More than one way ...
Dairy co-ops pursue varied paths to structural changeBy Carolyn Liebrand,
Agricultural Economist
USDA/RBS/Cooperative Services
Editor’s note: This article is based on USDA/RBS Research Report187, “Structural Changes in the Dairy Co-op Sector, 1992-2000,” which presents a detailed look at the changes in the U.S. dairy cooperative sector and documents the structural changes that occurred in the final decade of the 20th century.
A
s the 20th century drew to a
close, the dairy industry continued
to adapt to dynamic
market conditions such as
advances in production technology
(both on the farm and in the milk
plant), consolidation and growth of retail
food chains, and vertical and horizontal integration
in milk manufacturing/processing
sectors. Other changes include new trade rules and practices
and changes in government dairy programs.Increasing size and productivity of production units and reduction in the number of production plants have become the tell-tale signs of change. Dairy cooperatives have likewise followed this pattern: fewer cooperatives were handling an increasing volume of milk, as the waning years of the century saw another wave of rapid consolidation in the dairy sector.
Dairy cooperative adjustment
The number of dairy cooperatives in the United States fell almost 20 percent between 1992 and the end of 2000. However, the adjustment was more dynamic than the net loss of 52 cooperatives indicates. A closer look reveals that 84 cooperatives went out of existence (or, 32 percent of the 1992 dairy cooperative numbers) during the nine-year period.
Some dairy co-ops disappeared
Dairy cooperatives exited the industry in a variety of manners. Many of the exiting cooperatives dissolved, going out of business and leaving no successor organization (table 1). Former members then joined other cooperatives, formed new cooperatives or resorted to selling their milk directly to milk plants independent of a co-op. A small number of dairy cooperatives were acquired by other dairy firms not operating on a cooperative basis (“investor-owned firms”). A few co-ops had their milk sales decline to less than one-half of their total sales, thus were no longer classified as predominately dairy cooperatives. This reorientation to other operations, usually feed or supplies, sometimes was the result of a merger with a supply cooperative. Finally, another large segment exited by merging with other dairy cooperatives.
Cooperatives combined with other dairy cooperatives for various reasons such as: to take advantage of scale economies; to better configure and utilize a system of manufacturing plants and to reduce operating overhead; to foster marketing clout; and to secure milk supplies, often eliminating overlapping activities, such as milk pick-up routes. Another driving force behind the mergers was to keep pace with consolidation in the retail sector, thereby allowing the unified cooperatives to supply larger volumes and meet customer product requirements through horizontal integration.
Also, the increased ability to transport milk due to improvements in trucking, milk quality and milk handling– as well as advanced packaging technology—may have facilitated this consolidation between dairy cooperatives. Furthermore, the increased merger activity the last three years of the century may have, in part, been a result of cooperatives anticipating and reacting to the new, consolidated Federal Milk Marketing Orders (FMMO), which went into effect Jan. 1, 2000. The mergers expanded the geographical reach and market power of the surviving/emerging organizations and by 2000 some dairy cooperatives’ memberships spanned multiple regions or were even nationwide, while the number of states housing dairy cooperative headquarters shrunk.
When dairy cooperatives exited the industry by merger, either the exiting cooperative’s operations were consolidated into an ongoing dairy cooperative that maintained its identity, or a new dairy cooperative was formed and the unifying cooperatives lost their identities. Indeed, 26 of the 36 dairy cooperatives exiting through merger between 1992 and the end of 2000 eventually became part of six new cooperatives formed by consolidation in this time period. Four of these six new cooperatives handled more than 1 billion pounds of milk per year. Just 10 cooperatives that exited via unification were absorbed into ongoing concerns.
Formation of new dairy co-ops
In contrast to the overall trend of shrinking dairy cooperative numbers, 32 dairy cooperatives were newly organized between 1992 and the end of 2000. This means that 15 percent of the nation’s present dairy cooperatives were formed during the past nine years. Six cooperatives were created by dairy cooperative unification, as mentioned previously, but most were formed by newly organized groups of producers (table 2). So, despite the headline-making consolidation taking place in the dairy cooperative sector during the 1990s, other trends were also afoot.
All but one of the 26 cooperatives organized by these new groups of farmers seeking alternative marketing avenues for their milk handled less than 1 billion pounds of milk annually, and the majority of these handled less than 50 million pounds. These new groups of producers banded together for a variety of reasons. Some formed to capture marketing margins by further processing their milk, focusing on a particular market niche. Commonly, the market niche was specialty cheese — a unique variety or product with distinguishing characteristics (perceived or real) such as “organic,” “rBST-free,” “locally produced,” etc. One group formed with the intention of processing branded fluid milk and capitalizing on similar types of attributes.
Adjustment in dairy co-op operations The type of marketing operations a dairy cooperative engages in on behalf of its members varies from cooperative to cooperative. Between 1992 and 2000, there was adjustment in the numbers of dairy cooperatives engaging in various marketing activities. In addition to entries and exits, some cooperatives altered the focus of their operations to adapt to changing market conditions, which put them into a different operational group.
A large portion of U.S. dairy cooperatives do not own or operate milk manufacturing or processing facilities, but they do provide producers a voice in the marketplace, meeting such needs as negotiating milk price and terms of trade, ensuring the accuracy of weights and tests in computing producer milk checks, and providing representation in government policy matters. These “bargaining- only” cooperatives were the most numerous type in 1992 and, by 2000, represented an even larger share of U.S. cooperatives (table 3). Many of the new bargaining- only cooperatives were formed by new groups of producers (as opposed to being the result of cooperative consolidation).
A handful of cooperatives closed their aging manufacturing facilities during this time period but continued their bargaining activities. These co-ops were regrouped into USDA’s “bargaining- only” designation. Thus, bargaining-only cooperative numbers dropped off at a slower pace than the other operating types over the nine-year period.
Another subset of the nation’s dairy cooperatives, in addition to their bargaining activities, manufactures milk into commodity, or undifferentiated, dairy products, such as butter, powder and bulk cheese. Some of this activity occurs on a small scale for market-balancing purposes, and others on a large scale to capture economies of size. This commodity manufacturing group declined by more than one-half from1992 through 2000, a higher rate than the other operating types.
Maintaining small, under-utilized and old balancing plants is costly, while building new, large-scale plants is also expensive, particularly for small cooperatives. On the other hand, for those that manufactured commodity products on a large scale, the limited flexibility of a narrow product line probably left them more vulnerable to inventory losses arising from the volatile milk prices of the 1990s than a more diversified product line would have. Accordingly, no new cooperatives were organized to focus solely on these types of operations, an indication of the commodity manufacturing cooperatives’ declining profitability in the marketplace.
Many of the commodity manufacturing cooperatives that exited between 1992 and 2000 did so by merging with diversified cooperatives — cooperatives that own a system of plants to make a variety of products — both differentiated and commodity, while at the same time selling a large portion of their milk supply to other handlers and performing the requisite bargaining services. The consolidation of commodity manufacturing cooperatives with (or into) diversified cooperatives improved flexibility in product mix and efficiency
from a more rationalized system of
plants. Some plants were closed when
they could not be utilized efficiently
within the new system of plants. These
plant closures alarmed some producers
who formerly had their milk shipped to
these local plants, even though their
milk still had a marketing outlet with
the cooperative.Diversified cooperatives are the least numerous of the operating types —these 14 cooperatives represent just 6.6 percent of all U.S. dairy cooperatives in 2000. However, they account for over one-half of all milk handled by the nation’s dairy cooperatives. Their shrinking numbers truly reflect the fewer-but-larger co-op trend and represent increasing horizontal, as well as vertical, coordination. An indication of their vitality is that none of the exiting diversified cooperatives dissolved or went out of operation. Instead, all but one merged with another cooperative.
These cooperatives expanded (predominantly
through mergers) in
response to the changing market conditions.
Indeed, by 2000, there were no
diversified cooperatives that handled
less than 50 million pounds of milk
annually. Their large volumes, wide
product mixes and geographical reach
position them to be suppliers of choice
to the large, national food companies.
Moreover, some are sophisticated marketers
of consumer products as well.
This vertical integration
extends the dairy
producer members’
operations up the food
chain, returning more
of the marketing margins
back to the farmer.Taking an alternative approach, some cooperatives manufacture selected products on a smaller scale for a particular market niche—typically cheese. For this article, these “brandedcheese” cooperatives and the cooperatives that package fluid milk are grouped together. Both aim to move their members closer to the consumer. In fact, some of these dairy cooperatives market products made from member milk directly to consumers.
The specialty cheese cooperatives must compete with other cheesemakers on the basis of the quality and uniqueness of their product, as they lack the size and scale to compete on price with the large commodity cheesemakers. (Almost by definition, these specialty cheese-making cooperatives are predominately small, handling less than 50 million pounds of milk annually.) These smaller cooperatives must find and develop a niche for their specialty product. For those unable to do so, the market is unforgiving.
Stiff competition also faces fluid processing cooperatives. The mature, highly competitive fluid processing sector has faced perhaps the most consolidation by investor-owned firms
(IOF) and only a handful of dairy
cooperatives continue to thrive in the
fluid business. Yet one cooperative has
been rather successful and grew to
where it handled over 1 billion pounds
of milk in 2000.Regardless of the intense market competition, fluid and branded-cheese cooperatives are the second most common type of dairy cooperative in the United States and represent an ever-so-slightly larger share of total dairy cooperative numbers in 2000 compared to 1992. Thirty percent of the fluid and branded-cheese cooperatives were formed since 1992, a faster pace than for the other operating types. All of these newly formed branded-cheese and fluid processing cooperatives were small.
Dairy co-ops remain viable
Dairy cooperatives have taken diverse roads to address their specific marketing needs, but each has its merits. Thus, the role of cooperatives in the dairy industry remains a dominant one as the 21st century begins.
Dairy cooperatives in the United States have demonstrated an ability to successfully adapt to changing market conditions. While the trend appears to be away from operating small balancing plants, others are finding opportunity in capturing niche markets on a small scale. Alternatively, some cooperatives have eliminated their unprofitable manufacturing operations and focus their attention on gaining power at the bargaining table and providing services to their members.
Finally, representing the majority of total cooperative milk volume, diversified cooperatives offer milk and dairy product buyers a full range of services while securing marketing margins and security for their members. Many of the high-volume hard product manufacturing cooperatives have been folded into the plant systems operated by the diverse cooperatives. Thus it seems dairy producers will continue to have a variety of cooperative avenues to meet their needs and preferences in marketing their milk.[end]
