Abstract

DARIMAC: An Export Marketing

Agency-In-Common for Dairy Cooperatives

Carolyn Betts Liebrand

Karen J. sPatz

The report conceptualizes a marketing agency-in-common (MAC) of dairy

cooperatives to facilitate the export of manufactured dairy products. A specific

plan for the organization and operation of a MAC to export product(s) is

described. Avenues for exporting both bulk and differentiated (value added)

product lines are discussed.

Key Words: Marketing agency-in-common, dairy cooperatives, agricultural

exports

ACS Research Report 126

December 1993
Preface

Dairy cooperatives in the United States are facing greater challenges with

lower Government support prices and increased foreign competition.

Liberalization of trade will present further challenges for dairy cooperatives.

Previous research has demonstrated that export opportunities exist for U.S.

dairy products. To take advantage of these new market opportunities and retain

control, dairy cooperatives can organize a marketing agency-in-common

(MAC). This report develops a model for interested dairy cooperatives to

employ in designing a MAC.

In-depth personal interviews were conducted with selected MACs that are

currently exporting agricultural products to examine their structures and operations. Further analysis revealed the elements necessary for a successful MAC.

These elements were incorporated into a model MAC, DARIMAC, designed for

exporting bulk and differentiated dairy products. This report is for illustrative purposes only and does not take the place of an in-depth feasibility study.

The mention of an organization’s name, products or brand name is for discussion purposes only, and does not constitute endorsement or recommendation by USDA or ACS.

Acknowledgments

The authors thank the cooperatives that contributed insight into their operations,

and our reviewers. We also recognize K. Charles Ling, ACS dairy program

leader, for conceptualizing the project.
Contents

. . . Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III

Market Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Analysis of Existing MACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Key Issues for Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

DARIMAC ............................................................................................................. 20

Proposed Mission and Objectives ............................................................ .20

General Characteristics.. ........................................................................... 20

Structure and Organization.. ...................................................................... 23

Products ..................................................................................................... 24

Services ..................................................................................................... 25

Membership Agreement.. .......................................................................... 26

Financing ................................................................................................... 29

Marketing and Promotion .......................................................................... 30

Implementation .......................................................................................... 31

Future Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ii
Highlights

Cooperatives dominate the manufacture of many dairy products. The

recent lowering of the minimum Government support price and anticipated

change in international trade barriers have fostered an increased interest in

exporting among dairy cooperatives.

The cost of U.S. milk production is competitive among major dairy exporting countries, the third lowest after New Zealand and Ireland. However,

European Community dairy subsidies hinder the ability of U.S. dairy industry to

compete on price alone. Nonetheless, there are opportunities for exporting U.S.

dairy products and future growth in exporting is predicted. Numerous reports

have outlined the potential for exporting U.S. dairy products.

Options for dairy cooperatives range from exporting through a domestic

broker to exporting direct. A strategic alliance such as a marketing agency-incommon (MAC) is one potential avenue for cooperatives entering or expanding

export markets. A MAC is a group of marketing cooperatives that market under

a common agreement. A MAC would enable dairy cooperatives to capitalize on

economies of size while allowing member cooperatives to maintain operational

independence.

Seven MACs were studied in detail to demonstrate how groups of cooper-

, atives have successfully used a common agency to market member products.

Six of these MACs are organized as cooperatives and the seventh is the exclusive marketing agent for its seven cooperative “partners.” All agencies offered a

complete product line in their respective commodity category. This allows buyers to “one-stop shop” rather than having to purchase separately from multiple

sources.

Like other cooperatives, hired management of the agencies is governed by

their boards of directors. Six of the agencies sell to both domestic and export

markets. The independent company (exclusive agent) is contracted to sell only

to specific foreign countries. Six of the MACs studied had membership agreements whereby members grant authority over selected functions to the agency.

Most of the MACs studied required the agencies’ members to sell all their product through the agency. Three agencies own subsidiaries that operate independent for-profit companies. They expand the agencies’ product lines with purchases from members and nonmembers.

Three agencies source product to fulfill an order from the member in closest proximity to the customer. Two agencies allow members the first right of

refusal. When a product is differentiated, the agency chooses the member

cooperative that can fulfill the specifications of an order. None of the agencies

physically pool their products. However, two agencies pool revenues. The other

agencies keep revenues separate for each member, passing net revenues from

sales of differentiated and branded products back to the source cooperative.

All agencies market their products under a brand name and/or label identifying the cooperative or agency name. Five of the six agencies organized as

cooperatives also sell nonmember goods. Two market nonmember products

when short on member products and three market nonmember products to

expand the product line.

. . .

ill
Highlights

Dairy cooperatives collectively have large market shares in most bulk or

commodity products, a key element for successful group marketing. Several

cooperatives can manufacture “customized” bulk products and differentiated

value-added products, enabling a dairy MAC to offer a wide variety of products

to overseas customers.

A model agency, called DARIMAC for illustration, functions as an exclusive

export trading agency for designated products of member dairy cooperatives.

This model agency will serve as a resource for dairy cooperatives exploring

alternative organizations to export their products. DARIMAC’S mission is to

enhance the economic position of member cooperatives by enabling members

to participate in international markets at reduced risk and on a long-term basis

through centralized marketing of dairy products.

DARIMAC is organized as a cooperative. Member cooperatives must be

willing and able to commit a specified volume of their manufactured product(s)

for export. DARIMAC will serve as the export department for each of the members-finding buyers, negotiating sales, preparing export documentation, handling document transmittal, collecting from buyers, and paying the supplier.

DARIMAC will provide services such as market research and promotion, quality

control, and assistance in labeling and packaging.

The board will consist of one director from each member cooperative.

Each member cooperative will have one vote, plus additional votes based on a

moving-average of their volume of business. The number of personnel required

will depend upon the diversity of products and volume of business. The staff

would be comprised of a general manager, international sales manager, a

transportation manager, and support staff.

DARIMAC’S primary purpose will be to sell member products overseas.

However, the agency will also export nonmember products on a commission

basis. This will broaden the product line and fill supply gaps.

Membership agreements will require members to market any and all

exports through DARIMAC. The agreements specify sales terms, contract modification and termination, and contract enforcement. Quality standards will be

specified and strictly enforced.

Differentiated products will be sold on a commission basis only. Member

cooperatives will commit a specified volume of their bulk products for export.

Earnings and expenses associated with sale of bulk products will be pooled

without a physical pooling of products. Transportation costs will be pooled and

charged to members according to distance and volume. When DARIMAC

secures an order for bulk products, it will select a cooperative(s) to fill the order

based on buyer preference, destination, availability of product, and the cooperative’s share of orders previously filled.

DARIMAC will serve as the export agent for member cooperatives. Method

of export will depend upon the country and the market targeted. Initially, domestic sales by DARIMAC will be prohibited except for special circumstances, as

defined by the board.

iv
Highlights

Potential members must provide funds to finance a feasibility study and

organization. DARIMAC could be financed using a base capital plan. DARIMAC will

pay all exporting costs from the marketing fee charged for pooled products and

from the commission charged on differentiated products.

DARIMAC will use the “DARIMAC Brand” for products marketed through the

agency. It will also be responsible for all advertising and promotion of member

products in overseas markets. Product research and development will be the

responsibility of member cooperatives, but DARIMAC will advise members of

needs and tastes of foreign consumers.

Once organized, the manager will conduct in-depth market studies to

determine long-term market strategy. It will be implemented in stages to ensure

success. Further avenues for growth will also be considered, including forming

an export trading company under Title III of the Export Trading Company Act of

1982 with noncooperatives. Expansion of markets could include domestic

sales. Future strategies could also include alternative business arrangements

such as joint ventures, subsidiaries, and licensing.
DARIMAC:

An Export Marketing ,Agency-In-Common for Dairy Cooperatives

Carolyn Betts Liebrand

Karen J. spaa

U.S. dairy cooperatives continue to search for

new markets and structures to address the changes

in the U.S. dairy industry. The U.S. dairy market is

mature-growth is expected to be generated by

population growth and not by increased per-capita

consumption. Increases in productivity are outstripping the needs of the U.S. domestic market

and is driving the U.S. dairy industry to look

beyond its borders. Continued relatively low

Federal support prices for milk and increased competition from foreign competitors will require dairy

cooperatives to work harder in finding profitable

markets for their members’ milk. On the other

hand, the breakup of the former Soviet Union,

along with the possibility that major milk producing nations may reduce or limit subsidies to their

dairy industries, may lead to new or expanded

market opportunities for the U.S. dairy industry.

Research by the National Dairy Board has shown

that bulk U.S. commodities currently cannot compete on the basis of price with low-cost producers

in New Zealand and Australia, nor with Europe’s

hefty export subsidies [5] l. Those forces push

world market prices 30 to 40 percent below prices

for U.S. bulk commodities like nonfat dry milk and

butter. However, apart from lower cost producers

and as trade barriers worldwide are under increasing pressure to reform, this price gap could shrink.

When they do, dairy cooperatives should be positioned to enter international markets. Furthermore,

competing in export markets could help U.S. dairy

cooperatives to focus improvements in product

quality and packaging, and better position themselves to meet potential competition from foreign

firms in the advent of more liberalized trade.

The National Dairy Board also promotes U.S.

dairy products in export markets with funds from

1 Number in brackets refer to references.

TERMS

Bulk products or commodities

A more generic product with little to distinguish it from manufacturer to manufacturer.

These are standard products commanding

little or no price differences between manufacturers, such as butter or nonfat dry milk

powder.

Differentiated or value-added products

Products that have been further processed

or distinctively packaged and/or formulated giving it unique characteristics, setting it

apart from products made by other manufacturers. Often the point of difference commands a higher price for the product, for

example, branded products or specialty

cheeses.

Marketing agency-in-common (MAC)

A grouping of marketing cooperatives, or a

combination of marketing cooperatives and

individual farmers, who market products

under a common agreement. It enables

cooperatives to pool resources while allowing member cooperatives to maintain operational independence.

Dairy Price Support Program

The Federal government offers to purchase

surplus butter, nonfat dry milk, and cheddar cheese at announced prices. These

prices are set to cover processing costs,

allowing processors to pay farmers an

announced minimum price for manufacturing milk.
the cooperator program of USDA’s Foreign

Agricultural Service (FAS) and producer checkoff

funds. Dairy cooperative leaders around the country acknowledge the need for cooperative efforts in

identifying ways to strengthen their bargaining

power in the global marketplace and to enhance

returns to members.

A strategic alliance, such as a marketing agency-in-common (MAC), is a potential avenue for

dairy cooperatives to enter or expand export markets. Pooling resources and marketing expertise

would allow dairy cooperatives to capitalize on the

economies of size and market power of a larger

organization. A MAC would enable cooperatives to

develop overseas markets, facilitate and/or manage the export of manufactured products, while

allowing member cooperatives to maintain operational independence. Cooperatives could collectively gain control over export activities at less cost

than if each were to setup individual export

departments. Relatively few dairy cooperatives

have delved into international markets, so there

may be fewer obstacles to cooperation between

cooperatives who may have viewed themselves as

domestic market competitors [2]. The few dairy

cooperatives already involved in exporting may

welcome the opportunity to spread the risks of

international marketing, while cooperatives with

limited international experience may wish to enter

the global arena at reduced cost, capitalizing on the

expertise of sister cooperatives.

There have been numerous reports published

outlining the potential for U.S. dairy products in

overseas markets, so this report will briefly review

the export market potential facing dairy cooperatives. A review of other successful MACs, their

structures and performance, will identify critical

elements dairy cooperatives must adopt to organize a successful agency for exporting. Finally, a

model organization that dairy cooperatives can use

to effectively compete in international markets will

be described in detail.

MARKET POTENTIAL

Dairy cooperatives hold a prominent position

in the U.S. dairy industry. Cooperatives provided a

market for 76 percent of all milk sold to plants and

dealers in 1987, the most recent year that cooperatives were surveyed by the Agricultural Service

Cooperative (ACS) [4]. A fundamental role of dairy

cooperatives is to guarantee members a market for

their milk. As a result, the task of balancing the

supply of milk to meet demand has fallen largely

to the cooperatives. Many cooperatives manufacture butter, powder, cheese, and other products

(less perishable than fluid milk) to provide additional market outlets as well as to facilitate balancing activities by maximizing milk’s ability to be

stored and transported. As a result, cooperatives

dominate the manufacture of many dairy products.

Ninety-one percent (525,000 metric tons) of all

dry milk products manufactured in the U.S. in 1987

were distributed by just 31 cooperatives (table 1).

Cooperatives also distributed 83 percent of the butter and dry whey products manufactured in the

U.S. While 82 cooperatives (28 percent of all dairy

cooperatives) handled butter, only 22 cooperatives

(7 percent) distributed dried whey products. In

addition, close to one-third (94 cooperatives) marketed 45 percent of all cheese manufactured in the

U.S.

The risk to a cooperative of ensuring a market

for its members’ milk is minimized by the Federal

Dairy Price Support Program. Cooperative losses

are limited because the Government will purchase

all butter, cheese, and nonfat dry milk (NFDM) that

cannot be sold commercially at or above

announced prices. USDA purchased 28 percent of

the butter, 5 percent of the American cheese and 26

percent of the NFDM produced in the U.S. (annual

average for 1987 through 1991) (table 2).

However, since late 1983, successive reductions in the support price for milk have increased

dairy manufacturers’ exposure to risk. Not only are

the purchase prices for surplus products lower, but

milk price movements have become increasingly

volatile and erratic as market forces are less

restrained by the lower floor under prices (fig 1).

These volatile prices for manufactured dairy products have made managing inventories more risky.

2
Table 1--Marketings/distribution of selected dairy products, 1987

Product

Cooperatives Share of dairy Volume Cooperative Total

that co-ops that distributed by share manufactured

distribute distribute cooperatives of U.S. in U.S.

Butter 82

Dry milk products 3 1

Cheese 94

Cottage cheese 23 8 88 13 689

Dry whey products 22 7 414 83 498

Frozen dairy product mix n/a n/a 33 10 329

Ice cream and ice milk 2 1 7 44 592 8

Bulk whole milk l 251 85 24,331 n/a n/a

Packaged fluid milk l 34 11 3,339 14 24,638

Bulk cream 70 24 n/a n/a n/a

Total dairy cooperatives

Number Percent

28

10

32

1,000

metric tons Percent

1,000

metric tons

416 83 501

525 91 580

1,100 45 1,100

Sources: Marketing Operations of Da& Cooperatives, ACS Research Report 88 (41.

1 Net cooperative volume (adjusted for intercooperative transfers); volume covered by bargaining and purchased from other sources is

included.

Table P-Dairy product removals by USDA, 1987 through 1991 1

1987 1988 1989 1990 1991 Average

1,000 metric tons

Butter production 501 547 588 591 606 567

Butter removals 2 85 142 188 182 201 159

Cheese production 2,424 2,527 2,546 2,749 2,763 2,602

(American only) 1,232 1,251 1,213 1,313 1,272 1,256

American cheese removals 128 108 17 10 35 59

NFDM production 480 444 397 399 398 424

NFDM removals 254 121 0 53 122 110

Removals as share of U.S. production

Percent

Butter 17.0 25.9 31.9 30.7 33.1 28

All cheese 5.3 4.3 0.7 0.4 1.3 2

American cheese 10.4 8.6 1.4 0.7 2.7 5

NFDM 52.9 27.3 0.0 13.4 30.6 26

Source: Dairy Situation and Outlook Yearbook, Economic Research Service, USDA, August 1992.

1 Delivery basis after unrestricted domestic sales. Includes removals under DEIP and similar export programs, may

include purchases under 709 and 4a.

* Includes butter-equivalent of anhydrous milkfat.

3
Figure l- Comparison of the Minnesota-Wisconsin (M-W) price

and the milk support price, 1978 through 1992

Dollars Per Cwt

16

15

14

8

M-W 1

Support

1978 1980 1982 1984 1986 1988 1990 1992

4
Table 3-Ranking of countries on the basis of cost of producing milk, 1988

Cost per cwi excluding

subsidies

Cost per cwt including

(rank) subsidies (rank)

Index U.S.=100

New Zealand 42 (1) 26 (1)

Ireland 65 (2) 60 (2)

United States 100 (3) 100 (3)

Netherlands 101 (4) 103 (4)

Canada 140 (5) 146 (6)

France 174 (6) 140 (5)

West Germany 192 (7) 160 (7)

Source: Baker, Dereck, et al [l].

U.S. Milk Producers’ Cost of Production

Is Competitive

Basic to any industry’s competitiveness is the

cost of raw materials. Cost per unit of output measures the relative efficiency of dairy farms in different countries. A 1990 study compared milk production costs in seven major milk producing countries

[l]. A ranking of countries by their costs of milk

production from this study is presented in table 3.

The cost of producing milk in the U.S. was

third lowest among the seven exporting nations

compared. Milk production costs were lowest in

New Zealand, followed by Ireland. When the value

of government subsidies to producers was added

in; these two nations’ advantage over the U.S.

increased. France and West Germany showed the

highest costs per cwt of milk produced, but if subsidies are considered as part of the cost, the gap

narrows somewhat between each of these countries

and the U.S.

New Zealand and Ireland have significant

export market shares in butter and nonfat dry milk

due to their relatively low milk production costs.

However, despite their efficiencies, Ireland’s and

New Zealand’s milk production accounted for just

1 and 2 percent of the world milk supply (on average, 1987 through 1992), while the U.S. produced

an average of 15 percent of the world’s milk supply

between 1987 and 1992 (table 4). Comparative

domestic consumption also affects export potential.

Export Market Opportunities

The potential of U.S. dairy cooperatives to

play a major role in exporting is largely untapped.

Despite controlling a major portion of the domestic

production of certain manufactured products,

dairy cooperatives have not been significant

exporters. In 1990, the ACS surveyed cooperative

exporters [9]. Eight dairy cooperatives reported

annual exports valued at $12.4 million. However,

two-thirds of these sales were through domestic

agents. Dairy cooperatives’ share of U.S. dairy

product exports was only 3.8 percent in 1990

(table 5).

U.S. exports of dairy products totalled $325

million and included a wide selection of products

in 1990 (fig. 2). The leading product exported was

butter, 27.3 percent of the value of all dairy product

exports, followed by whey and cheese (12.1 and

11.9 percent, respectively). Ice cream exports made

up 8.5 percent of all dairy exports.

Cooperatives exported a limited variety of

products and accounted for minor shares of overall

exports of any given product. The value of cooperative exports of each dairy product was less than 7

percent of all U.S. exports of that product. The

value of cooperative exports of butter, cheese, and

NFDM was a large proportion of total cooperative

dairy exports (58.7 percent) (fig 3). However, the

value of cooperative exports of these 3 products in

1990 amounted to just 5 percent of total U.S.

exports of butter, cheese, and NFDM. The value of

5
Table AMilk production, selected countries, 1987-92

1987 1988 1989 1990 1991' 19922 Average

U.S. 64,732 65,840

Canada 7,986 8,229

EC (total) 119,421 117,106

France 26,146 26,000

Ireland 5,751 5,573

Netherlands 11,672 11,406

West Germany 32,436 31,974

Other E.C. 42,416 42,153

New Zealand 7,245 7,936

Other countries 226,295 229,922

Total 425,679 429,033

U.S. 15 15 15 15

Canada 2 2 2 2

EC (total) 28 27 27 27

France 6 6 6 6

Ireland 1 1 1 1

Netherlands 3 3 3 3

West Germany 8 7 7 7

Other EC 10 10 10 10

New Zealand 2 2 2 2

Other countries 53 54 54 55

Total 100 100 100 100

1,000 metric tons

65,424 67,276

7,980 7,975

117,722 117,920

26,150 26,400

5,575 5,595

11,321 11,285

32,442 31,100

42,234 43,540

7,406 7,746

236,378 241,056

434,910 441,973

Percent of world total

67,370 68,150 66,465

7,900 7,850 7,987

114,211 112,852 116,539

25,880 25,800 26,229

5,527 5,467 5,581

11,050 10,890 11,271

28,900 28,300 30,859

42,854 42,395 42,599

7,973 8,334 7,773

231,789 227,568 232,168

429,243 424,754 430,932

16

2

27

6

1

3

7

10

2

54

16 15

2 2

27 27

6 6

1 1

3 3

7 7

10 10

2 2

54 54

100 100 100

Source: WoM Dairy Situation, Foreign Agricultural Service, USDA, selected issues.

1 Preliminary.

2 Forecast.
Table 5-Exports of dairy products by reporting cooperatives, 1990

Product

Value

of

co-op

exports ’

Share of

total

co-op dairy

exports

Value of

all U.S.

dairy

exports 2

Share of

total

U.S.

dairy

exports

co-op

share of

U.S.

exports by

product

Commodities- 7,300,823 58.7 145,760 44.8 5.0

Butter & anhydrous milkfat P) 88,639 27.3

Cheese (“) 38,726 11.9

Nonfat dry milk (“1 18,395 5.7

Whey, fluid or dried 2,618,226 21.1 39,228 12.1 6.7

Lactose 441,523 3.6 16,755 5.2 2.6

OtherCasein

Donations

Evaporated and condensed milk

Fluid milk and cream

Ice cream

Ices

Miscellaneous

Other whey products

Puddings

Rennet and concentrates

Yogurt and buttermilk

2,071,540 16.7 123,490 38.0

8,780 2.7

13,511 4.2

3,588 1.1

17,385 5.3

27,681 8.5

3,176 1.0

24,860 7.6

3,931 1.2

2,568 0.8

7,443 2.3

10,567 3.2

1.7

(“1

(“1

TOTAL 12,432,112 100.0 325,233 100.0 3.8

Dollars Percent $1,000 Percent Percent

1 ACS survey of cooperative exporters.

2 Foreign Agricultural Trade of the United States, Calendar Year 1990 Supplement.

3 Confidentiality requirements prohibit release of data.

7
Figure 2- U.S. dairy exports, 1990

Cheese ( 12%)

Nonfat dry milk (6%)

Whey( 12%)

. . .

. . .

. . . .

. . . .

. . . .

. . . .

t:::::::::::~::::::::::::::::::::::~:::::::::::~

I

Other (30%)

Butter/milkfat (27%)

Donations (4%)

Ice Cream (9%)

Figure 3- U.S. dairy cooperative exports, 1990

Butter, cheese, NFDM (59%)

Whey (21%)

Lactose (4%)

Other (17%)

8
whey products exported made up the next largest

share of cooperative exports, 21.1 percent, but

accounted for only 6.7 percent of total U.S. whey

exports.

Thus, there are opportunities to market U.S.

dairy products internationally, but cooperatives to

date have only played a relatively minor role.

A number of Government programs aid commercial exports of U.S. agricultural products

including dairy (see box to the right). The USDA

Dairy Export Incentive Program (DEB’) subsidizes

export sales of selected U.S. dairy products to specified countries. Eligible products include nonfat

dry milk, whole milk powder, butteroil, butter, and

cheddar cheese. Algeria and Mexico were the major

destinations in 1992. DEIP was first authorized in

1985 and is scheduled to expire in 1995. DEIP

export subsidies offset the difference between the

U.S. price and the world price. All sales are made

by private firms which meet certain criteria in

order to bid for export subsidies for a particular

country. The exporter must negotiate and carry out

all export transactions.

The short-term goal for DEIP is to increase

U.S. dairy product exports. The long-term goal is to

help U.S. dairy companies gain exporting experience. This program has not only increased export

sales but helped to develop, maintain, or expand

new markets. Most DEW sales in 1992 were by

European Community (EC) companies acting as

brokers for U.S. produced dairy products. In the

case of butteroil, all DEIP exports were by four EC

firms. This is in conflict with the long-term goal of

DEE? Recently, more U.S. companies have participated in the program including some dairy cooperatives. Thus, cooperatives have become aware of

foreign buyer’s needs through DEIP but have not

taken advantage of the opportunities to directly

develop a presence in overseas markets.

Furthermore, U.S. cooperatives forgo the margins

that the EC firms realize from DEIP sales by not

directly exporting themselves.

Although DEE” sales represent subsidized

sales, they can give U.S. dairy products a presence

in markets they might not otherwise have. This visibility could lead to significant long-term relationships with foreign customers when these developGOVERNMENT EXPORT ASSISTANCE

PROGRAMS FOR COMMERCIAL SALES

Export Guarantee Program (GSM-102)

Provides the exporter with a full faith and credit

guarantee issued by the Commodity Credit

Corporation (CCC} for 6 months to 3 years on

the foreign letter of credit for 98 percent of the

value of the commodity This guarantee allows

“high risk” countries to arrange financing to buy

U.S. agricultural commodities.

Intermediate Export Credit Program

(GSM-103)

Essentially the same as GSM-102 (above) except

that it provides the exporter with a full faith and

credit guarantee for 3 to 10 years.

Dairy Export Incentive Program (DEIP)

The USDA awards cash subsidies to qualified

low bidders to enable exporters to meet prevailing world price for targeted dairy products and

destinations.

ing countries’ economies become stronger, enabling

them to purchase U.S. dairy products at more competitive prices. In addition, should major dairy

countries that subsidize their dairy industries

reduce or eliminate their subsidization, the U.S.

may be well positioned to capture significant market share, having already familiarized various

importers with U.S. dairy products.

Another effort that benefits potential U.S.

exporters of U.S. dairy products is the National

Dairy Board (NDB) generic advertising and promotion campaigns. This export market development

began in 1991 with U.S. dairy producer check-off

funds and USDA Cooperator program funding.

Market research is conducted to identify potential

export market opportunities. Markets targeted are

Mexico and Pacific Rim countries, including Japan.

9
Products promoted are value-added products such

as frozen dairy products and cheese. The NDB educates foreign consumers about the quality of U.S.

dairy products in the markets with the best sales

potential. Generic promotion of U.S. dairy products

benefits U.S. exporters who take advantage of the

increased demand by actively exporting to those

targeted countries.

ANALYSIS OF EXISTING MACS

Agricultural cooperatives have formed marketing agencies-in-common (MAC) for a variety of

reasons, including: to market by-products (viewed

as peripheral to the group of cooperatives’ main

focus), to expand their customer base through

diversified products lines and/or increased volume, and to capture savings from collective marketing efforts. Other MACs have organized to

spread the costs of establishing consumer-recognizable brand names for differentiated products.

Dairy cooperatives have also formed MACs.

Some dairy MACs negotiate price premiums in

Federal milk marketing orders. A recent trend

among dairy cooperatives has been formation of

information sharing associations to exchange

inventory and market data for specific products

(see box below). However, there are several successful non-dairy cooperative MACs whose features could be used in the design of a model MAC

for exporting manufactured dairy products.

Seven MACs were studied in detail to demonstrate how groups of cooperatives have successfully used a common agency to market member prodEXAMPLES OF DAIRY MARKETING AGENCIES-IN-COMMON

Central Milk Producers Cooperative

A federation of 14 dairy cooperatives that supply about 95 percent of the Class I milk in the

Chicago federal milk marketing order. It sets prices on Class I and II milk, All orders for milk go

through CMPC, and the federation determines the most efficient strategy to move the milk,

Mid-Atlantic Cooperative Milk Marketing Agency

A federation of 3 large cooperatives that represent 85 to 95 percent of the milk marketed in the

Middle Atlantic milk marketing area. It negotiates over-order premiums for Class I milk,

Challenge Cream and Butter Association

A federation of 2 cooperatives in California for marketing bulk fluid milk and dairy products.

Dairy Marketing Cooperative Federation

A federation formed in 1992 of 9 cooperatives that share marketing, production and inventory

information on nonfat dry milk products.

Dairy Marketing Information Association

An association formed in 1993 of 9 or more cooperatives reaching from coast to coast to share marketing information for whey products and lactose on a weekly basis.

Western Cooperatives Milk Marketing Association

Formed in 1992 to share marketing information weekly on butter and powder, it also takes various

market actions to enhance returns to member cooperatives and their milk producer owners.

10
ucts. Insight into the design and operation of these

various agencies was obtained through personal

interviews, consultation of literature and staff

familiar with the agencies, and a mail survey of

one of the agencies. To assist discussion, characteristics of the agencies are presented in table 6. The

features of the categories are interrelated in some

cases. For example, type of product(s), their production cycle and/or market characteristics influence the terms of the membership agreement.

Likewise, whether a MAC employs pooling is

dependent on the type of product(s) handled, i.e.,

pooling is more appropriate for bulk products than

for differentiated products.

Elements of Selected MACs

Six of the agencies are organized as cooperatives. The seventh is the exclusive marketing agent

for its seven cooperative “partners.” This independently owned company is contracted to sell the

cooperatives’ products only to specified export

markets; the cooperatives retain the right to market

their product independently in all other markets.

These seven agencies have been in existence

for an average of 39 years, ranging from 12 to 82

years in operation. Three of the marketing agencies

have been in operation for over 60 years. This indicates the longevity of this form of business.

The oldest marketing agency examined was in

dairy marketing. At one time this agency marketed

dairy products for 38 dairy cooperatives in the

western U.S. It has changed substantially over its

history in terms of number of members and products marketed. As member dairy cooperatives

grew, they began marketing independently and left

the agency.

Memberships in the agencies examined

ranged from 2 to 8. More than half of the agencies

studied had 5 or more members. Members in all

but one of the agencies surveyed were cooperatives, while one agency had mixed membership of

cooperatives and individual growers/packers.

The number of States where the member cooperatives are headquartered varied. Participating

cooperatives often have producer-members in more

than one State, enabling many of these agencies to

source products from more than one region. Four

of the agencies source the member products from

one region, two source from multi-regions, while

just one agency sources product locally

Products- All agencies offered a complete line of

products in their respective commodity category.

This allows buyers to “one-stop shop,” rather than

having to purchase separately from multiple

sources. Some agencies also offer a specified mix of

member products. For example, a cotton agency

offers a specified blend of different cottons to a

mill.

In four agencies, products were distinct from

each participating cooperative due to differing

qualities or degree of processing. In one case, members of an agency handled different product types

or varieties. In another agency, all participating

cooperatives produced a homogeneous product,

though their buyers perceived quality differences

between source plants.

Market Share-Market share is the share of sales

by an agency as a percent of total sales in a market

area. This market area can be further defined as

regional, domestic, export, or global. Furthermore,

market power can also be demonstrated by share of

production in a specific region. Six agencies have a

major share of specific market area and/or

product. Two agencies control less than 10 percent

of the market.

Board of Directors-Each of the six cooperative

agencies has a board of directors with a

representative(s) from each member cooperative.

Five agencies have one vote per director, where

each member cooperative has the same number of

directors-thus equal voting. For one agency,

voting is proportional to volume of product sold.

The exclusive agent that contracts with

cooperatives does not have a board of directors per

se, but a majority of current cooperative partners

must approve the participation of any additional

partners.

The number of directors on the agencies’

boards varies from 3 to 18. Four of the agencies’

11
Table 6--Elements of selected agricultural marketing agencies-in-common

AGENCY:

Element:

A B C D E F G

Tvpe of

organization

Year formed

Number and

type of

members

coop

1922

6 packers--

(3 co-ops,

3 individuals)

coop

1979

3 co-ops

CO-0p

1980

5 co-ops

coop

1911

2 co-ops

Independent

company co-op co-op

1981 1930’s 1972

8 co-ops-- 3 co-ops 4 co-ops

(1 of which is a

federation of

co-ops)

Location of

members

Product

source

WA MN, ND

Local Regional

CA, OR

Regional

CA

Regional

LA, NY, OH,

PA, WI

Multi-regional

Multi-state

Regional

CA, MS, TX

Multi-regional

Products

(excluding

nonmember

products)

Market share

Fresh pears, Dried beet pulp, Dried fruits and Butter, dried Frozen bovine Turkey, Raw cotton

apples, cherries sugar beet nuts: walnuts, milk products semen processed

molasses raisins, prunes, turkey products

hazelnuts, figs

Major share of Major share of Major shares of Substantial Major share of Strong brand Majority of U.S.

a pear variety, U.S. exports U.S. portion of U.S. exports image cotton

substantial production; California butter production

share of apple strong brand production;

production in image world- strong brand

region wide image in

western U.S.

Board of

directors

6--one from 18--6 from 15--3 from 1 to 3 from None-- 3--one from 4--one from

each member each member each member each member independent each member each member

co-op co-op (chair, co-op (pres, co-op company. co-op. co-op

(manager, with vice-chair, pres, chair, v. chair). Co-op partners (manager).

board member v. pres, 2 vote on

as alternate). directors). Voting based acceptance of

Equal voting Equal voting on volume Equal voting new partners. Equal voting Equal voting

Continued--
Table 6 (cont.)--Elements of selected agricultural marketing agencies-in-common

AGENCY:

Element:

A B C D E F G

Management

Domestic or

export sales

Hired. Hired.

Centralized HO Centralized HQ

near members. near port.

Board sets Board sets

policy policy

Both Both

Hired. Hired. Independent Hired. Hired.

Centralized HO. Centralized HO. company. Centralized HQ. Centralized HQ

with sales

offices.

Board sets Board sets Sets own policy Board sets Board sets

policy policy policy policy

Both Both Exports only Both Both

Export sales

methods

Domestic

brokers and

direct sales

Exclusive Exclusive Domestic Direct sales Directs sales, Direct sales

foreign agent foreign brokers brokers with foreign domestic and

and direct sales and agents agents-- foreign agents

distributor

network

Sales staff 2--international, 4--combined 4 VP’S, 1 1 --international 1 --international 1 --export HO staffed by

1 --domestic, domestic and manager-- marketer, plus marketer manager personnel from

3--international international international staff (domestic member co-ops

marketers marketers sales; plus staff and

(domestic and international)

international)

Overseas

offices

No No No No No No 5 foreign

offices

Membership

agreements

Seasonal Requires 2 Exclusive All of member Distributorship; All of member None.

agreements; all years advance agency rights; co-ops’ company has co-ops’ Membership fee

of members’ notice to all of members’ specified exclusive products sold is sufficient

products sold terminate; all of products sold products sold representation through agency; incentive to

through agency members’ through agency through agency rights in agency has market through

byproducts sold specified authority to agency

through agency markets enforce quality,

form and timing

Continued--
Table 6 (cont.)--Elements of selected agricultural marketing agencies-in-common

AGENCY: A B C D E F G

Element:

Subsidiaries

or divisions

2 divisions- 1 subsidiary for 1 subsidiary for 3 divisions-- none none 1 subsidiary for

supplies, credit, nonmember mixing member retail, food nonmember

(both dormant) sales products, and service and sales

nonmember food ingredients

sales

Sourcing of

products

Agency directs Agency directs Agency directs Agency directs Agency fills Agency directs Agency directs

order according order according order according order according customer order order according order according

to customer’s to customer‘s to customer’s to customer’s by purchasing to customer’s to customer’s

specifications, specifications specifications specifications products from specifications, specifications.

availability of partner co-ops availability of

product, product, Final sales

proximity to proximity to decisions rest

customer, customer, with each

proportion of proportion of individual co-op

orders member orders member

co-op has coop has

already filled; already filled,

co-op has first member coop

right of refusal has first right of

refusal.

Pooling Pools Pools proceeds, No

expenses; net of

individual expenses;

members may separate pools

combine fruit by product

Pools expenses No

and returns

No Pools expenses

Continued-
Table 6 (cont.)--Elements of selected agricultural marketing agencies-in-common

AGENCY: A B C D E F G

Element:

Operating Monthly per- Each co-op Pro-rata share Margins fund Margins fund Per-unit Monthly percosts unit fee based pays in monthly of operating operating costs operating costs marketing fees, unit fee based

on agency‘s its estimated costs, based on higher rate for on agency’s

projected pro-rata share sales volume further estimated

annual budget of direct and processed annual budget

indirect products, lower

marketing costs for less

for each differentiated

product pool products

Financing Retained Per-unit Retained Retained Family financed Retained Membership fee

earnings marketing fee earnings earnings earnings

Distribution Patronage Through net Revolvement of Patronage Earnings remain Revolve retains All earnings

of earnings dividends; proceeds of prior year’s dividends in privately held at board’s returned to

retained pools retains company discretion members via a

earnings volume-oriented

revolved at formula

Board‘s

discretion

Branding Agency brand No brand, but Each member Agency brand No brands, sold Agency brand Each member

and member sold under co-op markets primarily; under member only co-op markets

brand/name agency name under individual member co-op co-op’s names under individual

brand brands also co-op name

Non-member Yes Yes Yes Yes No Yes No

sales

Promotion Agency Agency Member co-ops’ Agency Company Agency Member co-ops’

and responsibility responsibility responsibility responsibility responsibility, responsibility responsibility

advertising some joint

effort

Research and None Both agency Both agency Agency None Agency None

development and member and member

co-ops co-ops
board of directors have one director per member

cooperative, one agency has three directors per

cooperative; and one has six directors per member

cooperative. Where there is only one director per

member, it is usually a manager, while boards having more than one director per member are composed of a mix of management and directors.

Offices, Management, and Sales Staff-Hired

management operates within the policy guidelines

set by the board. The independent company

manages its own operations, but works with the

partner cooperatives in meeting each individual

cooperative’s needs. Five cooperative agencies

conduct all operations from one office. One agency

has centralized headquarters in addition to

dispersed sales offices. Furthermore, one agency

also maintains a separate office to manage

domestic transportation. The headquarters of the

independent company and one of the cooperative

marketing agencies are not located in close

proximity to their member cooperatives.

Six of the agencies sell to both domestic and

export markets. The independent company (exclusive agent) is contracted to sell only to specific foreign countries.

The exclusive export agency employs export

sales staff only. Four agencies have separate sales

staff for domestic and export sales.

Only one agency has overseas sales offices.

The other six agencies sell from offices in the

United States.

The agencies use a variety of methods to

export member products. Four agencies use more

than one method depending on market characteristics. They use domestic brokers and/or sell direct

to overseas buyers and/or use exclusive and

nonexclusive foreign sales agents. One agency is

itself the exclusive domestic-based export agent for

its partner cooperatives. A domestic broker is used

by three agencies; five make direct sales; and four

use foreign agents where two of these are exclusive

agent agreements.

Membership Agreements-Membership

agreements documenting the rights and duties of

member cooperatives and their agency in the

marketing of member cooperatives’ products

through the agency are necessary for an agency to

pool the risk (and benefits) of marketing. Members

grant authority over selected functions to the

agency through membership agreements. In

addition, they enable an agency to offer customers

a reliable supply of products. In most of the

agencies, members are required to sell all their

product through the agency. In one case, products

committed to the agency are byproducts of

individual member cooperatives’ processing. These

cooperatives market their primary products

individually, but sell 100 percent of their

byproducts through the agency. In the other

instance, the cooperative partners give the

exclusive agent the right to market all their exports

to specified countries and only to those countries.

The cooperatives retain the right to market their

products to all other markets, and the company is

specifically prohibited from marketing outside the

specified countries and from marketing

nonmember products. One agency does not have

an exclusive agreement, but the membership fee is

an incentive for members to sell through their

agency. For this agency, there are relatively few

buyers for its products, compared to the other

agencies, making it more difficult to market

outside the agency.

Subsidiaries-Three agencies own subsidiaries

that operate as independent for-profit companies.

Profits are then distributed to members of the

agency, usually based on their individual sales

through the agency. The subsidiaries allow the

agencies to expand (diversify) product lines with

purchases from members and nonmembers. For

example, one agency’s subsidiary sells animal feed

products produced by nonmembers which

complement the animal feed ingredients produced by

members. Two of the subsidiaries sell member and

nonmember products (one sells a similar product, the

other sells a different product or mix of the member

and nonmember products), and one agency’s

subsidiary offers only nonmember products.

One agency has two divisions providing nonmarketing services to member cooperatives.

16
However, these divisions are dormant, because

there are currently other sources of the services that

are more cost-efficient.

Sourcing of Products-How a product is sourced

from members depends on type of product (highvalue, differentiated products verses bulk

commodities) and the capabilities of members to

deliver a specified product. When member

cooperatives are equally capable of fulfilling an

order, the agency directs the member cooperative

in closest proximity to the customer to supply the

product. This approach is used by three agencies.

Two of these agencies allow their members the first

right of refusal-when the agency assigns a sales

order to a cooperative, the cooperative can refuse

to deliver under the terms offered.

As trust in the agency grows, cooperatives are

less likely to balk at the terms offered. When the

products offered by members are uniquely differentiated, then the agency chooses the member that

can fulfill the specifications of the particular order.

This is essentially the case for all of the agencies.

Customers often request a specific cooperative’s

product (even for the agency selling “undifferentiated” byproducts). In all cases, it is the agency that

directs delivery, although for three agencies the

final sales decision rest with each member cooperative.

None of the agencies physically pool (commingle) their members’ products. Most member

cooperatives store their own products until sale.

One agency, whose products are packaged and

highly differentiated, rents warehouses for future

distribution. Another agency may rent storage

space at port prior to shipping when necessary. In

one agency, members sometimes combine their

products to complete an order. However, this is

done at the member cooperatives’ discretion, not

the agency’s.

Pooling-Two agencies pool revenues from the

sale of member products and pay members the

average pool price. Pooling of revenues allows the

agency to spread the price risk among all members.

This is practical for undifferentiated bulk products.

The other cooperatives keep revenues separate for

each member cooperative, passing net revenues

from sales of differentiated and branded products

back to the source cooperative.

Operating Costs-Agencies employ two methods

to pay operating costs. Five agencies charge a perunit fee and two operate on the margin between

what they pay members for their products and

what they receive from the sale of members’

products. Per-unit fees are collected either as a

commission or from a market service fee. A

commission or market service fee is a set

percentage of the price, or set per-unit charge. Two

of the five agencies require member cooperatives to

pay the service fee on a monthly basis. The per-unit

fee is based on an annual budget determined from

estimated, or in some cases, known volumes, and

then broken down to a monthly fee charged to all

members. Another agency charges two different

fees, a higher one for those members selling highervalue, differentiated products that require more

marketing support, and a lower fee for those

selling more generic products that incur fewer

marketing expenses. Agencies that operate on a

per-unit cost basis typically take the market price

for their products. Agencies operating on profit

margins provide full disclosure to members on all

sales and costs.

Financing and Distribution of Earnings-While

the independently owned company is self-financed,

four of the agencies raise capital with retained

earnings. One is financed by part of its per-unit

marketing fee, and one uses a membership fee. The

earnings of the privately held company remain

within it, while six of the others return equity at the

board’s discretion. One of the six distributes

earnings through net proceeds from sales.

Branding-All agencies market their products

under a brand name and/or with a label

identifying the cooperative or agency name. There

are several approaches to branding-agency brand,

cooperative brand, a shared label with the agency

and cooperative brand, or a combination of

17
methods. Two of the oldest agencies exclusively

use the agency’s brand and have developed a

brand name identity over the years. In addition to

bulk products, they also offer some high-value,

differentiated or further processed products. One

agency uses only its name rather than a brand

name. This agency markets bulk products used in

further food processing and in animal feed. Three

agencies market member products using individual

cooperative names or brands, as each has a unique

product and/or the brand name was well

established prior to organization of the agency.

Members of the remaining agency pack their

product with both the cooperative brand or name

and the agency brand. This allows buyers to

reorder products from a specific source.

Nonmember Sales-Five of the six cooperative

agencies also sell nonmember goods. The

independent company (exclusive agent) can market

only the products of the partner cooperatives. Two

of the agencies sell nonmember products when

there is shortage of member products. The other

three market nonmember products in order to

expand the product line, offering “one-stop

shopping” through a diversified product line to

customers. Two of these cooperatives sell

nonmember products through subsidiaries.

Advertising and Research-Advertising

responsibilities depend upon whether the agency

or the individual cooperatives own the brand(s).

The one agency whose members’ products are

marketed under individual cooperative brand

names is not responsible for advertising. Instead,

individual cooperatives advertise their own

brands. Another agency also provides advertising

services for its members-neither agency nor

cooperatives have brand names. One agency jointly

advertises and promotes with its members. The name

of individual members is used to identify products

because neither agency nor cooperatives have a

brand name. Four agencies that use the agency brand

or name, or share labeling are primarily responsible

for advertising and promotion.

Two agencies conduct all product research

and development for its member cooperatives.

18

Three agencies do not carry out any research and

development and two agencies share research and

development responsibilities with their members.

KEY ISSUES FOR CONSIDERATION

To evaluate factors critical to the success of a

MAC, industry-specific issues must be differentiated from structural and organizational issues.

Generally, many of the obstacles cited by the agencies studied were due to industry-specific problems, whereas factors contributing to success were

assigned to the strength of organizing as a MAC.

Furthermore, the members and their MAC are

dependent upon each other for vigor and growth.

The reasons for success were varied and

ranged from structural (farmer/members having a

better understanding of the marketing process

because they are board members) to management

(management with strong background in marketing rather than production). The success of the

agency was most often attributed to:

1.

2.

3.

4.

5.

membership agreements that give the agency

authority to make marketing decisions and set

quality standards while allowing members to

operate independently;

experienced marketing and sales staff;

the wide selection of products offered by the

agency;

better use of resources by pooling expenses and

services; and

the agency controlling a major share of the U.S.

market.

An examination of two recently failed MACs,

Farmers Export Company (FEC) and Valley Bean,

highlights the importance of membership agreements that give control of marketing to the MAC.

The membership agreements of these MACs that

went out of business allowed the members to sell

their products themselves or through others. Thus,

these MACs had to compete with their own members, and ended up purchasing product from nonmembers because members’ products were not

available-they had been sold elsewhere.

Furthermore, they could not refuse delivery from
members, in effect prohibiting the enforcement of

quality standards. Consequently, all member cooperatives shared the costs of low-quality grain and

the resulting loss of market value while those who

“unloaded” low quality product through the MAC

individually benefited.

Problems faced by the successful agencies

studied were primarily industry-specific issues.

However, structural and organizational problems

were also identified. Industry-specific issues

included increased environmental concerns, urbanization, and increased global competition. In other

cases, individual members experienced difficulties

causing uncertainty for the agency. One agency’s

member cooperatives were loosing producer-members because an investor-owned competitor was

offering better prices. This highlights the unique

symbiotic relationship between the agency, its

member cooperatives, and the member cooperatives’ producer-members.

The majority of agencies identified “politics”-conflicting philosophies, personalities, goals,

management styles, and/or egos-as a hindrance

to their goals. Politics can override clear business

judgements.

Differences among members are also a cause

for concern. In one agency, the volume of business

from its member cooperatives was lopsided, but

the members had equal votes on the board. This

situation created conflicts among the member

cooperatives. Proportional voting was suggested as

an alternative. One agency’s board has proportional voting which prevents similar contention.

Conflicts in goals and understanding of business practices between the board and management

creates inefficiencies. Members need to define the

purpose of the agency and management activities

that don’t require board approval. For example,

FEC lost nearly one-half of its net worth in futures

market speculation. (Futures market speculation is

not to be confused with hedging with futures contracts, which is a tool for managing price risk.)

If directors do not understand marketing they

can inhibit or delay important marketing decisions

by management. Commitment by all members is

necessary for a successful long-term marketing

strategy. Furthermore, if management does not

understand the philosophy behind cooperatives, it

may fail to achieve the agency’s goals.

Implications for a Dairy Export Marketing

Agency-in-Common

The key issues cited by the agencies studied

will also be crucial considerations in the formation

of a dairy exporting MAC. Given the highly developed markets of many dairy cooperatives, a key

area will be the membership agreement. A successful agreement will give the agency power over

export marketing decisions while not encroaching

on members’ domestic marketing plans. In the

same vein, the agreement must also obtain a commitment to market a specific volume through the

agency. The success of many dairy cooperatives

and the differing “corporate cultures” of management and boards will also make “politics” a potential impediment to cooperation.

Dairy cooperatives collectively have large

market shares in most bulk or commodity products, which is a key element for a successful group

marketing effort. The ability of several cooperatives to manufacture “customized” bulk products

and differentiated value-added products will allow

an agency to offer a wide product line to overseas

customers.

Given the expected changes in international

and domestic markets for dairy products, including

reduced trade barriers and Government support,

U.S. dairy cooperatives can actively take advantage

of market opportunities by combining resources to

market products through a MAC. This form of

organization should appeal to dairy cooperatives

as they can retain control over operations and

domestic marketing. Furthermore, since U.S. cooperatives have not yet established a strong overseas

market presence, a new agency will not conflict

with previous marketing arrangements. Finally, a

dairy MAC can be designed to incorporate all the

key elements that contributed to other successful

agencies.

19
DARIMAC

The remainder of this paper describes a model

agency, referred to as DARIMAC, which functions as

the exclusive export trading agency for designated

products of member cooperatives. DARIMAC is a

name used only for illustrating a hypothetical organization and is not an actual or proposed organization. This model agency can serve as a resource for

dairy cooperatives exploring alternative means to

export their products by providing insight into the

structure and operations of one method. Dairy

cooperatives can pick and choose from DARIMAC’S

attributes to design an organization that will fulfill

their specific purposes (see table 7 for a summary).

Proposed Mission and Objectives

The mission of DARIMAC is to enhance the economic position of member cooperatives by

enabling the member cooperative to participate in

international markets at reduced risk and on a

long-term basis to the greatest mutual benefit

through centralized marketing of dairy products.

The proposed objectives are:

1. to provide member cooperatives with greater

marketing options;

2. to enhance dairy cooperatives’ export market

share;

3. to become the primary reliable dairy product

marketing source for foreign customers;

4. to involve all interested U.S. dairy manufacturing cooperatives;

5. to establish brand identification of the agency;

6. to effectively conduct all export-related activities, assuming title and payment risk, for a wide

variety of dairy products;

7. to set and ensure standards for product quality

and proper packaging; and

8. to pool resources for market research and development of new and value-added products.

General Characteristics

DARIMAC is organized as a cooperative whose

members include dairy cooperatives as well as federated cooperatives and marketing agencies-incommon owned and controlled by dairy cooperatives. The organization is engaged in the production and/or sale of manufactured milk products for

which it exercises full authority in the sale of these

products. Member cooperatives or associations

must be willing and able to commit a specified volume of their manufactured product(s) to DARIMAC

for export.

As a cooperatively owned federation, control

is in the hands of its member cooperatives. As

owners, member cooperatives can ensure the agency is meeting their needs and performing the functions they desire. In essence, DARIMAC will act as

the export department for each of the member

cooperatives-finding buyers, negotiating sales,

preparing export documentation, handling document transmittal, collecting from buyers, and paying the supplier. Several of the successful agencies

studied perform these functions, allowing member

cooperatives to concentrate on production and/or

processing. Dairy cooperatives that lack, or who

have minimal exporting expertise, may find an

exporting MAC worthwhile. In addition, DARIMAC

will provide services such as market research and

promotion, quality control, and assistance in labeling and packaging. Strict quality control by some

of the agencies studied was instrumental in establishing customer loyalty in both domestic and overseas markets. DARIMAC must also be able to assure

customers of consistent high quality products. In

fact, lack of authority to enforce product quality

standards was key to the failure of two exporting

MACs.

A large resource base is required to become a

steady supplier to overseas markets. U.S. dairy

cooperatives have this potential-producing 83

percent of the dry whey, 83 percent of the butter, 91

percent of the dry milk products, and 45 percent of

the cheese made in the U.S. in 1987 [4].

Furthermore, the 20 largest dairy cooperatives produced more than 90 percent of the cooperative volumes of butter, dry whey, and dry milk products.

Thus, DARIMAC would control significant resources

from just a segment of the U.S. dairy cooperative

output.

20
Table 7--Elements of DARIMAC

Element DARIMAC

Type of organization

Year formed

Number and type of members

Location of members

Product source

Products (excluding nonmember products)

Market share

Board of directors

Management

Domestic or export sales

Export sales methods

Sales staff

Overseas offices

Membership agreements

Subsidiaries or divisions

Sourcing of products

Cooperative

Model developed in 1993

All U.S. manufacturing dairy co-ops eligible

Multi-regional

Multi-regional

Bulk and differentiated manufactured dairy products

Could control a major share of bulk dairy products

One from each member co-op (manager, with board member as

alternate).

Proportional voting

Hired.

Centralized HQ.

Board sets policy

Export only

Directs sales, domestic agents and foreign agents

Experienced international marketers

No

Requires 2 years advance notice to terminate; members export

only through agency; agency has authority to enforce quality,

form and timing

None, possible in the future

Agency directs order according to customer’s specifications,

availability of product, proximity to customer, proportion of orders

member has already filled

Continued--
22
Potential member cooperatives are located all

across the U.S. Because some of the MACs studied

have been successful with memberships that

stretch across regions, it is possible that dairy cooperatives could overcome any obstacles their geographical dispersion might present. Similarly, other

agricultural cooperatives have been successful with

widely dispersed members. However, time and

effort are likely to be needed to generate confidence in DARIMAC and unity of purpose among

widely distributed cooperatives.

Education of member cooperatives will be of

utmost importance. Developing export programs

and markets, as well as building long-term relationships with the right partners, will take time. A

lo- to 20-year perspective is not unreasonable. In

addition to the complexities of doing business

domestically, international markets pose added difficulties such as language barriers, currency fluctuations, different laws, government instability, and

cultural and taste differences. These markets traditionally take longer to develop, but as with any

long-term investment, it can provide long-term

payoffs. Members must trust that their investment

in DARIMAC is wise, even if benefits are not immediately seen.

Structure and Organization

Directors-Each member cooperative will have a

seat on the board. Representatives will be the general manager or chief executive officer (CEO) with

the president of the board from each member cooperative acting as an alternate. Each member cooperative will have one vote, plus additional votes

based on a moving average of their volume of business (i.e., the average of the last 3 years’ exports

through DARIMAC). Member cooperatives with

more at stake in DARIMAC’S operations will have

greater voting power. This board structure has

worked successfully for other marketing agenciesin-common, complete with proportional voting (in

some cases). Having just one representative from

each cooperative member on DARIMAC’S board will

keep it an efficient, workable size.

Management and Staff-Leadership from

management and the board is key to successfully

entering the international market. Short-term

domestic pressures will be intense, so expansion

into the foreign markets will require vision and

commitment. The long-term cost of developing

export markets may be less than the opportunity

costs of not pursuing a long-term strategy to

expand overseas sales.

DARIMAC will require fewer personnel than if

each member cooperative had its own export marketing department. Careful evaluation of staffing

needs is essential, for under-staffing could be as

disastrous as over-staffing is inefficient. DARIMAC

staff will be required to serve the needs of both customers and member cooperatives. The number of

personnel required will depend on the diversity of

products and the volume of business.

The staff would include a general manager or

CEO with expertise in international marketing,

international sales managers/marketers, a transportation manager and support staff - secretaries

and bookkeepers/accountants. The board must

clearly communicate DARIMAC’S mission and objectives to the general manager and then grant him or

her authority to make day-to-day decisions.

Management must keep the board informed of

DARIMAC operations to avoid mishaps such as

when Farmers Export Company managers went off

course into speculation in the futures market

instead of hedging.

Highly trained international marketers should

be hired and rewarded for their contributions to

the success of DARIMAC. Each sales manager’s area

of responsibility could be defined by criteria such

as: marketing area, product type, or end-user.

Marketers should stay current on importing countries’ regulations and requirements (such as labeling). Office personnel will handle all orders, export

documentation, billing, accounts payable, and general administration. A staff member (part-time or

full-time) should maintain quality control and

assist in formulation of products to meet customer

needs. Another manager would oversee transportation logistics to coordinate movement of products

to port and overseas.

23
Location of Headquarters-Location of the

headquarters must enable DARIMAC to meet

member cooperatives’ needs without favoring any

particular member. To avoid the appearance of

partiality, the office should not be in a member

cooperative’s facility. Only one of the agencies

studied used member facilities for its headquarters.

The office should be easily accessible to major

airports to facilitate convenient travel connections

for DARIMAC’S sales managers, customers, and

member cooperative representatives attending

board meetings. It is important to remember that

location of headquarters will not affect shipment of

product because no product will ever make its way

to headquarters.

Markets-At the outset, DARIMAC will confine its

sales to foreign markets. The agreement will

require members to make all exports through

DARIMAC. Members would be less likely to

relinquish control of their individually developed

domestic markets. U.S. dairy cooperatives have

only limited involvement in export markets so

DARIMAC will be in a strong position to be the

cooperatives’ exclusive export arm. However, the

possibility of DARIMAC being a full-time player in

both domestic and international markets should be

considered a future option because the market

power of a MAC would provide greater control

and coordination in the domestic market also.

Overseas Offices-Although a foreign sales office

is not necessary at start-up, foreign travel by the

agency staff is essential. Personal contact with

customers is viewed as a statement of commitment

to their market. Long-term commitment is often

enough to give an exporter a competitive edge.

Export Sales Methods-In essence, DARIMAC

serves as export agent or management company for

its member cooperatives. So, DARIMAC can choose

from a variety of exporting methods to make

international sales-exporting direct, selling to a

domestic-based export management company or

agent, or selling through a foreign agent or

distributor. Foreign agents include brokers who do

not take title and provide fewer services than a

distributor. Distributors usually perform more

services such as outlined in an agreement which

specifies the territory, advertising, quality of goods

on sale, risk allocation, and distributorship

procedure. Agreements can also be written for

brokers that include defining market(s) served and

renewal procedures.

The appropriate method of export will depend

upon the country and the market targeted. For

example, in some countries retail sales are handled

directly by retail buyers-bypassing wholesalers.

In this case, DARIMAC might sell directly to the

retailer or through an agent. Foreign agents know

the marketing and distribution system within their

country. Choosing the right agent is critical because

in some countries the arrangement is legally binding with or without an agent agreement. In-depth

market studies will determine the method of export

and distribution appropriate for each targeted

country. More than one method could be used per

country depending on the products, but in most

cases, foreign agents are exclusive importers.

Furthermore, DARIMAC could sell to domestic

based export management companies-but foreign

sales arrangements give DARIMAC more control of

its products further down the marketing chain and

enable it to return any margins from exporting to

its members. In addition, export arrangements

involving domestic agents may be inefficient

because DARIMAC will perform the same functions

as a domestic agent.

Subsidiaries-In time, need for a DARIMAC

subsidiary may develop in order to expand or

diversify product lines, and/or handle nonmember

sales. However, it would be premature to initially

pursue the creation of subsidiaries.

Products

DARIMAC will handle all available products

demanded by foreign buyers in an effort to be the

single contact point for U.S. dairy products.

DARIMAC will export bulk dairy products (such as

butter, cheese, lactose, dry milk, whey products,

etc.) and “value-added” or differentiated products

24
(for example, branded products, frozen dairy

desserts, yogurt, specialty cheese, etc.). A wide

variety and volume of products will enable

DARIMAC to effectively compete in world markets.

At times, one product or product type may subsidize the sale of another, allowing DARIMAC to

maintain its marketing edge and customer loyalty.

Money spent on developing markets is lost if a

product is marketed overseas only in years of surplus or relative profitability.

Foreign companies, along with a few domestic

companies, are currently capturing margins from

the export of U.S. dairy products with assistance

from the Federal Government’s Dairy Export

Incentive Program (DEIP). Thus, DARIMAC could

cultivate new markets by using the DEP.

The value of exporting bulk or undifferentiated products goes beyond the margins generated.

Bulk sales under the DARIMAC name will further

promote recognition in foreign markets, perhaps

opening up new markets for member products.

Also, exports of dairy commodities may contribute

to improved or more stable domestic prices.

Customized formulations and/or packaging

to meet specific needs of foreign customers can add

value to traditionally generic commodity products.

For example, the Foremost Ingredient Group of

Wisconsin Dairies manufactures about 50 specialized whey products. Through DARIMAC, foreign

customers could obtain a wider range of products

and product-formulation capabilities.

The most promising opportunity for generating positive margins is in marketing high-value or

differentiated products such as specialty cheeses,

yogurt, and ice cream. According to National Dairy

Board (NDB), foreign customers of dairy products

more willingly pay a premium for the diversity,

quality, safety, and consistency of U.S. value-added

dairy products. For example, market research conducted by NDB in Japan revealed that, given the

Japanese concern over the safety of food, highlighting the pasteurization of U.S. cheeses may give

them a unique competitive position [6].

Furthermore, as the world moves toward freer

trade, and subsidies are lowered on European

cheeses, it is likely that there will be a bigger market for U.S.-produced specialty cheeses. Dairy

cooperatives manufacture a variety of differentiated dairy products. This variety of products could

be offered collectively, offering overseas customers

“one-stop shopping” for high-value products.

Nonmember S&S-DARIMAC’S primary purpose

will be to sell member product. However, DARIMAC

may also handle nonmember sales on a

commission basis, thus providing income for the

agency. After subtracting the cost of the sale, which

would lower the per-unit operating costs for

member cooperatives, profits would be distributed

to members based on their volume or value of sales

through DARIMAC.

A critical element to effectively compete in

foreign markets is the ability of a supplier to provide a complete line of products. Buyers prefer to

buy from one source rather than shopping around

due to lower transaction costs and favorable pricing practices such as pricing a group of products

versus individual pricing. Nonmember sales products can be used to broaden product lines. Sellers

must offer a reliable source of quality products. If

member supplies of a specific product is tight, the

agency risks losing customers. Nonmember products can also fill the supply gaps, allowing

DARIMAC to retain its status as a reliable supplier.

Furthermore, nonmember products, if available at

less cost than member products, could lower prices

to customers-giving the agency an additional

competitive edge.

Services

To gain a marketing edge in overseas markets,

DARIMAC must offer consistently high-quality

products. Once foreign customers rely on an agency for high-quality products, it becomes a key factor in a MAC’s success. Therefore, DARIMAC will

have authority to set and ensure quality standards.

Products must be packaged appropriately in

correctly sized (metric) packaging and match labeling requirements of individual countries. DARIMAC

will assist its member cooperatives in meeting

these needs for specific foreign destinations. In

addition, there may be economies of size to be

gained by having DARIMAC secure any special

25
packaging and/or labeling supplies for member

cooperatives. DARIMAC must also ensure member

products meet phytosanitary and other requirements for entry into foreign countries.

Finally, DARIMAC will retain staff with expertise in the rules and regulations of the U.S.

Government’s export assistance programs. For

example, under DEIP, it is up to U.S. dairy

exporters to contact prospective buyers in the eligible countries. All sales are made by the private sector, not the Government, and only those with documented experience in buying and selling dairy

products for export (within the last 3 years) will

directly qualify to receive DEIP bonuses. Many

cooperatives can’t meet these requirements and

participate; so they must use a broker who takes a

share of the margin as commission. Direct participation in these programs will allow DARIMAC’S

members, rather than other companies, to capture

the margins from the export of bulk products.

Membership Agreement

DARIMAC will require member cooperatives to

sign a membership agreement when joining. The

discussion of existing MACs and failed MACs

illustrated that membership agreements are essential for efficient operations. The membership agreement is a contract between the member cooperative

and DARIMAC. Essentially it signifies a pact

between the member cooperative and the rest of

the DARIMAC membership. To be successful, member cooperatives must relinquish some individual

control for the good of DARIMAC. However, member cooperatives will retain more control than individually exporting through a domestic broker. In

addition, margins generated from export sales will

accrue to member cooperatives, rather than a broker. Members must comply with special guidelines

for processing and delivering products for export.

DARIMAC, in return, will maintain knowledge of

foreign markets and all aspects of export marketing. The basic elements of the marketing agreement

include sales terms, contract modification and termination, and contract enforcement [7].

Sales terms describe conditions by which

member cooperatives’ products will be handled by

DARIMAC. Specifications outline conditions (such

as, quality, quantity, form) required before

DARIMAC will formally accept products from a

member cooperative. Sales terms also include payment methods.

Quality standards should be specified and

strictly enforced, perhaps through penalties for

substandard product or refusal by DARIMAC to

accept delivery. Substandard product would hurt

DARIMAC’S efforts to establish itself as a reliable

supplier of quality dairy products. Member cooperatives would also give DARIMAC authority to set

labeling and packaging standards such as use of

metric units and labels that meet foreign standards.

A delivery provision instructs member cooperatives about the process of transferring products to

DARIMAC. Upon receipt of an order, DARIMAC will

direct member cooperative(s) on time and place for

product delivery. DARIMAC may source product(s)

from more than one member to assemble a full

shipment or to meet a large-volume customer’s

needs.

Member cooperatives must commit a specified

minimum volume of their bulk products (butter,

nonfat dry milk, bulk cheese) for export by

DARIMAC during a particular marketing period.

This requirement is a trademark of successful

MACs. This volume will be set at the beginning of

each marketing period and DARIMAC will take title

to bulk products. While the actual volume exported

through DARIMAC may vary from the amount committed, having a guaranteed minimum volume will

enable DARIMAC to become a reliable supplier to

international customers. Participating cooperatives

give up the right of marketing decision for committed products, giving DARIMAC authority to make

specialized marketing decisions.

However, members marketing differentiated

products (added-value products such as specialty

cheese, frozen dairy desserts, etc.) through

DARIMAC will not commit a specific volume, nor

will DARIMAC take title to differentiated products.

Differentiated products will be sold on commission

only. Members will provide periodic estimates of

their product volumes available for export, but

DARIMAC will not take responsibility for marketing

a set amount of differentiated product. DARIMAC

26
will also coordinate shipments of differentiated

products, where practical, to save shipping costs.

Pricing/Payment Methods-The board has

oversight of the general pricing policies of

DARIMAC, and gives management authority to

determine the prices, terms, and conditions for

products that will be sold in international markets.

DARIMAC will price goods to foreign customers to

maximize returns to member cooperatives while

remaining competitive in foreign markets. Offering

a full range of quality dairy products will convince

importers that DARIMAC is a choice supplier.

Products that generate lower margins are just as

important to the overall performance of DARIMAC

as high-margin products, because of the value an

importer may place on “one-stop shopping.” For

example, an item that completes the product line

but provides minimal or even temporarily negative

margins to DARIMAC may be essential to sustaining

customer loyalty. Also, DARIMAC could introduce a

“new” product to a market at a temporarily low

introductory price to encourage potential users to

try a product.

Through membership agreements, members

agree to DARIMAC pricing and payment methods.

Two common methods of paying members for

products sold will be used, depending on product

category-bulk or differentiated. Successful MACs

studied used pooled and commission sale methods

for payment. DARIMAC will handle differentiated

products on a commission-sales basis and will pay

members for bulk products on a pooled basis.

Members with differentiated products available for export will provide DARIMAC with their

current price list and quantities available. DARIMAC

will provide members international market information and recommend appropriate pricing practices for developing overseas markets. For example, one method may be to take the plant price for a

domestic sale and add additional costs required to

prepare the product for export and storage until

shipping. Then, the cost of domestic selling and

advertising should be subtracted.

Pooling-Pooling reduces price risk faced by the

individual member cooperatives and promotes

unity. Averaging the value of all sales made during

the pool life enables all pool participants to share

equally in the benefits and risks of exporting bulk

dairy products. DARIMAC will follow the example

of the agencies studied-pooling earnings and

expenses associated with the sale of bulk products,

without necessarily physically pooling

(commingling) the products. The number of pools

may vary depending on the number of bulk

product types and degree of differences within

each product type. For example, DARIMAC could

operate 7 pools-butter, anhydrous milkfat,

butteroil, nonfat dry milk powder, whole milk

powder, whey powder, and bulk cheese. These

pools could be further broken down by quality

standards.

The pool marketing period could be defined

as a calendar year, fiscal year, or shorter time period. The initial payment will be based on a published market price for the specific bulk product at

the time of delivery. For example, members could

be paid the Chicago Mercantile Exchange price for

the particular grade of butter delivered, the price

quoted for block cheese on the National Cheese

Exchange for bulk cheese delivered, etc. Final settlements will be made after the pool closes.

The pooling arrangement calls for net earnings from bulk exports (earnings from export sales

less product costs and marketing and shipping

expenses) to be allocated to each of the member

cooperatives on a pro-rata basis according to each

member’s participation on the market pool.

Government export assistance, such as DEIP bonus

payments, will be considered part of the pool earnings. This way, each member receives their proportionate share of earnings from bulk product

exports, regardless of which market or when their

products were exported, shielding individual

members somewhat from price swings experienced

in international markets. Additionally, each member cooperative shares proportionately in the cost

of making the export sale of these products.

Increased exports of dairy products can lead

to improved and/or more stable domestic prices.

27
For instance, the large 1992 exports of dairy products through DEIP were estimated to have raised

average 1992 domestic milk prices by $0.55 to $1 or

more per cwt. When this occurred, some cooperatives, which had committed product to foreign

buyers, missed out on the higher domestic prices

that their exports netted. Thus, by paying members

published market prices for products and pooling

net earnings, all will share in the costs and benefits

of exporting.

DARIMAC will estimate the volume of bulk

products it expects to export at the beginning of

each marketing period. Should the quantities members plan to commit exceed projected sales, each

member’s commitment will be reduced proportionately, maintaining its original share of the pool.

This should reduce the likelihood that DARIMAC

would have to dispose of surplus product.

When DARIMAC secures an order for bulk

products, it will select a cooperative(s) to fill the

order. This decision will be based on buyer preference (if any), destination of product, nearness of

cooperative to port of embarkation, availability of

specified product, and the cooperative’s share of

orders previously filled in the marketing period.

No cooperative may supply more product than its

committed quantity until all members in the pool

have fulfilled their commitments. DARIMAC may

source product from more than one member to

assemble a full shipment or to meet a large-volume

customer’s needs.

Transportation COSfS-DARIMAC’S transportation

personnel will coordinate the movement of bulk

product to international markets. Unlike

differentiated products where the source is

necessarily identifiable, bulk products might be

sourced from any member cooperative that

manufactures the product. As a result, bulk

products will be shipped from widely dispersed

member cooperatives to multiple foreign markets

via several different ports of departure. If members

were to pay actual shipping costs they would

naturally desire their shipments to go to the closest

customer (or rather, the closest port-for most

likely product will be priced FOB). However,

market needs may dictate a different destination.

Basing marketing decisions on freight

considerations alone could undermine the ability of

DARIMAC to effectively meet its customers’ needs,

hindering the total pool from achieving maximum

returns. Furthermore, charging actual freight costs

runs counter to the concept of pooling.

One way to counter these difficulties is to base

each member’s share of pooled transportation

expenses on a combination of distance and volume

[3]. Each member has a share of every shipment,

regardless of where product shipment actually

originates. From an equity standpoint, each member would be charged for the freight costs associated with transporting a portion of the volume

shipped (proportional to their share of the total

pool volume) to that port. Distance from each

members’ plant to a specific port is applied to this

portion of each shipment. Thus, actual shipments

will be made from the most efficient location, but

all members share total transportation costs equitably.

For example, assume 25 percent of the total

volume of DARIMAC exports of NFDM came from a

cooperative on the East coast and that DARIMAC

exported NFDM from 3 different points-East

coast, West coast, and Midwest. The pooled transportation charge to the East coast cooperative

would be calculated as if 25 percent of the NFDM

exports through the West coast point was shipped

from the East coast cooperative, even though no

product may have actually been shipped from the

East coast cooperative to the West coast port. This

method is sensitive to both volume shipped and

relative distances between member plants and destinations. Pool managers retain maximum marketing flexibility because shipping and sales decisions

affect members only through total returns to the

pool.

Sales Territories-Member cooperatives will

agree to make all export sales through DARIMAC.

“Export sales” will include sales to domestic agents

who then export the product in the same form.

However, sale of an ingredient to a domestic

company that further processes it before exporting

would not be prohibited. To protect member

cooperatives already involved in the export of

28
dairy products, it may be necessary to specifically

exclude certain products and/or markets from

DARIMAC’S territory, or to compensate cooperative

exporters for their investment. One MAC, as

discussed earlier, segmented markets by assigning

exclusive territories to the MAC in its membership

agreements. Any such arrangements needed by

DARIMAC will be detailed in individual

membership agreements.

DARIMAC, at least initially, will be restricted

from making domestic sales. However, if it can’t

export all of the committed bulk products, it may

then seek a domestic outlet for these product(s)

based upon pre-approved terms of sale set by the

board. This prevents domestic sales by DARIMAC

from undermining domestic marketing efforts of

members. For example, NFDM producers would

determine terms (such as price and quality) of

DARIMAC domestic NFDM sales. Conversely,

should DARIMAC have insufficient committed product to meet foreign demand, it may purchase additional product on the open market-from members

and/or nonmembers, whichever is most cost-effective. In this case, member cooperatives would not

be given any preference and shipping expenses will

be paid by DARIMAC. Distribution of earnings from

these exports would be based on volume of pooled

products only.

Contract Termination-Long-term commitment is

required to successfully develop export markets.

Moreover, because of the logistical and

organizational difficulties associated with getting

DARIMAC operational, the initial agreement should

cover a term of at least 3 to 5 years. Once the initial

period elapses, member could provide a notice of

termination. Barring that, the initial agreement

should automatically be extended for another 2

years. A minimum of 2 years notice should be

required for any cooperative to withdraw from

DARIMAC. These terms mirror those used by

effective MACs.

Contract Enforcement-A key segment of the

marketing agreement will be DARIMAC’S

enforcement rights, should member cooperatives

violate any terms of their agreement. Situations in

which conflicts are likely should be anticipated

when drafting provisions on enforcement and

remedies. For DARIMAC, these areas might include:

improper packaging or labeling, failure to meet

product specifications, non-delivery of committed

volume, and exporting outside of DARIMAC. A

major consideration in determining penalties for

breach of the membership agreement is the impact

of the noncompliance on the rest of the member

cooperatives who honor their agreements.

Financing

Start-up Capita/-Initially, potential member

cooperatives must provide funds to finance a

feasibility study and organization. Each interested

cooperative could pledge an equal share of the

total cost of these activities. Once DARIMAC has

been incorporated and initial capital needs are

assessed, capital for beginning DARIMAC operations

can be raised from members (through the sale of

common stock) and from loan(s) obtained from a

lending institution(s). Member cooperatives would

be required to purchase one share of class A

common stock that assigns voting rights, and a

number of class B shares to reflect the member

cooperative’s anticipated volume of business and

to assign additional votes based on its volume with

DARIMAC. Use of stock to assign voting rights is not

essential. However, different classes of stock makes

recognition of voting rights easier when using

proportional voting. Proportional voting was

preferred by some of the MACs studied.

Financing-DwMAc could be financed using a

base capital plan. Each member’s share will be

proportional to their current use of DARIMAC.

Equity requirements of the agency and of each

member will be adjusted annually to meet the

current needs of DARIMAC. Under-invested

member cooperatives will be required to add to

their equity on a systematic basis through retained

patronage refunds or per-unit retains. Margins

generated by DARIMAC will be returned to member

cooperatives as patronage refunds, based on each

member cooperative’s proportionate volume of

29
business with DARIMAC. However, in this type of

organization, margins would likely be small and

not a very reliable source of capital, particularly to

operate a base capital plan. Organizational

documents should provide DARIMAC with

authority to make additional capital assessments.

Those fully invested or over-invested will receive

most or all of their current patronage refunds in

cash. Capital should be sufficient to carry agency

operations through periods of low returns to

maintain and enhance DARIMAC’S position in

international markets.

Operating EXpSnSSS-DARIMAC will be

responsible for all costs associated with exporting

and marketing dairy products-documenting,

forwarding, routing, billing, collecting, office

expenses, salaries, travel, freight, promotion, and

market research, etc. For differentiated products,

assignable (direct) costs will be charged to member

cooperatives. Nonassignable marketing and

overhead expenses (not directly attributable to a

specific sale) will be collected via commission or

marketing fee. Based on estimates of nonassignable

expenses, DARIMAC will allocate these costs

between bulk and differentiated products.

Presumably differentiated products will require a

higher level of marketing support, and thus a

larger share of the costs, than bulk products. Based

on projected sales volume, DARIMAC will charge a

commission for each unit, or unit of value, of

differentiated product exported and a per-unit

marketing fee for bulk products. Any net margins

will be returned to members based on the value of

their differentiated products exported and through

the pool for bulk products.

Depending on the timing of sales, DARIMAC

may need to seek short-term operating loans to

finance operations. These would be paid back

quickly when payment for goods sold is received.

Marketing and Promotion

Branding-A “DARIMAC Brand” could be used for

products marketed through the agency. A strong

brand identity associated with quality and

reliability adds value to products and could benefit

all member cooperatives of DARIMAC. A uniform

brand name is often adopted by federated

cooperatives, including federated dairy

cooperatives.

As of 1985,26 dairy cooperatives sold branded products. If a cooperative brand has strong

recognition in a foreign market, DARIMAC could

employ dual branding. Both brands would be displayed on the product, similar to Kraft’s method of

branding after acquiring a new brand. Another

way would be for differentiated products to carry

the cooperative’s own brand and be labeled as

“marketed by DARIMAC.” On the other hand, dual

branding could create some confusion among buyers and less brand loyalty as a single brand,

“DARIMAC Brand.” Market research is necessary to

determine if a strong brand recognition already

exists.

Advertising and Promotion-DARrMAc will be

responsible for all advertising and promotion of

member products in all overseas markets. A

concerted effort by DARIMAC for its members will

realize benefits to all. Advertising and promoting

the entire product line under the brand of one

marketer, DARIMAC, would provide cost savings to

members. Development and use of a “DARIMAC

Brand” could increase the value of member

products. The agency will be responsible for

market research in foreign countries and hiring

advertising companies to carry out necessary

media campaigns.

Research and Development-DARIMAc staff will

work with member cooperatives and foreign

customers in formulating products to meet

customers’ specifications. DARIMAC may also

facilitate cooperation among member cooperatives

to produce the type and volume of product

requested. However, product research and

development will be conducted by member

cooperatives. DARIMAC will communicate product

needs, tastes and preferences of foreign customers

to its members. DARIMAC could also facilitate

licensing agreements between member

30
cooperatives when new products/formulations are

developed for overseas markets.

Implementation

The incorporation and startup of a new organization takes time and will require legal counsel.

The design of DARIMAC is also critically important

to its success. The mission and objectives should be

clearly understood and accepted by all member

cooperatives at the outset. Here are the steps for

incorporation and startup:

1. Hold an exploratory meeting of interested dairy

cooperative leaders to discuss their desire to

form an export marketing agency-in-common.

Select a steering committee of cooperatives that

wish to proceed.

2. The steering committee meets to set mission and

goals. A feasibility study is conducted to determine potential membership, products and volumes, cost analysis, and preliminary market

study.

3. Hold a meeting to discuss the results of the feasibility study. Vote whether to proceed at this

time.

4. Potential members pledge money and hire an

attorney to develop incorporation papers.

5. Call a meeting of charter members to adopt

bylaws and elect a board of directors.

6. At the first meeting of the board, directors elect

officers and assign responsibilities to design and

implement the business plan.

7. Acquire capital for the first year’s operating

costs.

8. Hire a manager who will then hire the MAC’s

operating staff.

9. Initiate operations.

Once DARIMAC begins operating, the board

and management will conduct in-depth market

studies to determine the long-term market strategy

This strategy should recognize the importance of

adequate planning and preparation to develop

export markets. There is potential danger in trying

to “do it all at once.” The cost of rushing into foreign markets with inadequate planning and preparation may permanently alienate foreign market

customers. Implementing the long-term strategy

should proceed in stages. DARIMAC could begin by

limiting exports to a few selected products or to

specific countries. Furthermore, a method of evaluating the success of each stage should be adopted.

Careful planning and evaluation should minimize

mistakes and ensure customers that DARIMAC is a

reliable, committed supplier of quality products.

FUTURE CONSIDERATIONS

This report has focused on the need for an

export marketing agency-in-common for dairy

cooperatives and how it would be organized and

operated. Once DARIMAC has achieved success,

other options for enhancing returns and marketing

opportunities for member cooperatives could be

considered. They could be included in DARIMAC’S

long-range plans.

DARIMAC, for instance, could expand membership to include noncooperatives. Title III of the

Export Trading Company Act of 1982 established

rules under which U.S. companies can join to

export goods and services with limited antitrust

immunity for approved export activities. By forming an export trading company (ETC), DARIMAC

could expand its overseas market power and

increase its product line. The ETC could only

export under conditions of the Act. (With only

cooperative members, DARIMAC is protected under

Capper-Volstead Act to jointly market domestically

as well as internationally).

On the other hand, expansion into domestic

marketing offers DARIMAC an opportunity to take

advantage of price differences and to expand its

global market share. Furthermore, a large share of

U.S. production from one source grants market

power to negotiate higher prices. In some cases,

new products developed for foreign markets could

be successfully introduced into the U.S. under the

“DARIMAC Brand.” Most marketing agencies studied marketed successfully in both domestic and

foreign markets.

Growth can be gained by either expanding

membership, cooperative and/or noncooperative,

or by expanding target markets (including domes3 1
tic). Another growth option is to use alternative

international business arrangements such as subsidiaries, licensing, and coventures/joint ventures.

A DAR&ILK-owned subsidiary could operate as a

stand-alone business without the 50-percent rule

limiting their source of product. A subsidiary could

act as an agent for nonmember sales and thus

increase supply and variety of products.

Subsidiaries also offer the option of expanding

operations into other areas, such as services, technical support, and complementary nondairy products.

If “DARIMAC Brand” gains recognition and

consumer loyalty, it has a value which can be marketed. For example, “DariMac Brand” could be

licensed to a foreign dairy manufacturer to use on a

specific product. The agreement would include

strict enforcement of quality and predefined markets. For example, if phytosanitary restrictions prohibit entry of a product such as yogurt into an

export market, then “DARIMAC Brand” could be

licensed to a yogurt manufacturer for use on their

product. This enables DARIMAC to complete its

product line.

Coventures, which are “collaborative business

activities that do not involve equity investments,”

include licensing and other informal arrangements

such as co-packing [8]. Creating a joint venture

involves equity investment and formation of a separa te company.

Subsidiaries, licensing, coventures, and joint

ventures further expand the flexibility and options

in foreign markets. These strategies are currently

used effectively by dairy export competitors, such

as the New Zealand Dairy Board.

DARIMAC could also facilitate relationships

between member cooperatives. Cooperatives that

have developed high-value, branded, or specially

formulated products could lend (or contract) technical assistance to other member cooperatives

and/or to DARIMAC. Alternatively, other DARIMAC

member cooperatives could be licensed to produce

specialized products to meet the specific needs of

international customers. The organizing members

of DARIMAC will have to design these arrangements

according to the needs of participating cooperatives.

DARIMAC could also be a way to expedite

group efforts of dairy cooperatives in international

humani tarian projects. For example, once operational, DARIMAC could coordinate a response to

humanitarian assistance requests like the dairy

industry effort in early 1993 to provide 100 metric

tons of dairy products to Russia.

In conclusion, future export opportunities

exist for U.S. dairy cooperatives. Given the longterm commitment necessary to effectively develop

overseas markets, U.S. dairy cooperatives must

plan today in order to take advantage of tomorrow’s opportunities.

The cost for individual cooperatives to export

is often prohibitive and cooperatives give up control and potential margins by exporting through a

domestic-based export broker. A MAC offers the

best option for U.S. dairy cooperatives as a least

cost method while retaining considerable control.

With careful planning that incorporates elements of

successful MACs and long-term commitment, an

organization such as DARIMAC could be a major

competitor in the global dairy market.

32

L
1. Baker, Dereck, et. al., Estimates of the Costs of

Producing Milk in Seven Major Milk-Producing

Countries, 1986. Economic Research Service,

USDA, Staff Report AGES 9056, August 1990.

2. Dobson, W.D. and R.A. Cropp, The Dairy

Marketing lnitiative of Upper Midwestern

Cooperatives, University of WisconsinMadison, 1992

3. Jacobs, James, “Analysis of Cooperative

Pooling.” Agricultural Cooperative Service,

USDA, Technical Assistance Report (confidential), June 1991.

4. Ling, Charles K. and James B. Roof, Marketing

Operations of Dairy Cooperatives. Agricultural

Cooperative Service, USDA, ACS Research

Report 88, November 1989. {Currently being

updated with 1992 survey data}.

5. National Dairy Promotion and Research Board

1992 Annual Report.

6. National Dairy Promotion and Research Board,

“National Dairy Board Kick-off in Japan,”

Press Release, August 30,199l.

7. Reilly, John D., Cooperative Marketing Agreements,

Legal Aspects. Agricultural Cooperative

Service, USDA, ACS Research Report 106,

July 1992.

8. Reynolds, Bruce and Karen J. Spatz, In terna tional

Business Arrangements Used by Cooperatives,

ACS Research Report 100, October 1990.

9. Spatz, Karen J., Agricultural Exports by

Cooperatives, 1990. Agricultural Cooperative

Service, USDA, ACS Research Report 107,

July 1992.

33
U.S. Department of Agriculture

Agricultural Cooperative Service

P.O. Box 96576

Washington, D.C. 20090-6576

Agricultural Cooperative Service (ACS) provides research, management, and

educational assistance to cooperatives to strengthen the economic position of farmers

and other rural residents. It works directly with cooperative leaders and Federal and

State agencies to improve organization, leadership, and operation of cooperatives and

to give guidance to further development.

The agency (1 ) helps farmers and other rural residents develop cooperatives to obtain

supplies and services at lower cost and to get better prices for products they sell; (2)

advises rural residents on developing existing resources through cooperative action to

enhance rural living; (3) helps cooperatives improve services and operating efficiency;

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and benefit their members and their communities; and (5) encourages international

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