1. Retail Distribution of Dairy Products Bob Cropp Dairy Marketing and Policy Specialist University of Wisconsin-Madison April 2001

2. U.S. Milk Production & Commercial Disappearance, 1980 to 2000 110 120 130 140 150 160 170 180 198019811982198319841985198619871988198919901991199219931994199519961997199819992000 Billion Pounds of Milk Milk Production Commercial disappearance

3. BFP or Class III Milk Price versus the Support Price, 1970-2000 $3 $5 $7 $9 $11 $13 $15 $17 $19 Jan-70Jan-72Jan-74Jan-76Jan-78Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00 Dollars Per Hundredweight Support price BFP/Class III price

4. Utilization of U.S. Milk Production Product: 1990 2000 Fluid milk 32% 28% Cheese 41% 47% Butter 6% 6% Frozen products 8% 8% Nonfat dry milk 3% 4% Other* 10% 8% * Milk proteins, lactose, nutritional beverages, etc.

7. U.S. Dairy Cooperatives and Their Share of Farm Milk Marketings

8. Cooperatives' share of U.S. farm marketings 77 36 20 11 30 88 38 43 19 12 29 89 29 34 18 13 27 0 10 20 30 40 50 60 70 80 90 100 MilkCottonGrainFruit & veg LivestockTotal Percent of U.S. cash receipts 1982 1997 1999

9. Dairy Cooperatives marketed most of farm milk to others as raw milk. 61 % sold as raw milk and 39% processed and manufactured in co-op’s milk plant. Dairy cooperatives are moving towards more value added activities. Dairy cooperatives are entering into joint ventures with other cooperatives and public corporations.

10. Dairy Cooperative Share of Manufactured Dairy Products, 1997 Dairy ProductMarket Share Butter61% Dry milk powder81% Cheddar cheese70% Other American cheese43% Mozzarella cheese26% Other Italian cheese18% Other cheese9% Total natural cheese40% Packaged (beverage) milk14%

11. Share of Dairy Products Sold Through Retail Stores Fluid Milk 74% Ice Cream 45% Butter 36% Cheese 40%

12. Fluid Milk Factors that have changed fluid milk distribution: 1) Glass bottle late 1800’s 2) Paper carton 1940’s 3) Plastic containers 1980’s These changes forced small bottlers out of business - 10,000 bottlers in 1940 - Less than 300 today

14. Distribution of Fluid Milk By Type of Container, 1973 - 1997

16. Since 1960’s, the balance of power for fluid milk has shifted from milk processors (dealers) to food retailers, primarily large supermarkets. This is forcing bottlers to get bigger Deans Foods and Suiza Foods have been active with acquisitions Deans Foods (13% of market) and Suiza Foods (17% of market) on April 5 announced intent to merge. Dairy cooperatives have entered into milk supply arrangements with major fluid companies. - Dairy Farmers of America with Suiza Foods - Land O’ Lakes with Deans Foods

17. Top U.S. Foodservice Distributors, 1999 Company1999 Sales (Bil. $s)1999 Market Share Sysco Foods17.413.3 Wal Mart14.110.7 U.S. Food/Ahold8.06.1 Alliant6.14.6 XPEDX2.92.2 Total48.337.0

18. Top U.S. Supermarkets

19. Private label dominates the fluid milk business. Percent Private Label White Milk 70.1% Flavored Milk 23.3%

20. Natural Cheese Cheese pricing relies on the Chicago Mercantile Exchange (CME) CME operates 5 business days a week CME prices change due to - A SALE at a different price - A BID at a higher price - AN OFFER at a lower price About 2% of cheese actually sold on CME

22. Distribution of Cheese 40% 43% 17% Retail Food Service Food Processing

23. Unlike fluid milk, branded cheese dominates retail sales. About 68% is brand cheese and 32% private label. Kraft brand has 45% retail market share Cooperatives not major brand sellers, but Land O’ Lakes brand is significant in delli sales. In Food service, Leprino’s is world largest manufacture of mozzarella Schreiber is major player in processed cheese-- more than 50% sold to fast food chains, some to retail as private and brand.

24. Butter: The butter/powder industry that existed in the 1950’s and 1960’s no longer exists. 50% of the butter produced in Wisconsin and California 1975, 366 butter plants, today less than 100 36 dairy cooperatives make butter, 61% share. Butter pricing like cheese is based off of the Chicago Mercantile Exchange.

25. Retail accounts for about a 36% of butter sales Some strong brand Land O’Lakes maintains a 31% market share at retail.

26. Ingredient Markets; Nonfat dry milk - Very little retail sales - About 60% is used in other dairy and food products - A surplus dairy product

27. Dry whey: - Dry whey and whey protein concentrates. - Used in dairy and food products - Competitive on the export market

29. Concern over farm-retail price spread: Fluid Milk: Farm value and retail value move together over time. Margin has increased, retail margin is about 25% - Not used as loss leader as much - Reduced competition at both wholesale and retail Inverse relationship between change in Class I price and margin--when Class I increases both wholesale and retail margins decrease and vice versa.

30. Butter: Retail margin has widened, but highly variable. - Retail margin is about 20% In 1980’s butter price stable due to federal price support. But support price reduced and since 1993 wholesale butter prices well above support. Changes in farm value of milk and retail margins inversely related.

31. Cheese: Retail cheese prices and farm value of milk have been less closely related. - Reduced federal support price - Also time required for raw milk to be transformed into cheese and eventually sold at retail. - A lot of value-added---640 pound cheddar blocks need to to cut and wrapped for consumer sales. Changes in farm value of milk and changes in retail margin inversely related. Retail margin about 36%

32. Ice Cream: Farm value of milk and retail price not closely related. Retail price has increased significantly past 5 years (up 40%)

33. General comments on Retail Margins: Retail margins have increased due to: Increased labor cost - However, output per employee in fluid plants increase more than 140% since 1970 and 150 % in dairy manufacturing firms. Increased packaging costs Increased fuel/energy cost Changes in product packaging, composition-- consumers demand convenience

34. Continuation on changes in retail margin: New product development Reduced competition Retailers have changed pricing strategy--now look to more profit from dairy case.

35. Changes in farm-retail spread and farmer’s share of retail dollar: Farm-retail spread increased 117.7% between 1982-84 and 2000. Farmer’s share of retail dollar: - all dairy products: 36.0% in 1986 29.5% in 2000 - 1/2 gallon of milk 39% - Cheddar cheese 32%

36. Summary Comments: Wholesale and retail prices respond more quickly to farm level price increases than decreases. Farm to retail spreads will likely widen due to more value added activities. Retail concentration is putting pressure on wholesalers that serve them--need to get bigger in order to have market clout. Retail food business is a low margin and high volume business.

37. Retail Food and Beverage Firms Consolidating: 1972 218,300 firms 1997 110,900 firms Market share of top 4 firms: 1972 = 16.2% 1997 = 18.3%

41. Summary continued: Retail prices of dairy products have increased less than retail prices for all food. 1982-84 = 100 retail price index For 2000: All food = 167.8 Dairy products = 160.7