USDA =a

United States

Department of

Agriculture

Rural BusinessCooperative

Service

RBS Research

Report 162

Local Cooperatives’

Role in the Emerging

Dairy Industry
Structural changes in the dairy industry such as the adoption of Total Mixed Rations in

place of manufactured complete feeds and declines in milk production in the areas

served by locals are bringing these cooperatives to a crossroads where they must

decide who will be their core customer. The ramifications of this choice are increased

through market segmentation which enables cooperatives to more precisely meet the

needs of producer-members but simultaneously increases diversity among members

and, potentially, among locals themselves. Survey results from 247 locals indicated

small producers (cl00 cows) made up 80 percent of their clientele. The production

practices of these producers appeared to lag significantly behind the innovators and

large producers (>l 00 cows) observed by locals as well as the small producers studied on a nationwide basis by USDA’s National Animal Health Monitoring System. To

survive themselves, locals will need to take a more aggressive and informed approach

to sustaining small producers.

Key words: cooperatives, local cooperatives, dairy production, feed

Local Cooperatives’ Role in the Emerging Dairy Industry

Julie A. Hogeland

Rural Business-Cooperative Service

RBS Research Report 162

June 1998
Acknowledgments The author wishes to thank Suzanne Miller for proposing this research topic.
Highlights ...........................................................

iii

Overview.. ..........................................................

.

Dairy and Pork Industry Evolution ..................................-2

Locals’ Core Customer .................................................3

Profile of Producers ..............................................

.

Characteristics of Innovators .......................................4

Small Producer Characteristics .....................................6

ProducerPriorities ...............................................

.

Service Adjustments .................................................. 11

Future Services .................................................14

Identifying the Future Core Customer .....................................16

Response to Technical Change ....................................18

Potential for Technical Services ....................................19

Core Customer Choices ..........................................20

Increasing Large Producer Share ...................................20

Ramifications of Increasing Large Producer Share .....................21

Strengthening Small Producers ....................................22

Locals' Goals ................................................

..2 3

Discussion .......................................................

..2 3

ii
Highlights Local supply cooperatives are finding that the “traditional” dairy producer on which

their business was built either no longer exists or is changing in significant ways that

demand a similar response. Structural changes in the dairy industry such as the adoption of Total Mixed Rations (TMR) in place of manufactured complete feeds and

declines in milk production in the areas served by locals have brought these cooperatives to a crossroads where they must decide who their core customer will be.

The ramifications of this choice are increased through market segmentation which

enables cooperatives to more precisely meet the needs of producer-members, but

simultaneously implicitly increases diversity among members and, potentially, among

locals themselves.

In a 1995-96 survey conducted by USDA’s Rural Business-Cooperative Service, member locals of six Midwestern regional cooperatives identified traits associated with

small (4 00 cows), large (>lOO cows), and innovative producers within their marketing

territories; the current and future services needed for dairy producers; and potential

problems from this transition.

Innovators constantly searched for greater efficiency. Exhibiting a “business manager’

approach, they routinely considered alternative goals for their dairy enterprise, usually

with the help of a consultant. High on their list was trying to stay on top of amino acids

and other specialized supplements, using TMR, expanding, and increasing preventative herd health.

The latter, along with record keeping, was identified by USDA’s National Animal Health

Monitoring System (NAHMS) as characteristic of producers with high-producing herds.

Since innovators were only beginning to pursue strategic alliances (e.g., with milk

processors and input suppliers) and contracting (e.g., contract heifer production), it

appears the dairy industry has not yet reached the interpersonal/interorganizational

complexity of the vertically integrated and coordinated pork industry.

More than 80 percent of respondents felt small producers did not know what to do in

response to industry changes. Although locals could identify many characteristics of

innovators, they had a much less detailed picture of the small producers who represented 80 percent of their clientele.

Coupled with survey findings that the small producers served by locals were less likely

to use TMR, adopt a business-manager approach to dairying, etc., than their nationwide counterparts described by NAHMS, it appears locals may not have adequately

prepared their member-owners to weather structural change. Instead, locals use the

volume business of large producers to sustain themselves. The short-term benefits of

this decision may put the long-term survival of locals at risk because, according to

respondents, innovators and large producers were using locals less, leaving them to

serve primarily small producers.

. . . 111
Local Cooperatives’ Role in the Emerging

Dairy Industry

Julie A. Hogeland

Agricultural Economist

Rural Business-Cooperative Service

Overview

Like other local cooperatives, those serving dairy producers grind feedgrains for producer-members, sell

manufactured feeds and other farm supplies, and provide nutritional, record keeping, and other forms of

business services. These activities have served the

dairy community well for many years. But their relevance is being challenged by significant structural

changes in the dairy industry and carryover from new

forms of ownership and coordination emerging in the

pork industry.

The fundamental change affecting locals is a

decrease in their customer base from a shift in milk

production away from the Midwest. Producers who

remain are, like others across the United States, shifting to total mixed rations (TMR), a feeding process

which does not require manufactured feeds or conventional feedstuffs. Locals are finding that the “traditional” dairy producer on which their business was built

either no longer exists or is changing in significant

ways that demand a similar response.

This report examines issues involved in redefining locals’ core customer, particularly in the context of

market segmentation, a technique developed by marketing researchers to identify subgroups of customers

(producers) with unique characteristics and needs. By

highlighting diversity among customers, segmentation

allows agribusinesses, including cooperatives, to more

precisely identify and meet these needs, and conceivably, for dairy locals, reverse member loss. At the

same time, locals may find such diversity makes the

choice of core customer more difficult.

Because this project is also an outgrowth of a

study on the role of local cooperatives in the emerging

pork industry I, selected findings are compared to suggest whether both industries are proceeding along the

same path and if locals face similar problems irrespective of members’ commodity specialization.

Also considered are the impact of innovation and

distribution on producer-members’ perceptions of

locals. It’s commonly said that cooperatives represent

an extension of members’ farms. How does members’

response to technical and structural change carry over

to shape the adaptability of locals as organizations?

Are locals well positioned to meet the goals they have

set for themselves?

Evidence for these diverse topics comes primarily

from a survey developed and analyzed by USDA’s

Rural Business-Cooperative Service (RBS), supplemented by interviews with regional cooperative managers.

During 1995-96, six regional cooperatives * selected member locals to be surveyed, generally choosing

those serving a large proportion of dairy producers

(“dairy locals”). Ninety percent of the respondents

were managers (including feed sales) and the remainder were directors. Of these, 7 percent were current or

former dairy producers.

These locals ranged from selling no dairy feed to

completely specializing; the median level was 45 percent of total feed sales. Sales of swine, beef, and speciality feeds like pet foods and horse feed also varied

widely. The median sales levels for swine, beef, and

specialty feeds were 10,14, and 9 percent, respectively.

’ Hogeland, Julie A. Role of Local Cooperatives in Emerging Swine

Industry. USDA/Rural Business- Cooperative Service Research

Report 144, November 1995.

2 Regionals were Countrymark, Inc., Growmark, Farmland, Land

O’Lakes, Southern States, and Tennessee Farmers Cooperative.

1
The principal economic activity for 56 percent of

dairy locals was selling farm supplies. Another 37 percent marketed grain and sold farm supplies. For 7 percent, grain marketing was the dominant activity.

Although about the same percent of locals serving

pork producers (“pork locals”) were equally involved

in grain marketing and farm supplies, fewer specialized in farm supplies in favor of grain marketing.3

Thirty-five percent of dairy respondents reported

sales of $1 million to $4.9 million for 1994; 22 percent,

$5 million to $9.9 million; 18 percent, $10 million to

$14.9 million; and 26 percent, $15 million or more.4 By

comparison, pork locals appear to be a more robust

group, as evidenced by the fact that 43 percent had at

least $15 million in sales.

As members of regional cooperatives, surveyed

locals were organized as federated cooperatives. Locals

owned by Agway, a regional cooperative based near

Syracuse, NY, were not included, so the sample was

not drawn from the total population of dairy locals.

Nevertheless, irrespective of cooperative organization, all dairy locals face a similar economic environment. In her 1994 report, The Changing Structure of

U.S. Dairy Farms, Perez observed, “Almost 44 percent

of U.S. milk production is still concentrated in the

Lake States and the Northeast, but their combined

share of total U.S. milk output has been declining during most of the last 9 years.“5

Milk production has shifted to mega-dairies in

the West and Southwest, notably New Mexico and

Idahoe, away from areas where farm supply cooperatives are prominent. Such large-scale operations

appear to have more in common with the vertically

integrated pork industry than with the smaller familycircumscribed dairies they are replacing.

Pork and Dairy Industry Evolution

Vertical Integration in the Pork lndustryDuring the 1970s and early 198Os, the reigning technology for pork production was farm-integrated, single3 Hogeland, 6. Reports are based on 1993 for pork locals.

4 Survey totals may not add to 100 for this and subsequent results

due to rounding.

5 Perez, Agnes. The Changing Structure of U.S. Dairy Farms. USDA

Economic Research Service, AER-690, July 1994,2.

6 Part II: Changes in the U.S. Dairy Industry: 1991-1996, National

Animal Health Monitoring System. USDA/Animal and Plant

Health Inspection Service, September, 1996,9. See also, “Here’s

why milks moving west,” by Richard Fallert, Mark Weimar and

Terry Crawford, Hoard’s Dairyman, January 10,1994.

2

site, farrow-to-finish production units. Although poultry production offered a potential model of vertical

integration, animal health and other problems unique

to the pork industry stalled the application of this

model to the pork industry.

As the 1980s progressed, the pork industry developed techniques based on specialization and division

of labor to control the spread of disease in large herds.

The increase in animal health offered by all in, all out

production (AIAO), segregated early weaning, multiple site production, artificial insemination, and other

techniques freed the industry to pursue economies of

scale.7

Compared with the autonomous and self-contained farrow-to-finish technology, such specialization

led to, and indeed, required partnerships, alliances,

and new patterns of ownership between producers,

packers, and other industry participants. Margins previously captured by marketing intermediaries became

costs that could be eliminated by linking successive

stages of production or marketing through ownership

or coordination-the process defined as vertical integration and coordination.8

The evolution of the pork industry is not finished:

the logical outgrowth of such vertical integration is a

systems approach embracing multiple production units

and regions to meet export demand on a world-wide

scale. And, in fact, export demand has absorbed the

growth in output from the restructuring of the pork

system. As global interdependence and interconnectedness increase, however, the next level of competition is

expected to occur through information systems integration, based on the growth and spread of knowledge

triggered by widespread computerization.9

If this scenario is correct, the scale economies fostered by the technological rigidities of vertical integration will be superseded by more flexible production

methods capable of responding quickly to market

intelligence. For cooperatives, this implies that linkThese innovations are described in Hogeland, 1995.

The term “vertical integration” generally refers to a highly

organized, tightly coordinated production and marketing

arrangement, based on common ownership, and generally

covering the entire span of activities from breeding or genetic

selection to processed consumer products. “Coordination,” on

the other hand, implies a less formal arrangement, or one

covering a subset of the span of the activities covered under

vertical integration.

Achrol, Ravi S., “Evolution of the Marketing Organization:

New Forms for Turbulent Environments,” Journal of Marketing

(55), October, 1991,Sl.
ages with producers and markets will become tighter,

eliminating any vestige of an arms-length retailer of

farm supplies.

Concurrent Changes in the Daiy Industry- In

comparison with the pork industry, the dairy industry

has been relatively quiescent. Facing significant competition from Europe, Australia, and New Zealand, the

domestic dairy industry has not been revitalized like

the pork industry, which has shrugged off maturity to

resemble, in many ways, an emerging industry.‘O

Neither export nor investment demand have provided much stimulus in part because debate over milk

support prices has preoccupied the industry.” While

the pork industry has attracted new entrants through

outside investment, new investment in the dairy industry largely occurs from the inside, through reallocations

of existing investments (i.e., dairy farms). Although

some scale economies exist, technical changei has not

yet created a basis for the web of interdependencies

defining vertical integration or coordination, leading

some to dismiss integration as a “nonissue.”

When price supports are phased out in 2000, the

industry will be better positioned to set the stage for

vertical integration by aligning the milk producer with

final demand. This may mean closed cooperatives, as

in the pork industry, to ensure producer-members

meet specifications for particular market segments.13 It

may also lead to market orders allowing cooperatives

to increasingly control upstream or downstream components of the marketing channel, such as bottlers, to

guarantee a market for members’ milk. In the pork

industry, producer cooperatives follow a similar

course by scheduling shackle space in packing plants

to eliminate overfeeding and maintain the continuous

flow production needed for vertical integration.

10 The term “emerging” is based on the Product Life Cycle, a

concept used to describe sales growth over time as a new

product is introduced (or emerges), then proceeds through

successive stages of growth, maturity (flat sales), and

finally, decline. See Hogeland, Julie A., Cooperatives’ Role

in the Artificial Insemination Industry, USDA/ACS

Research Report 90, March 1990. See also Hogeland, 1995.

11 “Next century holds much potential for dairy industry,”

Feedstuffs, March 10,1997,23.

12 Specific technical changes affecting dairy producers are

discussed in the context of survey results.

13 Defining milk as a beverage whose flavor, protein, fat, and

vitamin content can be tailored to appeal to different age

groups is one basis for market or segment definition.

Locals’ Core Customer

Locals’ Perceptions of Change- How much do locals

perceive the dairy industry is changing? A regional

cooperative spokeswoman writing to RBS voiced

regionals’ concerns:

l Changes are occurring in the dai y indust y but are

not as well documented as those in the swine industry. As a result, many local cooperatives may not be

prepared when the pace of change accelerates. We, at

our regional cooperative, believe that contracting

will eventually be a major part of dairy milk production. Contracting is already occurring in the

raising of heifer calves.

l Changes in the dairy market are important issues

because they affect resource allocations at the local

level. Many cooperatives are faced with obsolete

feed facilities, but are unsure whether they can get

the best return on the cooperative’s money if they

replace those feed mills.

Based on these changes, this regional estimated

the dairy industry was only 5 years behind the pork

industry.

Asked about the industry’s rate of change, 60

percent of surveyed locals agreed with the statement,

“The dairy industry is changing very fast; it won’t be

the same in 5 years.” Almost 40 percent said, “The

dairy industry is changing at a moderate pace. It could

look quite different 7 to 10 years from now.”

Pork locals responded in exactly the same proportions to a similar question- which suggests

changes at the producer level are beginning to have an

impact on dairy locals.

Variations in Producer ProgressivenessRegional cooperatives summarized how producers

served by locals were changing.

“High-tech” dairy farms (dairies) driven by the

bottom line are replacing “low tech” dairies, the core

clientele of many local cooperatives. High-tech dairies

use computerized ration building to slash costs while

significantly expanding yield per cow. Personal computers also help these producers access the cheapest

source of energy for formulating a total mixed ration

(TMR)14.

I4 By mixing all ingredients fed to cows (or group of cows), TMR

replaces individual, often specifically timed feedings of corn

silage, hay, pellets, etc. Because TMR is the only ration given to

the cows, they cannot pick and choose what to eat, but must

consume exactly what will maximize milk production.

3
To serve this class of producers, locals have resorted to sourcing cheap and nontraditional feeds such as

rice bran, cottonseed hulls, and bakery waste for TMRs.

By acting more as a commodity broker than a feed supplier, the local gets much smaller margins. Producers

using TMR can bypass the feed mill because many need

only a superconcentrate’ for a balanced ration,

As such producers take a more decisive role in

their dairy operation, they need fewer services from

cooperatives. Full service packages are rejected as too

expensive, forcing cooperatives to consider how the

service mix for this new class of dairy producers

should be combined (or bundled) and priced.

Low-tech dairies typically rely on a standard

ration based on complete feed@, a product staple of

local cooperatives. Often, the regional cooperative’s

brand name is sufficient to reassure users about nutritional content and performance. High-tech producers

are more exacting. Borrowing from the pork industry,

they are adjusting the energy and protein content of

TMR’s to the age, productivity, and potential of cows.

Complete mixed feeds are not specific or cheap

enough to meet the narrow criteria of their nutritional

and veterinary consultants.

Profile of Producers

What kinds of dairy producers do local cooperatives serve? Survey results revealed locals have found

a niche with small producers by default or design: 80

percent served producers with fewer than 100 cows; 19

percent, large producers, primarily in the lOl- to 200-

head group.

From a list of 22 traits, locals described the characteristics of those they considered innovative, large

(~100 cows), and small (cl00 cows). The survey did

not link innovation to a particular size of producer to

avoid biasing results in favor of large producers. Since

technologies like bovine somatotropin and computerized record-keeping require relatively small capital

investments17, the terms “high- and low-tech” were

also not used in the survey.

I5 Feedstuffs Reference Issue 1997 defines concentrate as “a feed

used with another to improve the nutritive balance of the total

and intended to be further diluted and mixed to provide a

supplement or complete feed.”

I6 Ibid. Complete feeds are “a nutritionally adequate feed for

animals. . . by specific formula compounded to be fed as the sole

ration and capable of maintaining life and/or promoting

production without any additional substance, except water, being

consumed.”

I7 Lazarus, W. F. and T. R. Smith, “Adoption of Computers and

Consultant Services by New York Dairy Farmers,” Journal of

Dairy Science (1988) 71,1674.

4

Nevertheless, survey findings placed innovators,

and to a lesser extent, large producers, in a class apart

from the small producers served by locals. The extent

of this gap becomes particularly apparent when innovators are contrasted with small producers.

Characteristics of Innovators

Figure 1 shows the characteristics of innovators

arranged according to the frequency observed by

locals. Characteristics noted by at least 48 percent of

locals were:

l [innovators are] seeking new sources of expansion

capital (48 percent);

l using bST routinely or experimentally (52 percent);

l rethinking goals, i.e., maximum vs. efficient milk

production (57 percent);

increasing preventative herd health through additives, premixes (57 percent);

improving labor utilization (58 percent);

increasing dairy operation’s size (58 percent);

ordering bulk feed to contain costs (62 percent);

concerned about feed composition and milk component pricing (64 percent);

using TMR (65 percent);

viewing dairy farm as business, not way of life (66

percent);

using consultants for business planning, other

aspects of dairy enterprise (68 percent); and

trying to stay on top of amino acids, other specialized supplements (71 percent).

Because only one of these traits refers to persons

other than the innovator (consultants), it appears that

innovators are pursuing a largely self-reliant course

toward greater efficiency, comparable with farrow-tofinish pork producers.

Partnerships with other dairy producers, off-farm

contract heifer production, strategic alliances with

milk processors or input suppliers, and revaluation of

established industry ties were less evident to locals.

From this, it appears that the dairy industry has not

yet reached the level of interpersonal/interorganizational complexity characteristic of contemporary pork

production, where strategic alliances and partnerships

underwrite the economics of the industry.

Yet this area will very likely be the next watershed for innovators because:

l 38 percent of locals saw innovators engaging in contract heifer production;

l 42 percent saw strategic alliances with milk processors;

l 44 percent saw breaking and reforming of traditional

industry ties;
Figure I- Characteristics of Innovative Producers Identified by Locals

Seeking new sources of capital to expand

Developing strategic alliances

with feed or equipment companies

Breaking and reforming traditional

or established industry relationships

Demanding unbundled services from locals

Developing strategic alliances with milk processors

Engaging in off-farm contract heifer production

Uses local less

Forming partnerships with other dairy producers

Uses local more

Uses complete feeds

Unsure of how to respond to industry changes

Trying to stay on top of amino acids,

other specialized supplements

Using consultants for business planning,

other aspects

Views dairy farm as business, not way of life

Uses TMR

Concerned about feed composition

and milk component pricing

Orders bulk feed to contain costs

Increasing dairy operation’s size

Improving labor utilization

Increasing preventative herd health

via additives, premixes

Rethinking goals, i.e.,

efficient vs. maximum milk production

Uses bST routinely or experimentally

L

0 10 20 30 40 50 60 70-80-90 100

Percent

5
l and perhaps most important for supply cooperatives, 44 percent saw innovators developing strategic

alliances with feed or equipment companies.

Sources of innovative behavior- Figure 1 may also

offer clues to the cause(s) of innovative behavior

among producers. For example, if seeking new (alternative) sources for expansion capital is taken as the

initial trait (or objective) of an innovator, then it and

those that follow in sequential order portray producers

who systematically scrutinize each component of production-labor, capital, feed composition, animal

health products, biotechnology, and even their own

motivation and aspirations-to achieve greater efficiency.

If the chain reaction of behaviors defining an

innovator begins from the opposite direction, i.e., seeking alternative expansion capital is the result of pursuing efficiency through every means available, then

another interpretation emerges.

Take, for example, the second most noticeable

trait of innovators, their use of consultants for business

planning and other aspects of the dairy enterprise,

noted by 68 percent of locals. Do consultants “train”

producers to view the dairy farm as a business rather

than a way of life (the third most important trait), and

behaviors like using TMR or improving labor utilization follow? Or, do producers decide to expand and the

prospect of additional debt from alternative financing

disciplines them to cut costs and improve efficiency?

If, indeed, consultants are the catalyst for transforming producers into innovators, locals need to

increase their roster of specialists for such things as

nutrition, facilities, and milk quality. If the decision to

expand is the trigger, then locals need to be a source of

alternative financing for producers. In fact, locals serving pork producers often do both.

Small Producer Characteristics

While question design was prompted by the

assumption that small as well as large producers could

be innovators, such was not supported by survey evidence. The primary attribute of small producers (and

the trait least characteristic of innovators), was that

they do not know how to respond to industry changes

(Figures 2 and 3). Only a small percent used consultants or viewed the dairy farm as a business, while

innovators, according to locals, viewed these as their

second and third highest priorities, respectively.

Compared with innovators, small producers

were more identifiable by what they didn’t do than by

what they did. Only four traits were observed by at

least 48 percent of locals, compared with 12 such traits

for innovators:

l [small producers were] concerned about feed composition and milk component pricing (48 percent);

l uses complete feeds (56 percent);

l orders bulk feed to contain costs (58 percent); and

l unsure of how to respond to industry changes (81

percent).

Even though small producers represent 80 percent of their clientele, locals had difficulty describing

them, beyond being struck by their confusion and lack

of direction.

Why locals did not have a fuller or multidimensional understanding of small producers is unclear,

because 35 percent of respondents noted these producers had increased their use of locals.

Moreover, fewer than 10 percent of locals perceived these producers wanted products and services

priced on an item-by-item basis (unbundled).

Although bundling has been commonly used by locals,

this variation on “one-stop shopping” has been resisted by large producers seeking whatever supplier will

give them the best deal. Because small producers are

willing to buy the way locals like to sell, locals may

find them receptive to packages of inputs and consulting services.

Producer Priorities

Figure 4 shows how locals viewed large producers. A fuller understanding of the implications of these

results can be obtained from grouping the traits used

to describe producers into three areas, feed cost/composition, improving efficiency, and industry relationships, to illustrate priorities by size of producer

(Figures 5 to 7). To facilitate comparison, within each

area the traits of innovators are arranged in descending order. A difference of 10 percent or more was

taken as a substantial difference between producer

groups.

Using this criteria, across all traits, large producers were less likely than innovators to:

l monitor developments in amino acids and other specialized supplements,

l increase preventative herd health via additives, premixes,

l use bST,

0 use consultants,

l reevaluate established industry connections,

l develop strategic alliances with milk processors,

l form partnerships with other dairy producers, and

l view dairy operation as business, not way of life.
Figure %-Characteristics of Small Producers Identified by Locals

Increasing dairy operation’s size

Seeking new sources of capital to expand

Views dairy farm as business, not way of life

Uses TMR

Uses local less

Unsure of how to respond to industry changes

Orders bulk feed to contain costs

Uses complete feeds

Concerned about feed composition

and milk component pricing

Uses local more

Rethinking goals, i.e.,

efficient vs. maximum milk production

Improving labor utilization

Trying to stay on top of amino acids,

other specialized supplements

Increasing preventative herd health

via additives, premixes

Using consultants for business planning,

other aspects

Demanding unbundled services from locals

Forming partnerships with other dairy producers

Engaging in off-farm contract heifer production

Developing strategic alliances

with feed or equipment companies

Uses bST routinely or experimentally

Breaking and reforming traditional

or established industry relationships

Developing strategic alliances with milk processors

0 10 20 30 40 50 60 70 80 90 100

Percent

7
Figure 3--- Innovative and Small Producer Characteristics Compared

Trying to stay on top of amino acids,

other specialized supplements

Using consultants for business planning,

other aspects

Views dairy farm as business, not way of life

Uses TMR

Concerned about feed composition

and milk component pricing

Orders bulk feed to contain costs

Increasing dairy operation’s size

Improving labor utilization

Increasing preventative herd health

via additives, premixes

Rethinking goals, i.e.,

efficient vs. maximum milk production

Uses bST routinely or experimentally

Seeking new sources of capital to expand

Developing strategic alliances

with feed or equipment companies

Breaking and reforming traditional

or established industry relationships

Demanding unbundled services from locals

Developing strategic alliances with milk processors

Engaging in off-farm contract heifer production

-1

:.:.:.:.:.:.: . ..A.. :.:.:.:.)):.:.:.f:.:.:.“:.~~: .+::::::::.::::: . . . . . . . . . . . . . . :.j:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:~:~~~~.:~ r................... . . . . . . . . . . . . .

::,:.... .. .

Uses local less I I

Innovators

Forming partnerships with other dairy producers

Unsure of how to respond to industry changes

Uses complete feeds

I I I I

lo 20 30 40 50 60 70 80 90 100

Percent

_

8
Figure 4- Characteristics of Large Producers Identified by Locals

Trying to stay on top of amino acids,

other specialized supplements

Developing strategic alliances

with feed or equipment companies

Demanding unbundled services from locals

Uses bST routinely or experimentally

Engaging in off-farm contract heifer production

Developing strategic alliances with milk processors

Breaking and reforming traditional

or established industry relationships

Uses local more

Uses complete feeds

Forming partnerships with other dairy producers

Unsure of how to respond to industry changes

Rethinking goals, i.e.,

efficient vs. maximum milk production

Increasing preventative herd health

via additives, premixes

Seeking new sources of capital to expand

Uses local less

Orders bulk feed to contain costs

Uses TMR

Concerned about feed composition

and milk component pricing

Improving labor utilization

Views dairy farm as business, not way of life

Increasing dairy operation’s size

Using consultants for business planning,

other aspects

30 40 50-60 70 80 90 100

Percent

9
Figure s--- Locals’ Observations of Producer Behavior Regarding Feed CosUCompositon

Trying to stay on top of amino acids,

other specialized supplements

Demanding unbundled services from locals

Uses TMR

Increasing preventative herd health

via additives, premixes

Concerned about feed composition

and milk component pricing

Orders bulk feed to contain costs

Uses complete feeds

30 40 50 60 70 80 90 100

Percent

Figure 6 Locals’ Observations of Producer Behavior Regarding Improving Efficiency

Uses bST

Uses consultants for dairy enterprise

Engaging in off-farm contract heifer

production

Views dairy operation as business, not way

of life

Seeking new sources of capital to expand

Increasing dairy operation’s size

Rethinking goals, i.e., efficient vs. maximum

milk production

Improving labor utilization

They are unsure of how to respond to

industry changes

0 IO 20 30 40 50 60 70 80 90 100

Percent

10
Figure 7- Locals’ Observations of Producer Behavior Regarding Industry Relationships

Breaking 81 re-forming established industry

ties

Developing strategic alliances with milk

processors

Developing strategic alliances with feed or

equipment companies

Forming partnerships with other dairy

producers

Uses local cooperative less

Uses local more

Innovators

I I

0 10 20 40 50 60 70 80 90 100

Percent

As large producers become more sophisticated, it

seems inevitable that these areas will increasingly

engage their attention. It would be easy to suggest that

local cooperatives should anticipate this interest and

respond accordingly, however, 44 percent of respondents observed that large producers had decreased

their use of locals.

All three producer groups were similar insofar as

they ordered bulk feed and were concerned about feed

composition and milk component pricing. Overall,

however, small producers-the core clientele of local

cooperatives-were more unlike both innovators and

large producers than they were alike. Consequently,

there appears to be two distinct populations of producers, small and progressive, where progressiveness

is defined as a continuum across the traits considered

in this analysis. And, analysis suggests locals are not,

by and large, serving the progressive segment.18

Service Adjustments

Impact of TMR- Over the 1993-94 reference period

used in the survey, the impact of changes in the dairy

industry on locals’ feed product sales by tonnage was

mixed, overall, but clearly reflected the growth of

TMR. Sales of complete feeds declined for 56 percent

of respondents and commodity sales increased for 67

percent-a remarkable result for a 2-year period.

These trends have undoubtedly strengthened since the

survey (Table 2).

Not surprisingly, three of the most commonly

offered services by locals reflect dairy producers’

endorsement of TMR: on-farm feed specialist, commodity or ingredient sales, and commodity/custom

blending (Figure 8). TMR has also caused locals to

increase staff expertise, begin bulk commodity sales,

and compete more intensively (Table 3).19

I* In the remainder of the report, the terms, “large,” “innovative,”

and “progressive” are used interchangeably.

I9 Other commonly offered services, consulting for nutrition

management and production, and feed record analysis may be

considered core services of locals, irrespective of members’

commodity specialization.

11
Table I- Relative Characteristics of Innovative, Large, and Small Producers

Innovative or Large Prods. Small Prods.

Leading Prods. (> 100 cows) (< 100 cows) Total

Percent

Feed CosVComposition

1. orders bulk feed to contain costs

2. uses total mixed rations (TMR)

3. uses complete feeds

4. concerned about feed composition, milk component pricing

5. trying to stay on top of amino acids, other specialized supplements

6 increasing preventive herd health through additives/premixes

7. demanding unbundled services from locals (priced separately from feed cost)

62 70 58

65 64 12

16 21 56

64 64 48

71 43 25

57 45 23

43 36 9

Industry Relationships

1. breaking, reforming traditional /established industry ties or relationships 44 23 5

2. uses local cooperative less than in previous years 34 44 12

3 uses local more than in previous years 23 22 35

4 forming partnerships with other dairy producers 28 18 9

5 developing strategic alliances with milk processors 42 26 2

6. developing strategic alliances with feed or equipment companies 44 36 7

Improving Efficiency

1 using consultants for business planning, other aspects of dairy enterprise

2 they are unsure of how to respond to the changes in the dairy industry

3 engaging in off-farm contract heifer production

4 improving labor utilization

5 views dairy operation as a business, not way of life

6 uses bST routinely or experimentally

7 increasing dairy operation’s size

8 rethinking goals, i.e., efficient vs. maximum milk production

9 seeking new sources of capital to expand

68 53 11

9 17 81

38 30 7

58 63 27

66 56 15

52 31 6

58 55 21

57 48 35

48 44 17

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

Table 2- Changes in Feed Product S&S, 1993/94 Table 3- LOCalS’ Reactions to Feed Sales Variability

Feed Product: Net Increase Net Decrease No Change

Percent

Premix/Low Inclusion Feeds 47 27 26

Complete Feeds 23 56 21

Commodity Products 67 15 18

Concentrates 28 48 24

Note that locals have largely rejected downsizing

or reducing feed sales staff. The core of their competitive strategy appears to be a sizeable, well-trained

staff. This approach is not surprising given their rural

community identities as employers and agricultural

resource for producers. Yet the fact that 41 percent of

respondents saw their community lose jobs a result of

changes in the dairy industry could mean locals are

unfairly pressured to overstaff when other agribusinesses are consolidating to lower overhead (Table 4).

Percent

The local has.. .

a started specializing sales staff 48

b begun bulk commodity sales 43

c expanded trade territory 40

d intensified competition with other dealers 39

e begun strategic planning 38

f increased efficiency in manufacturing or distribution 24

g coordinated activities with other locals or regional 22

h closed small mills 20

i begun joint ventures in feed or fertilizer with other locals 16

j investigated software and networking ideas 12

k reduced feed sales staff 9

I acquired private feed dealers 7

m. built new feed mill 7

n made no changes 7

o downsized in response to shrunken sales territory 6

p. exited feed business 0

12
Figure 8- Current and Anticipated Services from Local Cooperatives

Waste Management Consulting

Record & Decision Software

Environmental Management Consulting

Facility Financing

Feed Financing

Identifying Financing Alternatives

On-farm Financial Records Specialist

Building Layouts/Designs

Expansion Consulting

Dairy Enterprise Consultant

Labor Utilization Guidelines

Whole Herd Analysis

Startup Consulting

Commodity Blending

Feed Record Analysis

Residue Testing

Milk Quality Consultant

Production Specialist

Nutritional Consultant

Sell Commodities/Ingredients

On-Farm Feed Specialist

Custom Blending

10 20 30 40 50 60 70 -80 90 100

Percent

13
Table 4- Impact of Dairy Industry Changes on locals’ Communities

a The community has gained jobs-l 1%

b Grain production has been depressed-l 4%

c Area milk processors are processing more-22%

d Technical services for dairy producers are decreasinelE%

e Financing for dairy production by area banks has increased-26%

lost jobs-41 %

stimulated-39%

less-47%

expanding-61 %

decreased42%

no chang+46%

no change- 47%

no change31 %

no change--22%

no change-33%

Table 5- Ways Regional Cooperatives Can Assist Locals

Percent

a programs more competitive with other providers 43

b offer production credit to producers through local 27

c more specialists 27

d whole farm nutrient management 26

e give local more role in regional activities such as feed

manufacturing, marketing, or product development 26

f more programs addressing producers’ needs 25

g manure management and environmental services 20

h market access through value-added milk processing 20

i labor management services and information 19

Adding to this pressure is the potential for communities where dairying is a marginal enterprise to

experience what has been described as very exaggerated and deleterious impacts from seemingly minor

adjustments within the industry as a whole.20

As a result, rural communities and cooperatives

themselves may perceive that the latter exist [solely] to

provide a service-at cost, or irrespective of costthereby jeopardizing the ability of locals to aggressively pursue other goals like being a low-cost supplier. To

reconcile these conflicting expectations, locals may

attempt to shift a disproportionate amount of the burden of cost-cutting to regionals. Asked how regionals

could assist them, locals primarily wanted programs

more competitive with alternative providers (Table 5).

Future Services

The choices made by locals regarding future services, i.e., those needed during the next two yearszl,

can be interpreted by examining:

l future priorities irrespective of current choices

(Figure 8);

*O Harry K. And Andrew P. Davidson, “Perspectives on Regional

and Enterprise Marginality: Dairying in Michigan’s North

Country,” Rural Sociology, 1997,160.

21 In the broadest sense, “future services” represent the overall

direction dairy locals see themselves going.

l the extent that future service demand exceeds current demand (Figures 9-13); and

l total demand (current + future) (Figure 14).

Looking only at locals’ future service priorities

suggests that the future beyond TMR will depend

heavily on locals’ ability to offer environmental expertise and extend various forms of financing and financial analysis to producer-members, as indicated by

those services desired by more than 25 percent of

respondents. These services were: facility and feed

financing, identifying alternative sources of financing,

providing on-farm financial records specialists, environmental management consulting, and record and

decision software (Figures 11 and 13). The priority was

waste management consulting, chosen by 32 percent of

respondents.

Because interest peaked at 32 percent, locals did

not seem to be enthusiastic about adding new services,

unless service interests varied widely among respondents.

Figure 9- Consulting Services

Production

Specialist

Milk Quality

Consultant

Dairy Enterprise

Consultant

Nutritional

Consultant

Environmental Management

Consultant

0 20 40 60 80 100

Percent

14
Figure 1 0- Startup/ Expansion Services Figure 1% Feed Services

Startup Consulting

Expansion Consulting

Currently Offered

Add in 2 Years

_ _

60 80 100

Percent

Figure 1 i- Financial Services

Identifying Financing

0 20

Currently Offered

Add in 2 Years

llllu

40 60 80 100

Percent

This lack of enthusiasm combined with the slight preference for credit services may be complementary findings reflecting the difficulty dairy farmers experience

obtaining financing.22 Insofar as the areas served by

dairy locals have stagnant populations and low land

values, locals may feel their membership is strengthened more by financing than alternative services.

Looking at future demand relative to current

demand suggests waste management consulting, facility financing, identifying alternative financing, providOn-Farm Feed Specialist

Custom Blending

Sell

Commodities/Ingredients

Commodity Blending

0 20 40 60 80 100

Percent

Figure 13- Records Management

On-Farm Financial Records

Whole Herd Analysis

Feed Record Analysis

Residue Testing

Labor Utilization Guidelines

Record & Decision

Software

I Currently Offered

Add in 2 Years

I4

60

Percent

80 100

22 Schwarzweller and Davidson, 162.

15
ing on-farm financial records specialists, labor utilization guidelines, and record and decision software will

be areas emphasized by locals.

Combining current and future demand indicates

that locals do not anticipate significant changes in their

service offerings beyond the changes already exacted

by TMR. Selling commodities/ingredients, providing

on-farm feed specialists, production specialists, nutrition management consulting, custom blending, commodity blending, and feed record analysis will continue to be the backbone of their business (Figure 14).

Not first choice for these locals are the building layouts/design, startup consulting and environmental services and other popular services of the pork industry.

In short, dairy locals do not see the vertical integration

and coordination of the pork industry necessarily

influencing dairy production in their area.23 This result

may be evidence that:

technical change within the dairy industry has not

yet reached the critical mass necessary to transform

the industry, and by extension, locals;

milk production is declining at a sufficiently rapid

rate that many locals see no pressing need for new

services;

or, like their core customers, small producers, dairy

locals are caught in a stalemate.

Identifying the Future Core Customer

who Defines “Survivor”?- In 1996, Feedstuffsz4 reported 54 percent of more than 280 feed manufacturers

planned on geographically expanding their marketing

territory in the next 5 years. Almost 50 percent expected

to broaden their feed lines by species or feed type, and

more than 40 percent intend to build or expand an existing facility. Only 10 percent planned to change current

distribution methods.

These findings indicate too many suppliers will

be chasing after too few customers.

Yet the drive to increase the customer base and

retain existing customers goes beyond building new

facilities and expanding product lines. To respond more

effectively to producers, agribusinesses, including

regional cooperatives, are using market segmentation

techniques to classify and define their customer base.

Such techniques may be a competitive necessity,

but they create unique problems for cooperatives insofar as they exacerbate member diversity and governance. Moreover, unlike investor-owned firms who

can choose to specialize, cooperatives are pulled in

opposite directions as they try to serve both high- and

low- tech producers. This dilemma was reflected in

survey comments:

l We have to offer programs that reward producers

for volume purchases that help our own efficiencies,

yet still service the traditional producer. How is this

done?

The choice among groups is made more difficult

by the fact that large and innovative producers (consistent with survey evidence, the two adjectives are usually considered synonymous) are generally regarded

as the likely survivors of structural change, and therefore, the core customer of the future for most agribusinesses. In this vein, a respondent wrote, “We will lose

some customers, however, (so) we are focusing our

main attention on the survivors.”

But who determines what is or isn’t a survivor?

Who defines the timetable for evaluating whether a

particular category of producers made the grade or

not? What role do cooperatives play in determining

who survives and who doesn’t? Will particular producers be forced by industry attitudes into a

Procrustean bed25 which cripples their chances for survival? The debate over which group to focus on brings

issues like these to the table:

l Low-tech producers will inevitably drop out of the

industry sooner or later, so why bother investing in

them?

l Established producers are too inflexible or disillusioned to conform to our production requirements

and market specs; we prefer to train new people.

l We are committed to the survival of low-tech producers because they embody the reasons why our

cooperative was started.

l No one in the feed business can afford to write off

any customers, so let’s try to meet low tech producers on their own terms, letting them, like other members, shape the cooperative’s direction.

The difficult issues involved in this debate could

lead cooperatives to place themselves on the sidelines

as neutral observers watching the forces of structural

23 Dairy marketing cooperatives and land-grant universities may

provide services comparable to those available to pork producers.

The impact these alternative providers have on locals’ choices is

beyond the scope of this report.

24 “Feed manufacturers look to expand market territory,” Feedstuffs,

October 14,1996,14.

25 This mythological image of cutting off a person’s feet so they fit

into a bed symbolizes the act of forcing conformity to arbitrary

standards.

16
Figure 14- Service Priorities (Current Plus Anticipated)

Feed Record Analysis

Dairy Enterprise Consultant

Feed Financing

Whole Herd Analysis

Expansion Consultant

Sell Commodities/Ingredients

On-Farm Feed Specialist

Production Specialist

Nutrition Management Consultant

Custom Blending

Commodity Blending

Building Layouts/Designs

Identify Financing Alternatives

Record & Decision Software

Startup Consulting

Environmental Management Consultant

Waste Management Consulting

On-Farm Financial & Records Specialist

Residue Testing

Facility Financing

Labor Utilization Guidelines

Milk Quality Consultant I

IO 20 30 40 50 60-70-80 90 100

Percent

17
change sift through their membership, much as cyclical and counter-cyclical forces affect the mix of commodities they market.

Response to Technical Change

The choice of core customer is also fueled by concern that small producers are not modernizing and

innovating, thereby self-selecting themselves out of the

industry. To a degree such concern may be justified. A

1993 survey of Iowa pork producers revealed small

producers were uniformly less likely than medium or

large producers to use records to calculate their cost of

production, nutritional or veterinary consultants,

scales to sort hogs or mix feed, marketing services,

multi-site production, or plan a major genetic change

within a year.26

Turning to the dairy industry, facilities-tie stalls

or stanchion barns for lactating cows-have restricted

small producers’ use of TMR27, the fundamental innovation considered in this report. USDA’s National

Animal Health Monitoring System (NAHMS) estimated only 28 percent of operations with less than 100

dairy cows used TMR in 1996, compared with nearly

64 percent for larger herds.28

Insofar as NAHMS monitored 83.1 percent of

U.S. milk cows, it appears locals may be serving (or

observing) somewhat less progressive producers than

the norm. Like NAHMS, 64 percent of locals observed

innovators and large producers using TMR, but only

12 percent described small producers thus (Table 1).

NAHMS also found that record-keeping through

Dairy Herd Improvement Association records, on-farm

computers, or a combination of these was the most significant difference between high- and low-producing

herds.29 Low-producing herds had less than 100 cows,

corresponding to the small producers of this study.

Record-keeping systems allowed high producers to

evaluate the effectiveness of management practices like

bST, estrus synchronization, or culling healthy cows

through break-even milk production levels.

2h Lawrence, John D., Daniel Otto, Seth D. Meyer, and Steven

Folkerts, A Profile of the Iowa Pork Industry, Its Producers, and

Implications for the Future, Staff Paper 253. Ames, Iowa: Iowa

State University, June 1994,13.

*’ Info Sheet, Management Practices Associated with HighProducing U.S. Dairy Herds, USDA/Animal and Plant Health

Inspection Service, January 1997,Z.

28 Part I: Reference of 1996 Dairy Management Practices, National

Animal Health Monitoring System, USDA/Animal and Plant

Health Inspection Service, May 1996,lO.

29 Info Sheet, 1.

If viewing the dairy operation as a business

rather than a way of life represents the same diligence

as record-keeping, then locals found a business-manager approach among 66 percent of innovators and 56

percent of large producers, compared with only 15

percent of small producers (Table 1).

High producers also tended to focus more aggressively on overall herd health. NAHMS found a significant difference in the number of large and small producers interested in whole-herd diagnostic services.30

High producers also practiced more progressive neonatal calf care by such practices as separating newborn

calves from the dam before nursing, feeding greater

amounts of colostrum, etc. Similarly, small producers

were less likely to undertake the pre-entry vaccinations

which are the primary biosecurity measure used by

producers introducing new cattle to their herd.

Survey results point in the same direction: 57

and 45 percent of locals observed innovators and large

producers, respectively, increasing preventative herd

health through additives/premixes (Table 1). Only 23

percent saw this behavior among small producers.

Fifty-two percent of locals saw innovators using

bST routinely or experimentally; 31 percent saw such

use among large producers, and 6 percent among

small producers (Table 1). Although NAHMS discovered small producers used bST only sporadically even

though it markedly increased milk production per

cow, only 19 percent of locals anticipated their products or services would be affected by bST.

As yet, according to NAHMS, only a minority of

producers, mainly with larger herds, practiced contract heifer raising (had others raise their calves), so

they could specialize in milk production. Among surveyed locals, 38 percent observed innovators pursuing

off-farm contract heifer production; 30 percent saw it

among large producers, and 7 percent among small

producers (Table 1). Although NAHMS observed such

production has tripled between 1991 and 1996, more

than 70 percent of locals doubted contract production

would affect their services or products.3’

Locals’ Role Expanding Service Awareness- The

potential for locals to interject more service awareness

into their core-customer base may be circumscribed by

the reluctance of small producers-the primary owners of locals-to change. Even though small producers

need leadership to transcend structural change, they

may lack the necessary vision to empower their coop30 Ibid., 3.

31 Part II: Changes in the U.S. Dairy Industry: 1991-1996,23.

18
eratives to provide such leadership. For example,

although NAHMS indicated producers of top-producing dairy herds were twice as likely than their lowproducing counterparts to engage in low-impact

manure management practices, only 32 percent of

locals wanted to add waste management consulting to

their roster in the next 2 years.

Nevertheless, it is evident that dairy producers

themselves are interested in upgrading their production practices-61 percent of locals saw technical services for dairy producers expanding within their communities. In fact, this trend dominated all other

indicators of change considered in the survey (Table 4).

Here again, innovators led the way: 68 percent of

locals observed this group using consultants for busiTable 6- COnStraintS on Locals’ Dairy Services and Programs

Structural Change

Percent

1 Larger producers bypassing services of local 46

2 Rapidly decreasing cow numbers/dairies in our trade area 29

Feed Pricing

1 Conflict between pricing services

separately vs. bundling in feed cost

2 Deciding how to price concentrates or supplements

to work with or compete with commodities

3 Company profitability

Feed Sales

1 Size of feed business

2 Old or inadequate mill

3 Feed department profitability

4 No feed mill

Cooperative Commitment

29

23

19

45

40

32

6

Present demand for these services may not support them 43

Limited specialized knowledge or training 22

Local has other priorities 21

Reluctance to risk local’s equity 16

Time constraints 12

Not sure changes in dairy industry warrant local

changing product and service mix

Attitude of management

Attitude of board

Regional has other priorities

Leadership support and programs not available

from feed supplier

10

9

8

8

5

Social Pressures

1 Image of local cooperative among dairy producers

2 Negative customer reaction

3 Community, social, or political pressures

13

7

3

ness planning and other aspects of the dairy enterprise,

53 percent observed the same among large producers,

and 11 percent among small producers (Table 1).

Potential for Technical Services

Can locals be a part of the surge in technical services? Within the pork industry, local cooperatives

have viewed production management and consulting

services as a way to offset dependence on feed sales

and services and as a channel for disseminating technical information to producer-members. Although there

is concern about the longevity of small producers,

pork locals do work closely with some, based on their

willingness to align their operations with cooperative

products and services. The industry-wide movement

to networking and strategic alliances have provided a

supportive environment for such relationships.

But survey results indicate these services have

not become ensconced among dairy locals. For close to

50 percent of respondents, offering current and new

services to dairy producers was limited by larger producers bypassing locals, the size of feed business, and

the perception that present demand may not support

services (Table 6). To make a successful transition to

dairy management/consulting services, locals felt they

needed the right people to deliver new technology, the

ability to lower feed cost to compete as a low cost supplier, and a basis for determining whether to price services separately or roll into feed cost (Table 7).

The loss of large producers undoubtedly exacerbates feed mill overcapacity, making locals wary of

ladling on service overcapacity. The consequence may

be a vicious circle: small producers don’t know how to

respond to industry changes, and cooperatives, who

serve these producers, don’t assume a leadership role

because they conclude that demand will not support

service investment.

Compounding this dilemma, 42 percent of locals

saw bank financing for milk production decrease, and

47 percent saw production cutbacks among area milk

processors (Table 4). These figures indicate that there

is a critical imbalance within locals’ marketing territories. Producers are trying to become more efficient

even as bankers, if not processors, are discouraging

milk production. This imbalance suggests that some

form of vertical integration or coordination, perhaps in

tandem with milk marketing cooperatives, is needed

to capture the benefits of technical services offered by

supply cooperatives. Locals supplying inputs to pork

producers are frequently part of a value-added chain

culminating in processed meat products.

19
Table T-Areas affecting SUCCeSSfUl Transition to Dairy

Management/Consulting Services

Percent

Distribution

1 Having the right people to deliver new technology 61

2 Whether to price services separately or roll into feed cost 47

2 Determining channels for distributing new technology or

information 25

Feed Manufacturing

1 Lowering feed cost sufficiently to compete

as low cost supplier 51

2 Biosecurity issues affecting feed composition and delivery 7

Risk

Encountering resistance from producer-members

favoring conventional production methods 35

Products or services not meeting expectations

of dairy producer-members 27

Products or services not meeting expectations of the local 11

Products or services having unanticipated consequences

for the local 10

Regional-Local Coordination

1 Local and regional have different philosophies

or operating styles

2 Speed of information exchange between local

and regional on key issues

3 Fuzzy organizational authority

4 Governance issues

Regulations

25

19

11

5

1 Federal regulations such as OSHA, etc. 18

2 Rural community ordinances regarding zoning, pollution, etc. 9

Core Customer Choices

Whether relationships prevalent in the pork

industry are an option for dairy locals depends on

how they define their core customer, the type of producer considered to be the backbone of their business.

At this point in the evolution of the dairy industry, it is

probably still possible for cooperatives to make some

choices about the type of producer they wish to serve

in the future. For example, cooperatives can focus on

small producers because survey results indicate this

group has chosen them, or they can try to expand their

customer base among large producers, reasoning that

the rate of attrition among small producers will eventually eliminate them as customers.

Whatever the rationale, fundamentally, locals

have two choices: (1) gain share among large producers; or (2) strengthen small producers.

Among progressive producers, the pursuit of

technical change, networks, and alliances demonstrate

a sensitivity to costs which will eventually allow some

form of vertical integration to emerge within the dairy

industry. Although small producers undoubtedly also

want reduce costs, survey findings indicate they have

not found a way to do so, a situation further complicated by their overall lack of focus or direction. As a

result, the two groups have different agendas.

Progressive producers want to increase efficiency

through further innovation and cheap inputs while

small producers need direction and the services and

other inputs progressives already use.

Increasing Large Producer Share

A 1996 Harvard Business Review study concluded, “When a company is deciding which new products

to add to its line, it should consider two key factors:

First, which new product contenders best fit its distribution system, and second, whether the distribution

system will add value to the product in the eyes of the

end user .“32

Getting large producers to use locals more could

be difficult for the very reasons locals number among

their advantages.

Figure 15 shows that locals considered their primary strength to be their wide array of products and

services. At a minimum, locals carry their regional’s

brands and often those of other cooperatives and dealers. Next was the quick turnaround or response time,

undoubtedly reflecting, to some degree, staffing policies at locals.

The third most important aspect of locals was

location. Although consolidations have occurred

through mergers or attrition, locals are still numerous

throughout the Midwest. It is not unusual to find

locals primarily serving a one- or two- county area.

These features of cooperative marketing boil

down to a single fundamental advantage: availability.

Locals are easily accessible and so are their products.

Their strategy can be summarized as a mass marketing

approach geared to satisfying many preferences and

purchasing patterns-the “all things to all people” philosophy.

Although such availability reflects the readiness

of locals, based on egalitarian cooperative principles to

serve all types of producers, it could conflict with the

limited availability characteristic of high status or

32 Fites, Donald V., “Make Your Dealers Your Partners,” Harvard

Business Review, March-April 1996,86.

20
Figure 1s Locals’ Self-Described Strengths in Dairy Management/Consulting Services Compared

with Alternative Providers

Range of products & services offered

Quick turnaround or response time

Location

Strong relationship w/producers

Quality of staff training

Relationship w/regional cooperative

Ability to anticipate & respond to change in

trade territory

Prices

Linkages within ag community

Storage facilities

Relationship w/other locals

0 IO 20 30 40 50 60 70 80 90 100

Percent

newly introduced products-those likely to appeal primarily to the innovators and large producers of this

study.33

In fact, status-seeking behavior appears to be an

important dimension of producers’ behavior: sociologist Everett Rogers calls the popular and “extremely

expensive“ Harvestore silos, “a spectacular example of

the status-providing capacity of certain farm innovations.“34 Within the dairy industry, being the first to

use scarce or new AI bulls confers status and prestige

on producers.35 Consistent with these behaviors, a survey of patrons of Oregon supply cooperatives found

producers rejected egalitarian values like equal

prices.36

33 Status has been found to be a more important consideration for

innovators, early adopters, and early majority users than for the

late majority and laggards-the latter probably corresponding to

the small producers of this study. See Rogers, Everett M.,

Diffusion of Innovations, 3rd ed. (New York: The Free Press,

1983), 216.

34 Ibid, 216.

35 Hogeland, 1990,s.

3h Burt, Larry and M. E. Wirth, “Assessing the Effectiveness of Farm

Supply Cooperatives: A Comparison of Farmer and Manager

Viewpoints,” Journal of Agricultural Cooperation, 1990,24.

Positioning a product as high quality typically

requires a manufacturer (i.e., the regional) to limit the

number of retailers (i.e., member locals) carrying the

brand.37 To achieve this, retailers may be screened by

the manufacturer regarding their image or reputation

and ability to sell and service high-end brands.

“Credible commitments” or pledges made by retailers

to conform to particular brand sales goals or make

heavy investments to support the brand can be among

the behaviors required by manufacturers.38

Under this scenario, locals would need to be

proactive by “earning” the right to carry particular services or products. However, such investments would

show producers who intend to be survivors that their

cooperative has also self-selected itself as a survivor.

Ramifications of Increasing Large Producer

Share

Although a strategy of exclusive or limited distribution may increase share among large producers,

locals may object to the violation of cooperative norms

37 Frazier, Gary L., and Walfried M. Lassar, “Determinants of

Distribution Intensity,” Journal of Marketing (60) October 1996,

40.

38 Ibid., 40.

21
implied by treating some cooperatives differently. For

example, if a regional said to a local, “Look, we can

both do better if we help each other out,” other locals

could respond, “Why did you help them and not us?

We‘re here, too, so we deserve the same help.“39,40

Yet the clock cannot be turned back. Locals themselves laid the foundation for different treatment when

volume discounts for large producers became commonplace. Such discounts were offered by 90 percent

of dairy locals. As one local said, “Everyone does it to

get or keep the business.”

The tradeoff between “equal” vs. “equitable”

treatment inherent in such discounts reflects an economic reality that savings from the patronage of large

producers enables cooperatives to continue to serve

small producers, i.e., a single order from a large producer may equal the volume from a dozen small producers. As fewer employees are required to fill one

large order, overstaffing is reduced. Shipping is simplified compared with the cost of serving small, dispersed farms. These lowered costs can, in turn, facilitate developing new approaches such as catalogues,

which can be a more efficient purchasing method for

many producers.

Nevertheless, choosing a core customer may be,

for many locals, a decision equivalent to walking a

tightrope. Although the economics of serving large

producers may help locals serve their smaller counterparts, too much commitment to progressives could put

the survival of the local itself at risk if some of these

customers suddenly change suppliers in their search

for cheaper inputs. 41 Since innovators and large producers were using locals less, it is clear volume discounts are only part of the equation affecting cooperative patronage.

At the same time, if the cumulative impact of

paying higher prices puts small producers at an

absolute cost disadvantage, they-locals’ primary

clientele-will exit the industry. Consequently,

This discussion refers to limiting distribution when to do so

would not be a restraint of trade.

These words represent the dilemma of regionals faced with locals

who make credible commitments to carry certain products, versus

those who want something just because everyone else has it. As

explained by a sociologist, “Egalitarianism itself engenders and

legitimizes envy. People’s attitude is, ‘I want to have whatever

he has.“’ See The New York Times Magazine, August 3,1997,29.

Lawrence, et al., found larger pork producers were more willing

to bypass local communities and travel longerdistances for

supplies.

whether they focus on large or small producers, the

key issue for locals is, “Will they be responding to the

needs of a group that will be there in the future?”

Strengthening Small Producers

The seemingly straightforward business decision

to offer volume discounts invariably draws cooperatives into a more complex debate regarding the relative status of small producer-members, i.e.,

l If the business of a few large producers is equal to

that of many small producers, should a cooperative

use the profits (savings) from these large members

to postpone, if not halt, attrition among its small

members?

Alternatively, would savings gained from the

patronage of large producers be put to better use by

designing programs specifically for them as the likely survivors of structural change?

Are small producers themselves responsible for their

plight, or have the choices made by the cooperative

system contributed to their lack of direction?

Will rescuing small producers from the impacts of

structural change distract a cooperative from developing a value-added system unifying production

and processing activities?

Each of these issues is concerned with tradeoffs

between ownership and control, i.e., the “ownership“

of locals by small producers vs. the “control” imposed

by the economic reality of large producer business.

Issues concerning ownership and control also

occur at the level of federated cooperatives and are

similar to those faced by investor-owned firms.

Economist John Kenneth Galbraith attributed a split

between ownership and control within corporations to

the greater technical information possessed by corporate planners compared with stockholders.42

Traditional locals serving traditional producers are

also faced with the problem of keeping up with technical information, which may account for their reluctance, noted by regionals, to update services and operating methods.

Technical change on top of structural changes

like geographic shifts in milk production may have led

such locals to “shut down,” so they are really not capable of providing direction to the regionals they own.

Such locals have implicitly or explicitly decided they’ll

go when their market goes. This fatalism comes with a

cost for the cooperative system as a whole. Because

42 Galbraith, John Kenneth. The New Industrial State, 4th ed

(Boston: Houghton Mifflin Company, 19851,104.

22
such locals have not assimilated industry changes,

they are unable to be effective advocates for their

membership in a period when small producers may

have comparatively few supporters. This weakens the

ability of the federated system to balance the “top

down” focus of regionals with the “bottom up” perspective of locals.

Locals’ Goals

The survey gave locals an opportunity to

describe their goals?

l We want to be a leader in the dairy industry-when

a producer wants to expand or needs nutritional

help, they should talk to us first. We want to provide

the needed services.

l To be leading the way with new technologies; be the

source of information for making dairy producers

profitable; and provide the best feeds and service

available.

Although the responses, like those cited, correspond to an ambitious agenda, 40 percent of locals

considered their survival over the next 5 years to be

questionable.44

Locals with the most sanguine outlook found

suburbanization and increased sales in other product

categories (e.g., agronomy, pet food, etc.) had reduced

their dependence on feed sales. As a result, their goal

was simple: to be the No. 1 supplier, offering many

and varied services. These locals also foresaw changes

in the way farm inputs would be sold, predicting that

regionals would sell and deliver feed direct to the

farm, among other, ancillary functions.

Locals anticipating a continued role in the dairy

industry were prepared to offer specialized feeds and

management services complementing bST or heifer

production.

Region& Role- One-third of respondents felt

they had a key role maintaining dairy production in

their area, while 19 percent indicated they needed

more help from their regional to sustain this position

(Table 8). Especially important benefits from regionals

were technical assistance, feed production efficiencies,

and risk sharing (Table 9).

43 “Where would you like your local cooperative to be in 5 years

within the agricultural community and the dairy industry (i.e.,

position, influence, goals, relationship to producer-members,

etc.)?”

u Asked whether the expected changes in their trade area would

threaten the local’s survival over the next 5 years, 22 percent said

yes; 60 percent, no; and 18 percent, not sure.

Discussion

Changes within the producer base served by

cooperatives and use of sophisticated marketing techniques like market segmentation to profile the characteristics of various producer groups or segments combine to challenge the fundamentals of cooperative

organization and practice. Segmentation increases the

impact of member diversity within cooperatives by

highlighting differences between groups, and most

important, forces cooperatives to make explicit decisions regarding resource allocation among groups. The

result may increase the adverse impact of industry

changes on a particular producer group and at the

extreme, may put the cooperative in the position of

defining which group among its members will be more

likely to survive such changes.

TableE- Locals’ Impact on Dairy Production

a Key role in maintaining production.

b Has a role in maintaining production,

but needs more help from regional.

c Limited impact not expected to change.

d Some influence, but milk processors or other feed

companies are more influential.

e Small impact which could increase.

f Local is shifting focus to other types of producers.

g Some influence, but the regional cooperative

is more influential.

Percent

34

19

16

14

10

7

4

Table9- Benefits from Greater Coordination with Regional

Cooperative

a more technical assistance

b feed production efficiencies

c risk sharing

d access to specialists

e nutritional research

f market research

g producer credit

h strategic planning expertise

I facility design and layout expertise

j environmental expertise

k management assistance

I labor/management expertise

m. legal counsel

n no benefit

Percent

51

46

44

36

36

35

31

30

29

29

23

21

19

4

23
This power refutes the cardinal cooperative norm

of treating all alike. Yet competition between agribusiness suppliers forces cooperatives to use market segmentation and continuously amplify or refine segment

characteristics to keep pace with industry change.

Segmentation is not without value: it forces cooperatives to analyze their client base by risk tolerance,

short- vs. long-term goals, product preferences, etc.

Segmentation also reduces risk for cooperatives insofar as they can predict producer responses to various

programs or initiatives.

By defining producer profiles, segmentation also

implicitly creates a framework where locals themselves become less alike. Although locals have always

differed to some degree because they are bottom-up

organizations, the act of identifying different producer

needs and classes implicitly puts cooperatives into a

position of determining who among them is best qualified to meet those needs. In the example provided in

this report, producer segmentation by size ultimately

led to segmentation among locals through restricted

distribution.

Locals themselves have created a climate where

different treatment is acceptable. Ninety percent of the

247 respondents gave volume discounts to large producers. By identifying the likely needs and priorities of

various groups, segmentation legitimizes and expands

such practices, i.e., “If large producers ‘require’ volume discounts, we’ll provide them.” However, the net

impact of segmentation may be a zero-sum game insofar as the act of defining distinct producer profiles fosters equal treatment within, but not across, groups.

Those who may be left out of this process are

small producers who cannot articulate their needs or

who are too overwhelmed by industry change to fit

into logical and internally consistent profiles. And, in

fact, more than 80 percent of respondents felt small

producers did not know what to do in response to

industry changes. Although locals could identify many

characteristics of innovators, they had a much less

detailed picture of the small producers who represented 80 percent of their clientele.

Survey findings indicate that the small producers

served by locals were less likely to use TMR, adopt a

business manager approach to dairying, etc., than their

nationwide counterparts described by NAHMS. From

this, it appears cooperatives may not have adequately

prepared their member-owners to weather structural

change, relying instead on the volume business of

larger producers to sustain themselves. The short-term

benefits of this decision may put the long-term survival of locals at risk because innovators and large

producers were using locals less, leaving small producers as the cooperatives’ primary clientele.

Survey evidence suggests many locals have

accepted the common belief within agriculture that

large producers will be the survivors of structural

change within the dairy industry. From there it is

axiomatic that large producers should be the core customer of the future. Yet, the advent of TMR has significantly increased the self-sufficiency of large producers,

justifying locals’ concern that these producers will continue to bypass them in the future.

As a result, locals expressed little enthusiasm for

services that could attract large producers, which also

may explain why these producers were using cooperatives less. For example, although technical services for

dairy producers are expanding, locals hesitate to offer

them, fearing demand may not cover cost. But avoiding new services increases their ties to the feed business, already a vulnerable area for many locals.

Another reason for locals’ hesitation may be that

they were unable to visualize a dairy production system significantly different from the present one.

Integrated poultry production allowed pork locals to

learn how genetics, specialization, facilities, experience, etc., all combined to create a revitalized system

which could be replicated in the pork industry. Over

time, pork and poultry production came to have significant similarities, whereas the parallels with contemporary dairy production are less clear.

Consequently, dairy locals may anticipate operating in

the future much as they have in the past, where accessing and preparing feedgrains would continue to be the

core of their business. This means they would maintain the traditional definition of their business, even

when a new, expanded definition might better fit the

direction large producers appear to be heading.

Nevertheless, the inescapable fact is that locals’

primary clientele is producers with less than 100 cows.

Although locals generally saw themselves as having a

key role in maintaining dairy production within their

community, small, not large, producers appear to be

the most likely beneficiaries of a cooperative presence

in the farm inputs market for dairy producers.

It could be argued that locals should regard both

small and large producers as their core customer. This

can be done, at some risk of losing strategic focus,

insofar as the resources and requirements to fulfill the

very different agendas of small and large producers

could make it difficult to serve either group well.

Further, dairy locals may need to “get it right” the first

24
time; unlike the pork industry, the economics of the

North Central and Northeastern dairy industry do not

provide much latitude to fine-tune programs.

There are no easy answers for locals serving

dairy producers. Regional economics and differences

among producer agendas make it clear that, cast either

as structural change sifting producers, or credible

commitments allocating resources among locals, issues

of diversity, scarcity and triage will be increasingly

debated among cooperatives in the future.

25
U.S. Department of Agriculture

Rural Businesdhoperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business-Cooperative Service (RBS) 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 cooperative segment of RBS (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; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (5) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, gender, religion, age, disability,

political beliefs, sexual orientation, and marital or family

status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for

communication of program information (braille, large print,

audiotape, etc.) should contact USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,

Office of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20250-9410 or

call (202) 720-5964 (voice or TDD). USDA is an equal

opportunity provider and employer.