Cooperative

Information

Report 1

Section 16

Cooperatives

In the Dairy

Industry

United States

Department of

Agriculture
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Status Quo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Cooperatives in the Dairy Industry . . . . . . . . . . . . . . . . . . . . . . . . 3

Initial organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Adaptation to changing markets . . . . . . . . . . . . . . . . . . . . 6

Dairy Cooperative Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Bargaining-only cooperatives . . . . . . . . . . . . . . . . . . . . . 11

Manufacturing/processing cooperatives . . . . . . . . . . . . . 12

Cooperative cooperation . . . . . . . . . . . . . . . . . . . . . . . . 14

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Associations Serving the Dairy Industry . . . . . . . . . . . . . . . . . . 15

For More Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

RBS publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

RBS Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Revised September 2005

CII

Contents
Introduction

Farmer-owned dairy cooperatives in the United States engage in a variety of activities to provide members an assured market for their milk. They may negotiate prices and assemble, haul,

manufacture, process, or market milk and dairy products to wholesalers, retailers, or in their own stores.

Dairy cooperatives range widely in size and function-some

solely arrange for the sale of members' milk and provide few services, while others manufacture a wide range of products and may

market their own branded products directly to consumers. Additionally, many offer supporting services for their members, such as

providing field services, verifying weights and tests of milk, selling milk production equipment and supplies, and providing health

insurance.

A dairy cooperative business is owned, operated, and controlled by the dairy farmers who benefit from its services. Members

finance the cooperative and share in profits it earns in proportion

to the volume of milk they market through the cooperative.

Most dairy cooperatives are organized on a centralized basis-

-farmers are direct members. Only a few dairy cooperatives are

organized on a federated basis--members of the cooperative are

other cooperatives or a combination of direct members and cooperative members. Many are organized to serve farmers in a local

area or single State, while others serve members in multiple States,

regionally or nationally. Some dairy cooperatives have made additional business arrangements to increase outlets for members' milk

through subsidiaries, partnerships, federations, marketing agenciesin-common with other cooperatives, and joint ventures with other

cooperatives or investor-owned firms.

1

Cooperatives 

In the Dairy Industry
Status Quo

Dairy cooperative numbers in the United States peaked in

the 1940s at close to 2,300 in 42 States (fig. 1, table 1). By 2002 (the

most recent year dairy cooperatives were comprehensively surveyed by USDA), the Nation had only 196 dairy cooperatives

headquartered in 26 States.

Dairy cooperatives represented 13 percent of all agricultural

marketing cooperatives in the United States in 2002, markedly

down from 30 percent in the mid-1940s. This decline has been

faster than for other agricultural commodities. Likewise, the number of milk producers belonging to a dairy marketing cooperative

shrunk to 61,390 in 2002 from a peak in the 1950s of around 777,000.

However, this trend mirrors the national decline in total number of

dairy farms and increase in dairy farm size.

In sharp contrast, the volume of milk handled by cooperatives was 144 billion pounds in 2002, having expanded steadily

over the years from 31 billion pounds in the mid-1930s. On a percooperative basis, cooperatives handled an average of 736 million

pounds of milk each in 2002, compared to 14 million pounds in

the mid-1930s. Thus, despite their declining numbers, dairy cooperatives' role in the marketplace has continued to grow. The share

of all milk delivered to plants and dealers in the United States by

cooperatives was 86 percent in 2002, up from 48 percent in the

mid-1930s. Almost all of the milk received by dairy cooperatives (96

percent in 2002) came directly from member-producers. The rest

came from nonmembers or investor-owned firms.

The share of milk represented by cooperatives varies between

the regions of the United States. More than 90 percent of the milk

sold to plants and dealers in the East North Central, West North

Central, and South Atlantic regions was handled by cooperatives

in 2002 (table 2). In contrast, cooperatives had the lowest share in

the North Atlantic region (72 percent) followed by the Western

region (75 percent). (Ironically, 44 percent of all cooperatives are

headquartered in the North Atlantic region.) The cooperative share

was 87 percent in the South Central region.

In 2002, the majority (56 percent) of U.S. dairy cooperatives

were categorized as small cooperatives, handling less than 50 million pounds of milk annually. Thirty-one percent of the Nation's

dairy cooperatives were medium-sized—meaning they handled

2
50 to 99 million pounds of milk annually, while large cooperatives,

those handling at least 1 billion pounds of milk per year, accounted

for 13 percent.

Cooperatives sold 62 percent of the milk they marketed raw

and processed or manufactured 38 percent in their own plants in

2002. Dairy cooperatives have marketed a majority of the cheddar cheese, butter, and dry milk products produced in the United

States for about the past 60 years (fig. 2, table 3). Cooperatives'

share of dry milk products peaked in 1987 at 91 percent and in

2002 held an 85-percent share. Cooperative share of U.S. butter

production has fluctuated between 61 and 71 percent since the

1960s and accounted for 71 percent in 2002. Shares of all natural

cheese production have fallen to 40 percent in 2002 from a high

of 47 percent in 1980. Minor shares of the Nation's packaged fluid

milk, cottage cheese, and ice cream were distributed by cooperatives over the years.

The estimated net business volume of the Nation's dairy

cooperatives has expanded 40-fold, from $520 million in the mid1930s to $23 billion in 2002 (table 4).That volume represents

one-third of the total net business volume of all agricultural marketing cooperatives in the United States in 2002 and has fluctuated

from 27 percent (1943-44) to 38 percent (1987).

Cooperatives in the Dairy Industry

Milk is unique among farm commodities. It is highly perishable, produced, and "harvested" on a daily basis, and moved

from farm to market every other day, if not every day. The volume of milk produced varies seasonally and daily for biological

reasons. This variation is not coordinated with changes in demand,

which also vary from day to day and from season to season. The

task of balancing, or coordinating, the amount of milk supplied

with the volume of milk demanded is thus problematical.

Storage to balance supplies with demand is feasible only after

processing, except in the very short term. As technology developed, conversion of milk from raw product to various intermediate

and final products with longer shelf-lives became possible, but

required increasingly capital-intensive facilities and technologies

that are subject to significant economies of scale.

These fundamental characteristics of milk production, in concert with adverse marketing conditions and the economies available

3
from jointly owned milk handling facilities and manufacturing

plants, led dairy farmers to pioneer the application of cooperative

principles to marketing U.S. farm products.

Initial organization—In the early days of the Nation,

dairy farms were relatively small and remotely located.

Cooperatives sprang up spontaneously, formed by groups of

farmers seeking solutions to common problems. These groups

drew upon cooperative traditions that immigrant dairy farmers

had brought with them from Northern Europe. Milk from

several farms was pooled in one location (either by hauling milk

or cream in cans or by taking cows to the factory to be milked)

and made into cheese or butter.

Part of the net proceeds was returned to patrons in proportion

to the amount of milk each furnished. Cooperative creameries

were generally organized in areas where a large portion of the

milk produced could best be marketed for butter production,

thereby avoiding the high cost of transporting whole milk to distant city markets.

The first reported cooperative cheese factories were established in the mid-1800s. The number of creameries grew slowly

until mechanical cream separators were introduced around 1890.

By 1900, there were around 6,000 creameries and almost 3,000

cheese factories. About one-third were organized as cooperatives.

Milk evaporating and drying facilities emerged in the 1920s and

subsequently some creameries installed milk drying facilities to

provide a market for buttermilk and skim milk.

Concurrently, the organized marketing of raw milk for fluid

consumption began during the latter part of the 18th century in

cities where families were unable to obtain milk from nearby producers. A system of “middle-men” between producers and

consumers began to emerge in the 1800s. Fewer and fewer producers carried out all marketing functions. Milk price was

determined by negotiation; both buyers and sellers were small

and numerous.

During the mid-1800s, the rapid construction of railroads

permitted increased movement of "fresh country" milk to the cities.

Expanding urbanization made it necessary for families to obtain

milk from distant dairy farms in the country. Dairy farmers formed

associations to arrange these early shipments of “pure” country

milk to the cities.

4
By the late 1800s, the milk marketing system was steadily

moving toward a structure where hundreds or thousands of dairy

farmers sold to only a handful of large fluid milk dealers. Consequently, cooperative associations developed around the major

cities in the eastern part of the United States and in Chicago to

negotiate milk prices with milk dealers and distributors.

One tactic the early cooperatives employed to compel reluctant milk dealers to negotiate with them was the “milk strike.”

Farmers would withhold milk from the market which would

tighten supplies. This had short-term success in enforcing cooperative demands. Even so, the dealers began to develop a

bargaining edge over farmers, primarily due to better market information through their powerful organizations. In addition, the rural

isolation and the generally independent nature of most dairy farmers combined to restrain cooperative growth at that time.

Nonetheless, early cooperative associations laid the foundation

upon which later ones were built.

In the early 20th century, unfavorable economic conditions,

chaotic pricing of fluid milk, and dealers who balanced fluctuating

supply needs by refusing to accept some producers' milk spurred

the successful formation of large-scale cooperative bargaining

organizations for raw whole milk. Another important stimulus to

cooperative development was government policy for food control during World War I.

The Federal Food Administration, operating from 1917 to

1919, preferred to deal with groups rather than individuals. Cooperative associations were the only representatives of milk producers

and the government advised milk distributors to accommodate

producers' price demands. They complied rather than oppose the

Federal Government.

Furthermore, in a number of instances at that time, the right

of producers to join in negotiating price and terms of sale with

distributors in a particular market was questioned. On several

occasions, leaders of an association were criminally prosecuted

for violating antitrust laws—attempting to increase and fix the

price of milk. Even though they were found not guilty, the prosecutions were a disturbing element in the advancement of dairy

cooperative associations.

Enactment of the Capper-Volstead Act of 1922 granted cooperatives limited exemption from Federal antitrust acts and such

prosecutions abated. By 1925, cooperative dairy associations were

reported in all but 6 of the 48 States. In many cases, government

5
action had helped to give producer cooperatives a foothold strong

enough to ensure their lasting establishment. Dairy cooperatives

were thus positioned to provide an effective solution for dairy

producers' marketing problems.

Adapting to changing markets—Early bargaining

associations quickly found that increases in milk prices led to

problems in disposing of milk not needed for fluid use. In

response, numerous markets adopted classified pricing plans in

the 1920s and early 1930s. In every case, a cooperative

negotiated its adoption with the larger dealers. These plans

recognized the difference in the value of milk, depending upon

how it was used. Thus, raw milk prices were based on end-use.

Audit procedures were also established to ensure correct

payment by handlers. Consequently, dairy cooperatives

developed milk pooling systems to more equitably distribute

returns for milk used in different products to members and also

implemented plans for dealing with the seasonality of milk

deliveries.

● Government dairy programs—However, despite these

efforts by cooperatives to standardize milk pricing, there was continued instability in fluid milk marketing during the 1930s. This led

many States to adopt milk marketing orders. Federal Milk Marketing Orders (FMMO) were first authorized under the Agricultural

Marketing Agreement Act of 1937. By institutionalizing and enforcing classified pricing, these orders stabilized market conditions

and assured adequate consumer supplies of pure and wholesome

milk at all times. They benefited both producers and consumers by

establishing and maintaining orderly marketing conditions.

Producer approval was required before an order could be

implemented. Cooperatives were permitted to bloc-vote for their

membership. This led to the organization of many new cooperatives, some formed as a first step in obtaining a milk marketing

order and others to represent producer views different from those

of the members of existing cooperatives.

In addition, FMMOs exempt cooperatives from a marketing

service deduction if they perform certain marketing services (such

as providing market information, verification of weights, sampling, and testing of milk). Many small, bargaining-only dairy

cooperatives unable to perform these marketing services have affiliated with larger cooperatives to qualify for this exemption.

6
Up through the early 20th century, many dairy farmers had

been separating their milk at the farm—using the skim on the farm

and shipping the cream to a butter plant (hence the name “creamery”). Advancements in milk condensing and drying facilities

made the nonfat portion of milk marketable and prompted these

farmers to switch from shipping farm-separated cream to whole

milk. World War II brought an increased need for manufactured

dairy products, particularly dry milk products. Through lend-lease

funds, the Federal Government financed the construction of several

cooperative milk drying plants.

The Federal Milk Price Support Program was also started

during World War II and became permanent in 1949. The program

supports the farm milk price through government purchases of

butter, American cheese, and nonfat dry milk that cannot be sold

commercially for at least the announced prices. Prices for these

manufactured products are set at levels intended to enable manufacturers to pay farmers the announced support price for milk.

Cooperatives performing balancing services by manufacturing

milk not needed for the fluid market into butter, powder, or cheese

were thus assured of a market for these products at federally set

minimum prices. Around this time, many country plant operations changed from private ownership into cooperatives.

● Specialization and economies of scale—With improvements

in the road system, milk transportation shifted from rail to truck.

As significant economies of scale in assembling milk became apparent, there was substantial consolidation of milk receiving stations

and milk plants grew in size and shrunk in numbers. While cooperative numbers contracted, mostly due to consolidation and

merger, the volume of milk marketed by those remaining

expanded.

The development of the interstate highway system, refrigerated transport methods, and innovation in dairy product packaging

greatly increased the distance milk and dairy products could travel

to market while maintaining quality and shelf life. During the

1960s, widespread use of bulk tanks on the farm drastically

changed the marketing of raw milk. Larger volumes of milk could

be picked up from each farm and hauled directly (or transferred at

a pump-over station to a larger tank truck) to the city from substantial distances. Cooperatives took on much of the milk hauling

and routing of milk supplies, which cut costs and led to substantial economies of scale.

7
Some cooperatives with large raw milk volumes began to

unite in federated regional bargaining associations, thus pioneering regional pricing of milk. Facilitating these efforts were the

changes in the FMMO regulations that, in effect, removed barriers

to inter-order milk movement and more closely linked the separate

orders. When milk supplies tightened in the late 1960s, these federations were able to establish price premiums over minimum

prices for fluid milk (over-order prices) in FMMOs extending from

the Great Lakes to the Gulf of Mexico and Mexican border.

Conversion to bulk handling and processing of milk at plants

was completed by the 1970s. This required not only substantial

capital investment, but also additional milk volume for low-cost

operations. The increased efficiency in production, manufacturing, processing, and transporting milk led to fewer, but larger,

farms and processing/manufacturing plants. Dairy cooperatives

adapted similarly with a wave of mergers and consolidations in the

mid-1960s that markedly reduced cooperative numbers. The larger

organizations remaining, however, put farmers in a better position to negotiate with large, concentrated food companies and

milk handlers.

Many of these large, highly specialized investor-owned fluid

processing plants grew interested in avoiding the cumbersome

job of obtaining, managing, and coordinating milk supplies so

they could focus their resources on processing and marketing.

They increasingly looked to cooperatives to provide the exact

amount of milk they needed. Large-scale, multi-plant cooperatives negotiated “full-supply” contracts with these fluid processors

(and in some cases, manufacturers). Under a full-supply contract,

a cooperative provides just the milk volume the plants need and

manufactures whatever volume of milk is in excess of processor

demand into other products, such as butter and powder.

This task of balancing the volume of milk supplied with the

volume demanded is complicated because of the nature of milk

production—a fluctuating flow product that is harvested on a daily

basis. Further, dairy cooperatives agree to market all of the milk

their members produce. The larger the volume under one organization's control, the more the random variations of supply and

demand tends to offset one another (both within supply and

demand and between the two). As a result, the balancing services

that cooperatives are well-positioned to perform benefit the broader

market, as well as their members.

8
Thus, dairy cooperatives came to dominate the functions of

supplying fluid milk markets, routing the movement of milk, and

balancing supply with demand. In addition, their role in verifying weights and tests assures members of proper payment for their

milk. In this way, they have increased efficiency in milk marketing

and strengthened their position in the marketplace. Their guarantee to market all of their members' milk distinctly sets dairy

cooperatives apart from proprietary milk handlers.

Meanwhile, continued development of dairy technology

allowed dairy product lines to be expanded and diversified. Consumers received these developments with open arms in many

cases, particularly in the case of cheese. Subsequently, the large

manufacturing plants that cooperatives developed to manage milk

supplies began to evolve into important profit centers in their own

right.

● Facing the 21st century—In 2000, Federal milk marketing

orders were consolidated from 31 to 11 orders, reflecting the

increased geographical boundaries of milk markets. Moreover, the

Federal minimum support price for milk (at the national average

milkfat test) had been stepped down from a high of $13.49 in the

early 1980s to $9.90 at the end of the 20th century, where it remains

today. The lowered floor under the milk price allowed market

forces increasing influence. Dramatic price swings in raw milk

prices, previously unseen since the inception of the support program, resulted.

In addition to these regulatory changes, there was another

wave of consolidation in the dairy sector among investor-owned

dairy firms and grocery retailers as the 20th century drew to a

close. At the same time, the capital cost of keeping processing

capabilities up-to-date continued to grow. In response, the pace

of mergers and consolidation among dairy cooperatives picked

up again. Some of this activity was to satisfy the needs of large,

integrated food companies that increasingly looked for milk suppliers with national reach, the ability to provide entire lines of

dairy products, or the ability to meet particular product specifications.

Other dairy cooperatives merged to address regional needs

and to consolidate complementary or duplicate operations. For

example, in 1997, the top 5 dairy cooperatives handled 41 percent

of the net milk handled by all cooperatives. Subsequently, three

of these merged into a single entity, meaning the three largest dairy

cooperatives handled 46 percent of all cooperative milk in 2002.

9
Five cooperatives accounted for more than one-half (54 percent)

of the milk handled by cooperatives. Furthermore, two of these

large dairy cooperatives have national reach in both marketing

and membership, while the territories of many others span multiple

States.

Cooperatives also continued to look for ways to enhance the

value of their members' milk and to market it more efficiently.

Some formed joint ventures with proprietary handlers or with

other cooperatives to perform manufacturing and marketing functions, expand their market outlets, and share the financial risk of the

manufacturing and marketing activities. A few producer groups in

the Northeast and Upper Midwest formed small marketing cooperatives to try to enhance the value of their farm milk by capturing

“middle-man margins,” by reducing marketing overhead or by

pursuing “niche” markets that capitalize on consumers' interest

in quality and local source of their food. Some consumers are willing to pay premium prices for food with various attributes such as

“organic,” “natural,” “hormone-free,” pasture-based (grazing),

locally produced and “fresh.” Some of these niche-marketing cooperatives have been quite successful.

Dairy Cooperative Operations

Dairy cooperatives today run the gamut in size and extent

of services they provide. They differ markedly because they have

taken a variety of avenues to address the needs and preferences

of their members and specific market situation.

Most dairy cooperatives employ a general manager or CEO

and a staff of field representatives to build membership and provide assistance in improving milk production and quality. Other

employees include: laboratory technicians who verify the weight

and quality of farm milk delivered; personnel to prepare and distribute market information and represent the association in

legislative and regulatory affairs (such as Federal and State milk

market order hearings); and office staff who prepare and distribute milk checks and perform other administrative duties.

Cooperatives that manufacture or process milk also have employees who operate the cooperative's plants and develop and market

its products. Some cooperatives also provide other services such as

selling dairy equipment, supplies, and feed (even to the extent of

having their own system of feed mills, in some cases), providing

10
health insurance, retirement plans, and, beginning in the 1990s,

forward milk price contracts and assistance in using futures markets to manage milk price risks.

Alternatively, many small cooperatives, predominately in the

Northeast, limit their activities to arranging milk sales and issuing

milk checks. These are often affiliated with larger cooperatives

and usually have no hired staff.

A board of directors oversees every dairy cooperative. The

board consists of elected producer-members who set the cooperative's policy for the manager to carry out.

Individual cooperatives have tailored their operations to their

specific market situation to assure members a market for their

milk. Their divergent operations can be broadly grouped into two

operating types: “bargaining only” and “manufacturing/processing.” Furthermore, within the manufacturing/processing

group, there is a wide range in the type and scale of manufacturing operations.

Bargaining-only cooperatives—Many cooperatives

focus their operations on negotiating milk prices and terms of

trade for members' raw milk, but do not engage in further

manufacturing or processing. These “bargaining-only” dairy

cooperatives are the most numerous (74 percent of all dairy

cooperatives in 2002), but represent just one-quarter of U.S.

cooperative milk volume (fig. 3). Some of the larger bargainingonly cooperatives once had manufacturing capabilities, but

ceased their plant operations to focus only on milk marketing. A

number of them have joined in pricing federations. A small

number are “check-off” organizations that represent member

concerns in the policy arena and provide limited marketing

services.

Bargaining-only cooperatives have relatively few assets. Most

are small (64 percent handle less than 50 million pounds of milk

annually). At the same time, however, about 10 bargaining-only

cooperatives were quite large, handling over 1 billion pounds of

milk in 2002.

Members of bargaining-only cooperatives potentially face

the greatest marketing risk when the milk supply exceeds market

needs. In times of “surplus,” bargaining-only cooperatives may

have to sell some of their supply at reduced (“distressed”) prices

and/or incur increased costs in moving members' milk long distances to find a market. Lack of manufacturing facilities to

11
manufacture or process milk into storable products may weaken

their negotiating power with milk buyers. Also, they forgo potential margins that may be captured by further processing members'

milk. Alternatively, as long as there are buyers of milk, business risk

for bargaining cooperatives is low because members are not burdened by the expense of owning and operating under-used

manufacturing facilities.

Manufacturing/processing cooperatives—Just 50 of

the Nation's dairy cooperatives operated one or more plants for

manufacturing some or all of their members' milk into dairy

products in 2002. However, these cooperatives account for threefourths of all milk handled by dairy cooperatives. Owning

manufacturing facilities improves a cooperative's ability to

balance member milk supply with customer demand,

strengthening its negotiating position. These cooperatives can

provide their customers a full supply of raw milk and remove

the burden of disposing of unneeded milk. Manufacturing

operations also offer cooperatives the opportunity to add value

to their members' milk. The extent and character of these

cooperatives' operations vary widely.

● Commodity manufacturing cooperatives—Some cooperatives (10 in 2002) operate large-scale commodity manufacturing

plants making undifferentiated or generic “hard products” in bulk,

such as butter, nonfat dry milk powder, and cheese. They run a

high volume of member milk through their plants to make the

commodity products. They handled about 9 percent of all the milk

handled by dairy cooperatives in 2002. These “commodity manufacturing” cooperatives aim to operate their plants at maximum

capacity in order to achieve low per-unit costs. They all sell some

raw milk to other handlers, but for a few it's a major portion of

their member milk.

Many of these cooperatives began manufacturing dairy products to ensure a market for all the milk their members

produced—making the commodity products when they had surplus milk. Most now operate modern, large-scale plants that require

a continuous flow of milk near plant capacity to be cost-effective.

The commodity manufacturing cooperatives have limited

flexibility to adjust their product mix to changes in the market

because they are committed to operating their plants at maximum

capacity to make a limited line of commodity products. Volatile

milk prices leave them subject to inventory losses arising from

12
unexpected price movements. However, the advent of a futures

market for milk products has afforded hedging opportunities to

help manage this risk.

● Niche marketing cooperatives—Quite distinct from the

cooperatives making undifferentiated products, a number of smalland medium-sized cooperatives (18 in 2002) manufacture and market specialty dairy products for niche markets. These “niche

marketing” cooperatives aim to capture some marketing margins

in addition to processor margins, thus taking their operations

closer to the consumer. Most commonly, these niche marketing

cooperatives make specialty or branded cheese. Some are longestablished cooperatives while others formed more recently in an

attempt to capture a market based on various attributes of the

members' milk or production methods.

While somewhat sheltered from the volatility and low margins of the commodity markets, these cooperatives must be able to

produce and market a unique, high-quality product. They lack the

size and scale to compete on price with the large commodity manufacturers. Thus, their viability depends upon an ability to find

and develop a niche for their specialty product. For those unable

to do so, the market is unforgiving. However, a number of niche

marketing cooperatives are capitalizing on the increasing consumer interest in “organic” and “farm-based” or local production,

and specialty cheeses.

While most of the niche marketing cooperatives use all of

their members' milk in their own plants, a few belong to established or traditional cooperatives and simply “buy back,” or pay,

the larger cooperatives for the portion of their members' milk they

use to make their niche products. The larger cooperatives can more

economically market the milk they do not need for their niche

products. In some cases, they contract with other processors to

make their specialty products and do not own the processing facilities. The milk handled by these cooperatives amounts to less than

0.5 percent of all cooperative milk.

● Fluid processing cooperatives—In a similar vein, a small

number of dairy cooperatives have been successful in marketing

bottled milk. They typically make other products in addition to

fluid milk, such as ice cream and soft dairy products (yogurt, sour

cream, dips). These fluid processing or “bottling” cooperatives

also capture processor margins and at least some marketing margins through their operations. Most of the bottling cooperatives

have been long established and use most, if not all, of the milk

13
they handle in their own plants. This sector is extremely competitive and requires ample financial resources and top-notch

management to survive. Over time, many have merged into larger,

more diversified cooperatives, leaving just seven operating in 2002.

Fluid processing cooperatives accounted for less than 1 percent of

all milk handled by dairy cooperatives in 2002.

● Diversified cooperatives—Finally, some cooperatives operate a system of plants to manufacture a variety of dairy

products—both commodity and differentiated—including bottled

milk. At the same time, they sell a substantial portion of their milk

supply to other handlers. Some are sophisticated marketers of

branded, consumer products. The diversified operations better

position these cooperatives to direct milk to its most profitable

use. Thus, they are well positioned to capture processor and marketing margins from their many enterprises.

Many of these “diversified” cooperatives are the result of

mergers and consolidation between cooperatives that previously

had a more narrow operating focus. Several perform some of their

manufacturing/processing through joint ventures or partnerships

with investor-owned companies or other cooperatives. The 15

diversified cooperatives in 2002 represent almost two-thirds (66

percent) of all milk handled by dairy cooperatives. A majority of

these handled upwards of 1 billion pounds of milk in 2002 while

none handled less than 50 million pounds.

Cooperative cooperation—Dairy cooperatives work

together in assorted ways to serve their members. As mentioned

earlier, dairy cooperatives have formed joint ventures and

federations or marketing agencies-in-common (MAC) with

other dairy cooperatives to enhance their ability to market

members' milk.

These organizational structures allow the participating cooperatives to maintain their individual identities while strengthening

their collective position in various pursuits. The least formal

arrangement may be where membership areas overlap and cooperatives “swap” milk—pick up and/or receive each other's

members' milk, allowing them to more efficiently move milk from

farm to plant--a cost savings.

Some marketing agencies coordinate activities of their member cooperatives in establishing a scale of regional and interregional

service charges for milk above Federal order minimums. They

negotiate price premiums for fluid milk, provide a forum for adjust14
ing sales policies, and coordinate more efficient raw milk shipments. One marketing agency acts as the sales agent for the group

of dairy cooperatives' nonfat dry milk, capturing savings from a

centralized marketing effort and disseminating proprietary market

information among members.

In 2003, dairy farmers developed a national program under

the umbrella of a membership organization for America's dairy

cooperatives (the National Milk Producers Federation) to address

the supply and demand imbalances that can depress milk prices.

This effort is unique because it is aimed at supply-reduction

(through a combination of herd retirement programs, reduced production marketings programs, and export subsidy programs) and

because participation is also open to independent dairy farmers

not affiliated with a cooperative.

Summary—The Nation's dairy cooperatives have

shown their ability to successfully adapt to changes in the

marketing environment and offer a wide variety of avenues for

dairy farmers to market their milk. Their success has allowed

milk producers to maintain the independence of their farm

firms. Thus, in contrast to some other livestock sectors, dairy

farmers have been able to maintain their autonomy while

gaining some “muscle in the marketplace” through their

cooperatives.

Developments on various fronts raise new issues for U.S.

dairy cooperatives to address as the future unfolds. World trade

issues, such as subsidy levels and import quotas, are under scrutiny

by world bodies. The recent upsurge in domestic use of imported

milk protein concentrates has raised concern among dairy producers that it is displacing nonfat dry milk produced domestically

and depressing prices. New technology and procedures for making dairy products (such as cheese from dry dairy ingredients

rather than fresh milk) may require cooperatives to assess and

adjust their operations. In sum, the dynamics of the 21st century

dairy industry present a broad array of issues for dairy cooperatives

as they plan and direct their operations to market members' milk

to its best advantage.

15
Associations Serving the Dairy Industry

Dairy cooperatives, as well as individual dairy producers,

often belong to specialized organizations concerned with furthering the varied interests of the dairy industry through legislation,

advertising, sales promotion, merchandising, marketing, public

relations, and product research.

The National Milk Producers Federation (NMPF) was

founded in 1916 to provide dairy cooperatives and their dairy

farmer members a voice in the formulation of policy concerning

national issues affecting milk production and marketing.

The Dairy Production Stabilization Act of 1983 (Dairy Act)

authorized a national producer program for dairy product promotion, research and nutrition education to increase human

consumption of milk and dairy products. This program is funded

by a mandatory assessment of 15 cents per hundredweight (cwt)

of milk produced and is administered by the National Dairy Promotion and Research Board (NDB). The Dairy Act also provides

that dairy farmers can direct up to 10 cents per cwt of this assessment to qualified regional, State, or local dairy product promotion,

research, or nutrition education programs. Many of these fall under

the umbrella of the United Dairy Industry Association (UDIA), a

federation of State and regional generic producer promotion organizations.

In 1995, the NDB and UDIA jointly formed Dairy Management Inc. (DMI) to streamline and coordinate national, regional,

and local promotion efforts. DMI is a domestic and international

planning and management organization that endeavors to build

demand for dairy products on behalf of the Nation's dairy farmers.

DMI, along with international, State, and regional organizations,

manages the American Dairy Association, the National Dairy

Council, and the U.S. Dairy Export Council.

A number of State dairy associations exist to build up their

respective dairy industries. These associations of dairy farmers

engage in diverse activities to support and enhance the viability of

a particular State's milk producers. Activities range from representing dairy farmers' interests in regulatory and policy matters

to providing educational programs, or running a central milk-testing lab.

Other associations and cooperatives assist farmers with milk

production. Many artificial insemination (AI) organizations are

16
organized as cooperatives. They provide dairy producers access

to a wide variety of bulls, enabling them to capitalize on the most

recent genetic advances. Many Dairy Herd Improvement Associations (DHIA) are organized as cooperatives and provide

individual dairy producers an economical method of obtaining

information useful for improving breeding and management of

dairy herds in order to improve productivity.

As the DHIA program moved away from its government

roots in the 1990s, new business arrangements emerged, providing

a broad range of information services for dairy farmers. Some AI

and DHIA organizations consolidated into single entities. In

another case, a dairy cooperative joined forces with a DHIA to

create an information technology cooperative which provides farm

management tools.

The National Mastitis Council (NMC) is a nonprofit organization devoted to reducing mastitis and enhancing milk quality

by promoting research and providing information to the dairy

industry regarding udder health, milking management and milk

quality. Many dairy producers also belong to farm production supply cooperatives to secure supplies for their dairy farming

operations.

For More Information

RBS publications:

RR 206 Dairy Cooperative Growth Challenges

RR 203 Financial Profile of Dairy Cooperatives, 2002

RR 201 Marketing Operations of Dairy Cooperatives, 2002

RR 188 Cost of Balancing Milk Supplies: Northeast 

Regional Market

RR 187 Structural Change in the Dairy Cooperative Sector, 

1992-2000

RR 166 A New Approach to Measuring Dairy Co-op

Performance

RR 164 Financial Statistics of the Largest Dairy Coopera

tives, 1980-1995

RR 152 Dairy Cooperatives' Role in Managing Price Risks

17
Contacts:

Cooperative Services Staff Phone E-mail

Thomas Stafford 202/690-0368 thomas.stafford@usda.gov

Cooperative Marketing

Division Director, RBS/USDA

K. Charles Ling 202/690-1410 charles.ling@usda.gov

Dairy, Livestock and Poultry

Program Leader, RBS/USDA

Carolyn Liebrand 202/690-1414 carolyn.liebrand@usda.gov

Dairy, Livestock and Poultry

Program Staff, RBS/USDA

Cooperative Services Web Site: 

www.rurdev.usda.gov/rbs/coops/csdir.htm

18
19

Figure 1—Trends in number, volume, and membership of dairy

cooperatives, 1925-2002

2,500

2,000

1,500

1,000

500

0

Figure 2—Cooperatives’ market share of selected dairy product

production, 2002

100

90

80

70

60

50

40

30

20

10

0

Nonfat Butter Total Cottage Packed Ice 

dry milk natural cheese fluid cream

cheese milk

1925 1935 1943 1956 1964 1973 1980 1987 1992 1997 2002

Percent

86%

71%

40%

9% 7%

Cooperative share of U.S. production

3%

Milk 

marketed

(million cwts)

Cooperatives

Members

(thousands)
20

Figure 3—U.S. dairy cooperatives, by type of operation—share of

total number and milk volume, 2002

Share of dairy

cooperative numbers

11% Diversified & fluid

processing

75% Bargaining-only

5% Commodity

Manufacturing

75%

Share of milk 

handled (estimated) 25% 

Bargainingonly

9% 

Commodity

Manufacturing

0.5% 

Niche

Marketing 66% Diversified

& Fluid

Processing

9% Niche

Marketing
21

Table 1—Cooperative numbers, volume of milk marketed and

number of members, 1925-2002, selected years

Percent of Milk 

all U.S market Cooperative Members 

Dairy marketing by dairy share of of dairy

Year Co-ops cooperatives cooperatives1 U.S. Total2 cooperatives

(Number) (%) (Million pounds) (%) (Number)

1925 2,197 - - 460,000

1935/36 2,270 27 31,058 48 720,000

1943/44 2,286 30 n/a - 702,000

1956/57 1,746 28 58,038 59 777,400

1964 1,244 24 76,743 67 561,085

1973 592 14 83,227 76 281,065

1980 435 12 95,634 77 163,549

1987 296 10 105,798 76 120,603

1992 265 12 122,622 82 110,440

1997 226 12 127,418 83 87,938

2002 196 13 144,349 86 61,390

1 Net of intercooperative transfers.

2 Dairy marketing cooperatives' share of all milk delivered to plants and dealers.

Source: Marketing Operations of Dairy Cooperatives, selected years.

Statistics of Farmer Cooperatives, selected years.
22

Table 2—Dairy cooperative numbers, marketing share and

number of producers, by region, 2002

Marketing Number of Members Regional share

Region share1 cooperatives2 delivering of members

Percent Number Number Percent

North Atlantic 72 87 12,866 21

East North Central 93 53 24,314 40

West North Central 93 53 14,199 23

South Atlantic 95 8 2,770 4

South Central 87 8 3,617 6

Western 75 24 3,604 6 __ ___ ______ ___

All regions3 83 194 61,390 100

1 Cooperative member volume as a percentage of milk sold to plants and dealers in

region.

2 Cooperatives having members in the region, but not necessarily headquartered

there.

3 Number of cooperatives do not add to totals because some receive milk from more

than one region. States in each region: North Atlantic (CT, MA, ME, NH, NJ, NY,

PA, RI, VT); East North Central (IL, IN, MI, OH, WI); West North Central (KS, IA,

MN, MO, ND, NE, SD); South Atlantic (DE, FL, GA, MD, NC, SC, VA, WV); South

Central (AL, AR, KY, LA, MS, OK, TN, TX); Western (AK, AZ, CA, CO, HI, ID, MT,

NM, NV, OR, UT, WA, WY).
23

Table 3—Cooperatives distributing selected dairy products,

number and market share1, selected years

Year Bulk whole milk2 Packaged fluid milk Ice cream Cottage cheese

No. No. % No. % No. %

1936 408 - - 57 1 14 1

1944 - - - - - - -

1957 735 - - 130 4 108 7

1964 730 215 9 143 5 126 15

1973 548 85 12 60 5 64 13

1980 352 60 16 38 11 42 22

1987 251 34 14 21 8 23 13

1992 230 29 16 20 10 22 13

1997 204 21 14 13 6 13 10

2002 174 16 7 7 3 9 9

Year Cheddar cheese All natural cheese Butter Dry milk products3

No. % No. % No. % No. %

1936 n/a n/a 562 25 1,444 39 139 17

1944 n/a n/a 501 16 1,164 55 - 56

1957 n/a n/a 323 18 888 58 191 57

1964 n/a n/a 294 21 740 65 212 72

1973 n/a n/a 187 35 207 66 57 85

1980 n/a n/a 157 47 148 64 48 87

1987 n/a n/a 94 45 82 71 31 91

1992 59 75 75 43 68 65 26 81

1997 33 70 42 40 36 61 24 76

2002 24 n/a 32 40 19 71 17 85

Source: Marketing Operations of Dairy Cooperatives, selected years. 1 Percent of total processed or manufactured in the U.S. distributed by

cooperatives.

2 Bulk whole milk includes "market milk" and milk sold as market cream and butter

is "creamery butter."

3 Includes nonfat dry milk, dry buttermilk, and dry whole milk.
24

Table 4—Estimated business volume of U.S. agricultural

marketing cooperatives, selected years1

Percent of all marketing

Year Dairy Cooperatives cooperatives

(Million dollars) (%)

1935/36 520 33

1943/44 1,203 27

1956/57 2,764 35

1963/64 3,524 31

1972/73 6,102 31

1980 13,666 28

1987 16,548 38

1992 20,239 35

1997 23,374 30

2002 23,038 33

1 Includes gross business volume in 1935/36 and 1943/44. The remaining years

include net business volume where business between cooperatives was excluded.

Source: Cooperative Historical Statistics and Farmer Cooperative Statistics,

selected years.
U.S. Department of Agriculture

Rural Development

Rural Business–Cooperative 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 United States Department of Agriculture (USDA) prohibits discrimination in all its

programs and activities on the basis of race, color, national origin, sex, 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.