Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture # 9

CONSUMER TRENDS (ETHNICITY ) U.S. population will be nearly 50% non white by year White72%53% Hispanic11%25% African American12%14% Asian4%8% Native American1%1% Trend will be led by an increase in Hispanic population of more than 125%

Source: ERS data, USDA Net Removals, Milk Equivalent-Milkfat Basis, 8/23/05 CCC Net Removals (milk equivalent, milkfat basis)

TRENDS IN THE AGRIBUSINESS ENVIRONMENT AND VALUE CHAINS

AGRIBUSINESS ENVIRONMENT MORE COMPETITIVE MORE CONCENTRATED MORE INTERDEPENDENT MORE INFORMATION ORIENTED MORE END USER ORIENTED RAPIDLY CHANGING

VALUE CHAINS VALUE CHAINS ARE A USEFUL TOOL TO USE IN UNDERSTANDING CURRENT TRENDS A VALUE CHAIN INCLUDES ALL OF THE PRODUCTION AND MARKTING ACTIVITIES REQUIRED TO CONVERT RAW INPUTS INTO A FINAL PRODUCT FOR CONSUMER

TRADITIONAL VALUE CHAINS FOR AGRICULTURE INDIVIDUAL FIRMS COMPETING AT EACH LEVEL OPEN MARKETS BETWEEN EACH LEVEL CONSUMER PREFERENCES COMMUNICATED THROUGH THE CHAIN BY PRICE LITTLE UNDERSTANDING OF FIRMS AT OTHER LEVELS

INPUT SUPPLY PRODUCER ELEVATOR 1ST HANDLER GRAIN/OILSEED PROCESSOR REFINER FOOD MANUFACTURING RETAIL DISTRIBUTION FINAL CONSUMER Figure 1. Human Consumption Value Chain for Grains and Oilseeds

TRADITIONAL VALUE CHAINS FOR AGRICULTURE A FIRMS MAJOR STRATEGIC AND COMPETITIVE CONCERNS WERE AT THEIR OWN LEVEL LITTLE CONCERN ABOUT PROBLEMS OR ACTIVITIES AT OTHER LEVELS IN THE CHAIN MARKET PRICES SERVED AS THE MAIN FORM OF COMMUNICATION BETWEEN LEVELS

TRADITIONAL VALUE CHAINS FOR AGRICULTURE CHAIN EFFICIENCIES GAINED BY COMPETITION AT EACH LEVEL INFORMATION WAS HELD CLOSLY BY THE FIRMS IN THE CHAIN –NOT SHARED WITH COMPETITORS AT THEIR LEVEL –NOT SHARED WITH CUSTOMERS AT NEXT LEVEL

ONE NEW APPROACH TO VALUE CHAINS---VERTICAL INTEGRATION GAIN EFFICIENCY BY ELLIMINATING FUNCTIONS IN THE CHAIN ELLIMINATE COSTS BETWEEN LEVELS IN THE CHANNEL CONVERT PROFIT CENTERS TO COST CENTERS IMPROVE PERFORMANCE OF THE CHANNEL---- LOWER COSTS

GRAIN PRODUCER FEED MILL LIVESTOCK PROD. SLAUGHTER PLANT MEAT PROCESSING PLANT RETAIL DISTRIBUTION FINAL CONSUMER Figure 1. Human Consumption Value Chain for Livestock

ANOTHER NEW APPROACH TO VALUE CHAINS--COORDINATION IMPROVE QUALITY BY BETTER COORDINATING FUNCTIONS IN THE VALUE CHAIN IMPROVE PRODUCT QUALITY BY INFUENCING HOW FIRMS AT OTHER LEVELS OPERATE REDUCE COSTS BY PROVIDING INCENTIVES TO FIRMS AT OTHER LEVELS COMMUNICATE CONSUMER PREFERENCES MORE ACCURATELY

ANOTHER NEW APPROACH TO VALUE CHAINS--COORDINATION SOME EXAMPLES OF COORDINATION IN THE LIVESTOCK VALUE CHAIN –CARCASS CHARACTERISTICS AND LEANNESS IN HOGS –FECAL AND BACTERIA CONTAMINATION IN BEEF AND POULTRY –WITHDRAWAL PERIODS FROM DRUG S AND TREATMENTS –COOL AND SOURCE ANIMAL IDENTIFICATION FOR CATTLE AND HOGS –ORGANIC MEATS

GRAIN PRODUCER FEED MILL LIVESTOCK PROD. SLAUGHTER PLANT MEAT PROCESSING PLANT RETAIL DISTRIBUTION FINAL CONSUMER Figure 1. Human Consumption Value Chain for Livestock

SOME DETERMINANTS OF A VALUE CHAIN’S SUCCESS FOCUS ON VALUE CREATION IN FINAL PRODUCT SHARING INFORMATION TO CREATE COST SAVINGS OR ADD VALUE EQUITABLE SHARING OF RETURNS FOR VALUE CREATION MUTUAL TRUST/COOPERATION AMONG PLAYERS

SOME DETERMINANTS OF A VALUE CHAIN’S SUCCESS OWNERSHIP WHERE NECESSARY ALLIANCES WHERE POSSIBLE SELECTION OF VIABLE PARTNERS CRITICAL MASS AND MARKET PRESENCE QUALITY LEADERSHIP

NEW APPROACH TO VALUE CHAINS NEW VARIETIES OF COMPETITION ARE EMERGING COMPETITION AMONG VALUE CHAINS RATHER THAN AMONG FIRMS AT INDIVIDUAL LEVELS IN SOME CASES FIRMS AT EACH LEVEL ARE ALIGNING WITH COMPETING CHAINS

GRAIN/FORAGE PRODUCERS FEED INGREDIENT SUPPLIERS MILK PRODUCER COOPERATIVE HANDLER MILK PROCESSING PLANT FOOD MANUFACTURER RETAILER Figure 1. Human Consumption Value Chain for MILK

CONSUMER VALUE TRENDS DAIRY VALUE CHAINS WILL BE IMPACTED BY FOOD MANUFACTURING AND RETAIL LEVELS IN THE CHAIN –THEY WILL BE LOOKING AT WHAT CONSUMERS DEMAND –PRODUCERS WILL BE INVOLVED MORE AND MORE IN PROVIDING DESIRED PRODUCT CHARACTERISTICS

TASTE Time Consumer Value Hierarchy Source: Ron Olson, General Mills Consumer Values in Food Products

TASTE CONVENIENCE Time Consumer Value Hierarchy Source: Ron Olson, General Mills Consumer Values in Food Products

TASTE CONVENIENCE HEALTH BENEFITS Time Consumer Value Hierarchy Source: Ron Olson, General Mills Consumer Values in Food Products

CONSUMER VALUE TRENDS IT IS GENERALLY ACCEPTED THAT THE FOOD MANUFACTURER CANNOT IGNORE THE LOWER ITEMS IN THE VALUE HEIRARCHY MUST BE ABLE TO PROVIDE ALL THREE –TASTE –CONVENIENCE –HEALTH BENEFITS

NEW APPROACH TO VALUE CHAINS PROCESSOR TRAITS GOING FORWARD –HIGHER LEVELS OF DESIRED COMPONENTS –IMPROVED PROCESSING EFFICIENCY –IMPROVED FUNCTIONALITY IN FOOD MANUFACTURING

NEW APPROACH TO VALUE CHAINS NO LONGER VIEW QUALITY OF PRODUCTS AS STARTING AT FRONT DOOR OF PLANT FUTURE SUPPLY CHAIN LEVELS WILL BE MORE INTERCONNECTED MORE CLOSELY THAN IN THE PAST INFORMATION SHARED FROM RAW PRODUCT SOURCES THROUGH BACK DOOR OF PLANT AND ON DOWN TO RETAIL AND CONSUMER

NEW APPROACH TO VALUE CHAINS REQUIRES RADICAL CHANGES IN RAW PRODUCT PROCUREMENT –CONTRACT SPECIFICATIONS FOR SOME –ESTABLISHING TOLERENCES AND TESTING PROTOCOLS AT All LEVELS –MORE COMPLETE UNDERSTANDING OF SUPPLIER COSTS AND CAPABILITIES –ARRIVING AT MUTUALLY ACCEPTABLE SOLUTIONS THAT PROVIDE GREATER VALUE

NEW APPROACH TO VALUE CHAINS HEALTHINESS AND WHOLESOMENESS HAVE BECOME A VALUE EXPECTATION FOR CONSUMERS –NUTRIENT CONTENT –NUTRIENT QUALITY FAT PROTIEN CARBOHYDRATES VITAMINS AND MINERALS –FOOD SAFETY

GRAIN/FORAGE PRODUCERS FEED INGREDIENT SUPPLIERS MILK PRODUCER COOPERATIVE HANDLER MILK PROCESSING PLANT FOOD MANUFACTURER RETAILER Figure 1. Human Consumption Value Chain for MILK

NEW APPROACH TO VALUE CHAINS CHANGES IN WHO SUPPLIES RAW PRODUCT –ESTABLISHING A LIST OF “APPROVED” SUPPLIERS –INSPECTING SUPPLIER FACILITIES –ESTABLISHING REQUIRED SUPPLIER DOCUMENTATION –MUCH SMALLER # OF SUPPLIERS

Questions?