ca.gov/dairy/mbarchive.html
Source: California Department of Food and Agriculture
Source: California Department of Food and Agriculture
Source: California Department of Food and Agriculture
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
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
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”:
Class I
=
Class II
=
Used by Buyer “B”:
Class I
= 10%
Class II = 90%
90%
10%
Average price received by coop and its members =
“Blend” price = (.5 x $10.00) + (.5 x $8.00)
Price paid by Buyer “A”=
(.9 x $10.00) + (.1 x $8.00)
=
$9.80
=
$9.00
Price paid by Buyer “B”=
(.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.