Dairy Cooperative

Growth Challenges:

Technology, Ingredients (Proteins)

and Equity Financing Research Report 206

United States

Department of

Agriculture
Abstract Filtration separates milk components for use as ingredients in new products or new

manufacturing processes. Technology developments in filtration and new manufacturing processes are certain to shape the future of the dairy industry. Some ingredients,

such as milk protein concentrate (MPC), casein and caseinate, are almost all imported

due to lower prices in foreign markets. When domestic production becomes economically feasible, cooperatives are potential producers of milk protein ingredients, especially in the West region. Research and development, product development and marketing, acquiring manufacturing and processing technology and equity financing are

cooperatives’ major challenges. A brief historical review of tomatoes shows how technology has caused profound changes to an industry that strikingly resembles milk.

Key Words: Filtration, process technology, dairy ingredients, milk protein concentrate,

cooperatives, equity, tomatoes.

Dairy Cooperative Growth Challenges: Technology, Ingredients (Proteins) and Equity

Financing

K. Charles Ling

Agricultural Economist

Research Report 206

May 2005
Preface This report is intended to provide member-producers of dairy cooperatives information

on recent technology developments and technology on the horizon. These developments will create new uses for milk, new dairy ingredients, new products, and new

manufacturing processes and will open up new opportunities for the growth of the dairy

industry. Along with the new opportunities come challenges.

This report identifies four major challenges: research and development, product development and marketing, acquiring manufacturing and processing technology and equity

financing. Each of the four challenges is discussed at some length, with equity financing occupying a separate section.

In this report, an italic name in parentheses denotes the literature that is referred to by

the text. All statistics cited were up-to-date as of Jan. 14, 2005. Milk-equivalent was

calculated on a milk-protein basis. Mention of company and brand names does not

signify endorsement over other companies’ products and services.

i
Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Filtration Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

What is filtration? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Advent of ultrafiltration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Milk protein concentrate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

MPC co-precipitates and other milk protein products . . . . . . . . . . . . . . . . . . .3

Process Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Dairy Ingredients—Milk Proteins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Milk proteins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Milk proteins are mostly imported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Magnitude of milk protein imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Effects of milk protein imports on milk prices . . . . . . . . . . . . . . . . . . . . . . . . . .6

No incentives to produce milk protein products . . . . . . . . . . . . . . . . . . . . . . . .9

Relative value of casein to nonfat dry milk . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Protein Ingredient Production Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Some advantages of domestic production . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Location of protein ingredient plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Location of end-users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Regional specialization of milk use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Roles of Dairy Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Augmented first-handler role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Cooperatives are potential producers of milk protein ingredients . . . . . . . . .16

Cooperatives as end-users of milk ingredients . . . . . . . . . . . . . . . . . . . . . . .16

Dairy Cooperatives’ Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Product development and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Acquiring manufacturing and processing technology . . . . . . . . . . . . . . . . . .17

The Ultimate Challenge—Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Unique equity financing of cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Financing challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Equity financing alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Epilogue: Parallel to Processing Tomato Industry . . . . . . . . . . . . . . . . . . . . . . . . .21

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

ii
Contents References on Tomatoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

List of Figures

Figure 1—Estimated protein content in the imports of milk 

protein products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Figure 2—Estimated protein content in the U.S. production and 

USDA net removals of nonfat dry milk, and in the 

imports of milk protein products . . . . . . . . . . . . . . . . . . . . . . . . . . .8

List of Tables

Table 1—Composition of milk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Table 2—U.S. whey products and exports . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Table 3—U.S. share of world whey exports . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Table 4—Estimated protein content in the consumption imports of 

milk protein concentrates, casein and caseinates, 

and in the U.S. production and USDA net removals of 

nonfat dry milk, thousand pounds of protein . . . . . . . . . . . . . . . . . . .7

Table 5—U.S. dried casein production (skim milk or buttermilk 

product) and imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Table 6—Casein and nonfat dry milk prices, 1935-56, and 1996-2003 . . . . .11

Table 7—Production of nonfat dry milk for human consumption, 

milk production and milk production costs and 

returns, by region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Table 8—Milk production by State and region, 10-year changes . . . . . . . . . .14

Table 9—Tomatoes for fresh market, production by State, average 

1951-60 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Table 10—Tomatoes for processing, production by State, 

selected years 1951-2003 (tons) . . . . . . . . . . . . . . . . . . . . . . . . .23

iii
Highlights Two aspects of modern technology are going to be very important for the future of the

dairy industry. One is the filtration technology of fractionizing milk components. The

other is the process technology of making dairy products using dairy-based ingredients

with small amount of fresh milk. Wider adoption of these technologies will cause further restructuring of the milk industry. This presents dairy cooperatives with many challenges and potentially rewarding opportunities.

Filtration is the use of semi-permeable membranes to separate and “harvest” milk

components for uses as ingredients in various foods, beverages and nutritional and

pharmaceutical applications. Milk protein concentrate (MPC) is one such ingredient. In

the future, further technological advances may turn milk plants into milk “refineries”

that could fractionate milk components into all kinds of desired dairy ingredients.

On the other hand, advances in new manufacturing process technology may allow the

use of dairy ingredients with small amount of fresh milk in the manufacture of dairy

products. An example is a patented “wheyless process” for production of mozzarella

cheese. This process enables the manufacture of cheese from nonperishable or shelfstable dried dairy ingredients. This allows flexibility in the location of cheese manufacturing facilities as handling and/or transporting large quantities of fresh milk is not

required. Also, the need for refrigerated storage of the fresh milk would be minimal.

Several other wheyless-process patents also have been recently granted for making

various other dairy products from dry ingredients.

Among dairy ingredients that are of particular current interest to dairy producers are

MPC, MPC/casein, casein and caseinates. Until recently, there was no domestic production of MPC, casein and caseinates in the United States. Milk prices are such that

domestic production of these products can not compete with imports. (Other protein

products, such as whey protein concentrate (WPC) and other whey products, compete

very well with foreign production because whey price is not regulated.)

Other than price, domestic milk-protein production may have some advantages over

imports, such as fresher protein products at a lower transportation cost to customers,

better customer services due to proximity to end-users, and ability to supply protein

products in wet form or caseinates made from fresh milk.

Based on the profitability of milk production, the West is the region that is most certain

to see continued growth in milk production and could support new plant capacity. This

is the region where new milk-protein plants should be located, if they were to be built.

In fact, the first plants in the United States for MPC production are located in Tempe,

A.Z. and Portales, N.M.

One of the important functions of dairy cooperatives is supply- balancing and lastresort processing of surplus milk. Making milk protein ingredients would be an alternative outlet for such milk. Dairy cooperatives are certainly going to play a prominent role

in a milk-protein ingredient sector if it becomes economically feasible to produce such

products domestically.

Cooperatives also are end-users of dairy ingredients. Some cooperatives have been

making nontraditional dairy or related products to satisfy consumers’ shifting demand

or to have a complete line of products to offer customers. In most cases, the nontraditional products are dairy-based, and dairy ingredients constitute the major share of the

manufacturing inputs.

iv
Highlights In a future that is driven by technology, dairy cooperatives face many challenges. Chief

among them are: (1) research and development, (2) product development and marketing, (3) acquiring manufacturing and process technology, and (4) equity financing.

Research and development is the foundation of manufacturing and processing technology, product development and marketing. Through check-off dollars, dairy farmers

have funded many research projects that provide information pertaining to the development of process technology and new product development. However, only through a

cooperative’s own proprietary research and development efforts can it identify and

have a full grasp of its market niches and bring the new products to the market. 

New products may be developed by modifying the flavors, taste, colors, forms, packaging or shelf-life of existing products, or by fortifying them for desired functionality.

Product development also refers to using dairy ingredients (or dairy products as ingredients) to develop or improve foods and beverages.

Marketing new consumer products requires market research, test marketing, advertising and promotion, consumer education, shelf-space acquisition, merchandising, and

servicing the products. In marketing new dairy ingredients, the challenge is to provide

end-users (processors) with information on the attributes, the functionality, and the

application of the ingredients.

Machinery and equipment are the embodiment of manufacturing technology.

Cooperatives usually acquire new manufacturing technology through buying new

machinery and equipment. However, as the scale of dairy plants grows larger, the cost

of building a new plant with new machinery and equipment is substantial. The plant

also requires a large milk volume to sustain the operations.

To differentiate value-added products and gain competitive advantages, cooperatives

also must devote adequate resources to develop or acquire the process technology

and adopt new ways to manufacture or package them or enhance the particular attributes of the products. The other aspect of processing technology development is finding new ways to make existing products, such as the wheyless process for making

mozzarella cheese.

To meet all these challenges requires adequate financing—the ultimate challenge. A

dairy cooperative’s debt financing may work much the same way as any business. Its

equity financing, however, is unique and may have one or more of these features: (1)

common stock held by cooperative members (usually of nominal value), (2) retained

patronage as net savings allocated to members based on patronage but retained for

operations, (3) capital retains that are milk payments but are withheld at a certain rate

per hundredweight of milk, and (4) retained earnings that are earned on non-member

business. Members must treat retained patronage and capital retains as income for tax

purposes. They are revolved back to members after a certain period of time.

In lieu of retained patronage and capital retains, a cooperative may have a base capital plan. Under the plan, a target base-capital level is established at a rate per hundredweight of milk marketed during a representative period. This should provide an

adequate level of equity capital.

v
Highlights The challenge of managing a cooperative’s unique way of equity financing comes from

three directions. Members want as little retains and as short a revolving period as possible, while the cooperative needs an adequate amount of capital for operations and

the lending institutions require the cooperative to maintain a certain level of equity.

The base capital plan may be viewed as a compromise among the three conflicting

interests. Under the plan, once the prescribed base capital level is attained, a member

can expect to receive all allocated patronage earnings in cash. The cooperative would

have an adequate level of capital to operate with, and the base capital would have a

certain degree of permanency that helps relieve lending institutions’ concern about

risk.

From 1997 to 2002, average cooperative equity increased by 3 cents per hundredweight, while assets increased by 97 cents and liabilities increased by 95 cents per

hundredweight. Contributions by cooperative member-producers to the increased capital needs were minimal and cooperative growth was mostly financed by debts.

Various alternative equity financing methods have been used to reduce cooperative

members’ fiscal burden and investment risks: public stock corporations, limited liability

companies (LLC), joint ventures, and new-generation cooperatives.

It is difficult to operate a public stock corporation or LLC on a cooperative basis

because of one or more of the following: (1) Investors have problems with one-person,

one-vote democratic control of cooperatives; (2) Producers support the cooperative’s

business by patronizing it; investors do not; (3) With investor capital, the cooperative is

likely to lose Capper-Volstead status; (4) In a dairy cooperative, the distinction

between milk pay prices and premiums, on one hand, and profits on the other, is not

clear-cut, and the conflicts between producers and investors may be very difficult to

reconcile; and (5) There are fundamental conflicts between benefits for member-producers and investors’ focus on returns on investment.

The new-generation cooperative model has its strengths, but its characteristics also

have created a host of problems. Only the joint-venture model seems to have worked.

Many recent joint ventures formed by cooperatives with other cooperatives or firms are

organized as LLCs. On the marketing side, a joint-venture LLC may be used by a

cooperative and its partner to develop and market certain dairy products. The cooperative supplies milk to the LLC while the partner supplies technical and marketing knowhow. The joint-venture partners share the financing and the risk of the business activities of the LLC. This organizational model reduces the financing burden and risk

exposure of cooperative members, while a market outlet for milk is secured.

The promising rewards of adapting to new technology can be exciting, but the necessary industry adjustment can be challenging for dairy farmers and their cooperatives.

Success will depend on adequate member equity capital, well thought-out strategic

plans, and research and development.

vi
Highlights The evolution of the milk industry has a striking resemblance to the developments in

the tomato industry. Like milk, tomatoes have two use categories. Tomatoes for fresh

market are produced in every State in the Nation, while production of tomatoes for processing is highly concentrated, mostly in California. Improvements in bulk storage and

transportation technology have created the situation in which Midwest and Eastern

processors serve as final fabricators of processing tomatoes grown and partially

processed in California. In essence, the tomato industry has developed into two separate sectors—fresh market and the processing sector—each with its specific varieties

of tomatoes and distinctive characteristics. While the milk industry has not been differentiated to such extremes, the evolution of the tomato industry provides some food for

thought as milk producers ponder the future.

vii
Dairy Cooperative Growth Challenges:

Technology, Ingredients (Proteins) and Equity Financing

Introduction

The growth and the future of dairy farming

depend on expanding the market for milk and milkbased products. The market for traditional dairy products, of course, remains very important. Uses of milk

components as ingredients in new products that meet

the needs and the lifestyles of active and aging population sectors would further open up new outlets for

milk. Technology will likely drive this growth.

There are two aspects of modern technology that

are going to be very important for the future of the

dairy industry. One is the filtration technology of fractionizing milk components for use as ingredients in

various foods, beverages and nutritional and pharmaceutical applications. The other is the processing technology of making dairy products using mostly dairybased ingredients with small amount of fresh milk.

Advances in the technology of producing and

processing milk have resulted in major milk production growth in the western United States. Wider adoption of the filtration technology and the new processing technology will cause further restructuring of the

milk industry. This presents dairy cooperatives with

many challenges and potentially rewarding opportunities.

Filtration Technology

Milk is a complex mixture of water, carbohydrates (lactose), fat, protein, minerals and vitamins

(table 1). Advances in filtration technology allow milk

to be fractionized into its basic components. Based on

the characteristics and functionality of the components, they may then be used as ingredients in formulas to create final products.

What is filtration? Filtration is the use of semipermeable membranes to separate milk components

based on their molecular sizes. Depending on the pore

size of the membrane, ranging from the smallest to the

largest, the filtration process may be: reverse osmosis,

nanofiltration, ultrafiltration, or microfiltration (box 1).

Ultrafiltration is most useful in fractionalizing proteins

in milk.

Advent of ultrafiltration. Ultrafiltration was

originally developed to separate protein from whey.

One of the first commercial-scale ultrafiltration facilities in the United States was a plant to treat whey,

which was reported to have begun operation at

LaFargeville, N.Y., in 1971 (Kosikowski, p. 456).

Growing awareness of the nutritional value of various

1

Filtrations processes (simplified definition)

Reverse osmosis: Removes water only.

Nanofiltration: Removes monovalent

ions and retains other

solids.

Ultrafiltration: Removes minerals,

nonprotein nitrogenous compounds and

lactose and retains

proteins and fats.

Microfiltration: Removes lactose, minerals and small proteins and retains fat,

very large proteins

and particles.

Source: Smith for details.
whey proteins led to further advancement of the filtration technology. An example is a recently reported setup incorporating five filtering-process steps to fractionize whey within a closed loop membrane

ultrafiltration system for harvesting valuable whey

proteins (beta-lactoglobulin, serum albumin, IgG,

alpha-lactalbumin...., etc.). Whey concentrates are now

used in a variety of commercial products, including

body-building complexes, bakery goods, and frozen

food additives. In recent years, whey proteins have

also become valuable in nutraceutical and biopharmaceutical applications (Koph).

Two French scientists in 1969 originated the concept that enabled ultrafiltration of milk to become a

continuous tool for cheesemaking (Kosikowski, p. 510).

The ultrafiltration process for milk was developed in

the 1970s (United States General Accounting Office

(GAO)). In the United States, ultrafiltration of milk is

an acceptable in-plant procedure during the manufacture of standardized cheeses— cheeses that are covered by the standards of identity regulations. (A list of

the cheeses can be found in GAO, Appendix I. The regulations may be found at the United States Food and

Drug Administration (FDA) Web site).

In 1996, FDA allowed an exception to its standard

for Cheddar cheese in a pilot project to make cheese

from ultra-filtered milk. Milk was ultra-filtered on a

farm in New Mexico, then shipped to Bongards

2

Table 1—Composition of milk

Percent

Water 87.4

Carbohydrates 4.8

● Lactose (principal proportion)

● Glucose, galactose, oligosaccharides and others (minor quantities)

Milk fat 3.7 

● The most complex of lipids—More than 400 different fatty acids

and fatty acid derivatives, including CLA (conjugated linoleic acid)

● Fat-soluble vitamins A, D, E and K.

Protein 3.4 

● Casein (2.8 percent):

Alpha-casein

Beta-casein

Gamma-casein

Kappa-casein

● Whey protein (0.6 percent):

Beta-lactoglobulin

Alpha-lactalbumin

Serum albumin

Immunoglobulins (IgA, IgG, IgM)

Protease peptones,

Lactoferrin

Transferrin

● Nonprotein nitrogenous compounds (traces)

Minerals, trace elements and salts 0.7

———

Total 100.0

Sources: National Dairy Council and Chandan.
Creamery in Minnesota for making Cheddar cheese.

The process was permitted as long as the cheese produced met the criterion that it was nutritionally, physically, and chemically the same as cheese produced traditionally (GAO, pp. 1 and 12; also Cessna, APPENDIX

B, for standard cheeses with alternate make procedures). In December 2004, FDA issued a temporary

permit to Wells’ Dairy, Inc., for market testing cottage

cheese made using fluid ultra-filtered skim milk (FDA,

2004).

Milk protein concentrate. Ultra-filtered milk

from the in-plant or on-farm process is in wet form. Up

to two-thirds of the liquid components of the milk

(mainly water) is removed to greatly reduce the cost of

transporting the ultra-filtered milk to market or reduce

the amount of whey in cheesemaking (GAO, p.13).

When the ultra-filtered milk (usually skim milk) is

dried into powder, it is known as milk protein concentrate (MPC). MPC contains unaltered forms of milk

protein (both casein and whey protein).

In the first half of the 1980s, Hungary commercialized the first MPC (Dairy Australia, p. 23). The technology continued to evolve and commercial applications of MPC took off as its functionality became better

understood. (See, e.g. Smith; also Hendrickx, sheets 7-

10, for a description of functionality and applications.

For applications, see Dairy Australia, Appendix F.)

In dairy applications, MPC is preferred to nonfat

dry milk for standardizing the protein level in the milk

for making cheese products. MPC has a higher protein

content (ranging from 42 percent to greater than 80

percent) than nonfat dry milk (which averages about

35 percent protein) and a correspondingly lower lactose level. Less lactose generates less whey and, as a

result, cheese production is more efficient (Jesse). In

2002, 62 percent of all MPC imports were used in making cheese products (United States International

Commerce Commission, USITC Publication 3692, p 7-3).

MPC can also be used in a wide variety of nondairy applications, such as in sports drinks and bars,

nutritional food products, nutraceutical foods, etc.

(See, e.g. Dairy Australia, pp. 15, 25 and 71; Childs;

Frierott; and GAO, Appendix IV). “Specialty nutrition”

applications used 24 percent of all MPC imports in

2002 (USITC Publication 3692, p.7-3).

MPC can be custom-formulated according to the

required protein content level of the end-users. While

MPC is made through the ultrafiltration process, lower

protein content MPC can also be formulated by blending casein and nonfat dry milk.

MPC co-precipitates and other milk protein

products. Other than by filtration, some MPC may be

made by the precipitation process, where calcium chloride or dilute acid is added to skim milk and the solution is then heated to precipitate both casein and whey

protein. The co-precipitates contain 89 to 94 percent

protein (Smith). (The USITC Harmonized Tariff

Schedule classifies these MPC co-precipitates under

the same heading as casein and caseinates, HTS 3501.)

Other concentrated milk protein products of

interest include casein and caseinates. Casein contains

around 90 percent protein and is made by adding

either acid or rennet to skim milk. Addition of acid or

rennet to milk causes casein (but not whey protein) to

join together and separate from other components.

Caseinate is produced by neutralizing acid/rennet

casein with alkali and then drying the resulting product. The alkali treatment makes caseinate more soluble

than casein (Smith). Production of casein dates back to

at least early 1900s, primarily for nonfood uses. During

the post-World War II era, developments in food technology changed the uses of casein and caseinates from

almost entirely nonfood to mostly food (Manchester, p.

238).

Process Technology

Advances in new manufacturing process technology may allow the use of mostly dairy ingredients and

small amounts of fresh milk in the manufacture of

dairy products. An example is a patent (No. 6,372,268)

recently issued by the United States Patent and

Trademark Office, “Wheyless process for production of

natural mozzarella cheese.” The patent abstract states:

“The present invention provides a wheyless

process for preparing natural mozzarella cheese

using dry dairy ingredients. This process enables

the manufacture of cheese from non-perishable or

shelf-stable ingredients such as dried milk protein concentrate and anhydrous milkfat. This

enables greater flexibility in the location of cheese

manufacturing facilities as handling and/or

transporting large quantities of fresh milk is not

required. Also, in utilizing such a process, the

need for refrigerated storage of the fresh milk

would be minimal. The dry dairy ingredients

used in the present invention comprise milk protein concentrates and blends of milk protein concentrates with up to about 50 percent of a second

dry dairy ingredient selected from the group consisting of whey protein concentrate, whey protein

isolate, calcium caseinate, sodium caseinate, rennet casein, acid casein, nonfat dry milk, and mixtures thereof.”

3
(Author’s note: Whether the resulting product

can be marketed as “mozzarella cheese” is subject to

regulation by FDA’s standards of identity.)

Several other wheyless process patents also have

been granted for making various dairy products from

dry ingredients. The proliferation of this type of manufacturing process technology using dry ingredients is

going to alter the dairy landscape in a profound way.

A plant making “cheese” (or other dairy products)

from mostly dry ingredients can then be located anywhere, with no need to be close to dairy farms. The

plant would no longer need to deal with producer

payrolls, milk hauling, weather-induced intake variability, seasonality of milk production and composition, seasonal inventories of cheese, etc. This development will have great implications for milk producers

and their cooperatives, especially in regard to cooperatives’ roles in the supply chain.

Dairy Ingredients—Milk Proteins

Filtration technology is very useful in “harvesting” the components in milk. It is conceivable that further technological advances may someday turn milk

plants into milk “refineries” that could fractionate milk

components into all kinds of desired dairy ingredients

(Dairy Management, Inc., 2002). The filtration technology that incorporates five filtering-process steps to fractionize whey within a closed loop membrane ultrafiltration system for harvesting valuable whey proteins

(Koph, cited earlier) could be a precursor of more complete systems for fractionalizing milk components.

Milk proteins. The list of dairy ingredients could

be very long (ingredients included in American Dairy

Products Institute and Chandan are just the more familiar ones). Of particular interest to dairy farmers (and

the focus of this section) are protein products such as

milk protein concentrate (MPC), casein, and caseinates.

The United States has relied on imports to satisfy

demand for these products. However, growing import

volumes of milk protein products over the past decade

have heightened milk producers’ concerns that they

are displacing commercial uses of U.S.-produced nonfat dry milk.

Other protein products, such as whey protein

concentrate (WPC), are produced with a technology

similar to that used in producing MPC. However,

unlike skim milk that is used to produce MPC and

casein and is subject to administered prices, whey is a

byproduct of cheese production and is not subject to

price regulation. Without price being regulated,

domestically produced whey products compete very

well with foreign production and are not currently a

pressing concern for milk producers. During the past

10 years, substantial amounts of dried whey, whey

protein concentrate, and modified whey have been

exported (table 2). According to the Food and

Agricultural Organization of the United Nations, the

U.S. share of world whey exports grew from 8 percent

in 1994 to nearly 15 percent in 2002, before dropping

back to 13 percent in 2003 (table 3).

Milk proteins are mostly imported. Until recently, there was no domestic production of MPC, casein,

and caseinates in the United States. Milk prices are

such that domestic production of these products can

not compete with imports, which—besides being

lower-priced—pay very low import duties or no tariffs

at all.

There have been some recent efforts at starting

the domestic production of the concentrated milk protein products. A facility with an annual production

capacity of 16,000 metric tons of MPC-70 (the number

following MPC denotes protein content, 70 percent

protein in this case) equivalent product was completed

in Portales, N.M., by DairiConcepts, a joint venture

between two cooperatives, Dairy Farmers of America

and Fonterra (of New Zealand) (Kozak, et al).

Commercial operations started in July 2003 (Parsons).

This followed on the start-up of MPC production

(ranging from MPC-40 to PMC-70) by United

Dairymen of Arizona,Tempe, A.Z., about 6 months

earlier.

Beginning in June 2002, USDA has operated a

program for the sale, at a discount, of Governmentowned nonfat dry milk that has been in storage for

more than 24 months to processors for casein or

caseinate production. By the end of 2004, the activity

in this program totaled nearly 42.7 million pounds of

nonfat dry milk (AMS). (A similar program in 1986

and 1987 totaled only about one-half million pounds.)

However, some claimed that protein products not

made from fresh milk are less desirable in their sensory quality (e.g. Frierott).

Magnitude of milk protein imports. Following

one set of conversion factors used by USITC, MPC on

average may contain 65 percent protein; milk protein

concentrate/casein (MPC imports in the same classification with casein and caseinates) may contain 90 percent protein; casein may contain 87 percent protein;

and caseinates may contain 91 percent protein (USITC

Publication 3692, p. 3-33). These conversion factors

were used to calculate the volumes of protein contained in the imports of MPC, casein and caseinates as

shown in table 4.

4
5

Table 2—U.S. whey products production and exports

U.S. Production Exports Portion of production exported

———————————————————— —————————————————————— —————————————————————

Dried whey Modified Whey protein Modified Whey protein Modified

Year Dried whey concentrate whey1 Dried whey2 concentrate3 whey4 Dried whey concentrate whey

-----------------------------------------------------------------Metric tons------------------------------------------------------------------- -----------------------------Percent------------------------------

1994 549,657 82,469 43,463 61,704 363 281 11.2 0.4 0.6 

1995 520,391 133,518 49,243 93,991 5,681 727 18.1 4.3 1.5 1996 506,442 113,478 45,941 109,391 4,286 1,368 21.6 3.8 3.0 1997 515,655 119,767 40,619 103,961 10,234 1,805 20.2 8.5 4.4 1998 534,450 138,880 47,693 98,997 18,377 1,084 18.5 13.2 2.3 

1999 520,446 162,589 54,575 120,172 14,344 1,384 23.1 8.8 2.5 2000 538,824 151,562 51,711 166,003 15,626 1,976 30.8 10.3 3.8 2001 474,301 152,507 58,625 142,979 21,721 3,118 30.1 14.2 5.3 2002 505,901 142,083 56,549 150,676 22,951 4,245 29.8 16.2 7.5 2003 492,757 153,751 38,152 138,984 20,976 3,565 28.2 13.6 9.3 

1 Reduced lactose and reduced minerals.2 HTS heading 0404104000.3 HTS heading 0404100500.4 HTS heading 0404100850.

Sources: U.S. production from Dairy Products, annual summaries, by USDA/NASS.

Exports from U.S. Trade Intenet System, http://www.fas.usda.gov/ustrade/, by USDA/FAS.
Between 1989 and 2003, MPC protein imports

increased 22-fold, and MPC/casein protein imports

increased fourfold. While casein imports (excluding

casein glues) were rather flat (increased only 6 percent)

over the time period, imports of protein contained in

caseinates more than doubled (table 4). The volume of

protein contained in imported MPC, casein, and

caseinates, increased from 165 million pounds in 1989

to 279 million pounds in 2003, an increase of 69 percent.

One way to look at the magnitude of milk protein

imports is to compare it to the protein level contained

in U.S. nonfat dry milk production. Again, following

the conversion factor used by USITC, nonfat dry milk

averages around 36 percent milk protein (USITC

Publication 3692, p. 3-33). Protein contained in the U.S.

nonfat dry milk production increased 82 percent, from

315 million pounds in 1989 to 572 million pounds in

2003.

During the 15-year period, total protein imports

were equivalent to 52 percent of the protein contained

in the U.S. nonfat dry milk production. By comparison,

USDA net removals of nonfat dry milk (removed by

purchases under the Price Support Program and by

bonuses under the Dairy Export Incentive Program)

averaged 30 percent of production. Thus, the volume

of milk protein imports exceeded USDA net removals

by 74 percent over the 15 years. Imports exceeded

USDA net removals every year except 2002 (table 4).

The magnitude of each category of milk protein

imports may be better visualized in figure 1. While

imports of casein, caseinates, and MPC/casein show

gradual increase over the 15-year period, MPC imports

increased tremendously since 1995, peaking in 2000.

As a result, total milk protein imports peaked in

2000 (figure 2). Although imports were lower than the

previous year in 2001 and 2002, the volume increased

again in 2003. It may be inferred from the linear trend

line (Y=9,127.8x+147,800;R2=0.7781) that total milk

protein imports grew at a rate of 9 million pounds per

year during the 1989-2003 period (a growth rate equivalent to 273 million pounds of milk per year). Figure 2

also shows that milk protein imports exceeded

Government net removals every year except in 2002.

Effects of milk protein imports on milk prices.

The extent to which milk protein imports have

depressed milk prices depends on how much the

imports have displaced nonfat dry milk in various

applications. The USITC report estimated that imported milk protein products may have displaced approximately 318 million pounds of U.S.-produced milk protein, equivalent to 883 million pounds of domestic

nonfat dry milk (using a conversion factor of 36 percent) in 1998-2002. It further estimated that 34 percent

of the growth in the Commodity Credit Corporation

(CCC) stocks (equivalent to 353 million pounds) of

nonfat dry milk between 1996 and 2002 may be attributed to the increase in milk protein imports during the

time period (USITC Publication 3692, chapters 7 and 9).

The accumulation of nonfat dry milk stocks

increased the outlays of the price support program and

may have been the impetus causing adjustments to the

butter/powder tilt in the CCC purchase prices. On

May 31, 2001, CCC purchase price for nonfat dry milk

was adjusted downward by 10.32 cents, to $0.9000 per

pound, and the purchase price was further reduced by

10 cents, to $.8000 per pound on November 15, 2002.

Because of the substantial amount of CCC nonfat

dry milk purchases in recent years, the support purchase price in essence sets the price of nonfat dry milk.

Given the pricing formula in use in the Federal Milk

Market Orders (FMMO), the nonfat dry milk price in

turn determines the Class II and Class IV skim milk

prices. During those months when the advanced Class

IV price is the Class I price mover, the nonfat dry milk

also determines the Class I skim price. To the extent

that milk protein imports aggravated the nonfat dry

milk surplus situation and helped tilt the powder support purchase price downward, they certainly had

adverse impacts on the farm milk prices. (Jesse, pp.12-

17, for a detailed discussion)

Milk protein imports also lower the cost of standardizing the protein level in the milk for making

6

Table 3—U.S. share of world whey1 exports

Year U.S. exports World exports U.S. share

----------- Metric tons ----------- Percent

1994 63,104 808,097 7.8 

1995 100,971 820,490 12.3 

1996 115,339 907,633 12.7 

1997 116,942 956,687 12.2 

1998 120,512 955,725 12.6 

1999 136,125 993,908 13.7 

2000 198,992 1,213,397 16.4

2001 168,717 1,190,409 14.2

2002 178,240 1,225,622 14.5

2003 164,954 1,310,592 12.6

1 Whey and modified whey, whether or not concentrated or

containing added sugar or other sweetening matter

Source: Food and Agricultural Organization of the United Nations,

FAO Statistical Databases.
7

Table 4—Estimated protein content1 in the consumption imports of milk protein concentrates, casein and caseinates, and in the U.S. productionand USDA net removals of nonfat dry milk, thousand pounds of protein

USDA net

Imports vs removals vs.

protein in protein in

Milk protein Nonfat dry Nonfat dry U.S.nonfat U.S.nonfat

Milk protein cencentrates/ milk, U.S. milk, USDA dry milk dry milk

Year concentrates2 casein3 Casein Caseinates Total imports production net removals production production

-------------------------------------------------------------- Thousand pounds of protein -------------------------------------------------------------- -------- Percent --------

1989 2,165 4,840 125,422 32,907 165,333 314,880 - 52.5 -

1990 1,153 5,681 132,396 32,283 171,514 316,516 42,407 54.2 13.4

1991 1,608 7,345 131,954 33,662 174,568 315,909 97,036 55.3 30.7

1992 5,636 6,961 143,127 33,539 189,262 313,964 49,220 60.3 15.7

1993 8,340 6,737 115,975 33,996 165,049 343,615 109,563 48.0 31.9

1994 17,209 13,467 131,076 41,821 203,572 443,108 104,413 45.9 23.6

1995 10,442 5,972 126,218 49,323 191,955 443,878 109,724 43.2 24.71996 20,429 7,673 132,662 51,120 211,885 382,238 20,606 55.4 5.4

1997 24,358 22,607 124,720 52,083 223,767 438,322 107,277 51.1 24.5

1998 41,455 21,666 135,018 60,043 258,182 408,738 117,502 63.2 28.7

1999 64,308 19,260 126,901 65,225 275,694 489,478 194,608 56.3 39.8

2000 75,846 23,654 142,260 67,984 309,743 522,630 249,326 59.3 47.7

2001 40,796 13,759 118,182 76,705 249,441 508,960 178,509 49.0 35.1

2002 48,186 15,506 110,323 69,614 243,629 574,538 295,835 42.4 51.5

2003 50,867 25,344 133,195 69,334 278,740 572,055 231,881 48.7 40.5

–––––– –––––– –––––– –––––– ––––––– ––––––– ––––––– –––– ––––

Average 27,520 13,365 128,629 51,309 220,822 425,922 127,194 51.84 29.94

1 Factors used to convert products to protein: milk protein concentrate, 65%; milk protein concentrate/casein, 90%; casein, 87%; caseinates, 91%; and nonfat dry milk, 36%. (Adopted from

ITC, p. 3-33.)

2 Milk protein concentrate imported under HTS 0404901000.3 Milk protein concentrate imported under HTS 3501101000.4 Weighted average

Sources: Consumption imports of milk protein concentrates, casein and caseinates are compiled from U.S. Trade Internet System, Foreign Agricultural Service, USDA, http://www.fas.usda.gov/ustrade/. Nonfat dry milk

production is from Dairy Producs, annual summaries, various issues, Natioanl Agricultural Statistics Service, USDA. USDA net removals data is from Livestock, Dairy, and Poultry Outlook, April 27, 2004, andDairy Yearbook, Economic Research Service, USDA, http://www.ers.usda.gov/publications/ldp/.
8

Figure 1—Estimated protein content in imported milk protein products

Thousand pounds

1500,000

140,000

130,000

120,000

110,000

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

Protein in casein

Protein in caseinates

Protein in milk protein

concentrate

Protein in milk protein

concentrate/casein

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure 2—Estimated protein content in U.S. production and USDA net removals of nonfat milk, and in imports

of milk protein products

Thousand pounds

600,000

500,000

400,000

300,000

200,000

100,000

0

Protein in nonfat dry milk,

U.S. production

Total milk protein

imports

Protein in nonfat dry milk,

USDA net removals

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

y = 9127.8x + 147800

R2

= 0.7781
cheese. A plant may use nonfat dry milk for standardization, the price of which has been tilted downward.

Or it may use less expensive imported milk protein

(USITC survey showed that 62 percent of MPC

imports were used in processed cheese production in

2002). Either way, the cheese plant would have lower

input cost, and the lower input cost would shift the

cheese supply curve downward and outward and

result in lower cheese prices. Although cheese products made with MPC are outside FDA’s standards of

identity, their lower prices would lower the price level

of all cheeses due to substitution effects. Again, given

the FMMO price formula, lower cheese prices would

mean lower Class III prices. And in those months

when the advanced Class III price is the Class I price

mover, lower cheese price means lower Class I price.

So, when nonfat dry milk is displaced by milk

protein imports, lower milk prices will be the result.

This is simple economics—everything else being equal,

the more the supply, the lower the price. The question

is: how much lower? Estimates vary. The USITC

report estimated that as a result of the 2001 tilt adjustment, farm prices of milk dropped by 44 cents per

hundredweight, while the 2002 tilt adjustment caused

the farm price of milk to be lowered by 29 cents per

hundredweight (USITC Publication 3692, chapter 9).

No incentives to produce milk protein products.

With all the demand for MPC, casein and caseinates

being satisfied by imports, a pertinent question is why

is there no domestic production for import substitution (until recent start-ups)?

While the technology for the commercial production of MPC was only developed two decades or so

ago, casein production has a much longer history—the

United States did produce casein prior to 1970. Several

factors led to the cessation of casein production in this

country. They are the same reasons why the U.S. dairy

industry is reluctant to invest in MPC production. A

brief review of these factors is useful information for

assessing the current situation (more details can be

found in Manchester and in Ling, et al).

The United States produced 35.3 million pounds

of dry casein in 1931 (table 5). Casein production

peaked at 67.5 million pounds in 1937. It returned to a

relatively “normal” level the following year and

stayed relatively stable until 1942, when 42.3 million

pounds was produced. Production then dropped to

18.4 million pounds in 1943 and, by and large, was

maintained at around that level until 1951 (except for

the one-year surge in 1947). It then dropped to 7.5 million pounds in 1952 and further declined to 2.5 million

pounds in 1956, the last year the production figure was

9

Table 5—U.S. dried casein production (skim milk or

buttermilk product) and imports

Year Production Imports Total

------------------Thousand pounds------------------

1931 35,335 3,503 38,838

1932 24,428 1,201 25,629

1933 24,087 8,142 32,229

1934 37,331 1,491 38,822

1935 37,638 3,230 40,868

1936 46,140 16,209 62,349

1937 67,467 5,210 72,677

1938 48,549 417 48,966

1939 40,878 15,832 56,710

1940 46,616 24,523 71,139

1941 47,346 41,518 88,864

1942 42,268 16,819 59,087

1943 18,386 28,052 46,438

1944 15,264 47,225 62,489

1945 12,333 51,610 63,943

1946 18,319 45,346 63,665

1947 35,831 20,887 56,718

1948 14,372 40,585 54,957

1949 18,348 33,061 51,409

1950 18,531 54,552 73,083

1951 21,620 43,386 65,006

1952 7,482 56,836 64,318

1953 5,532 74,246 79,778

1954 5,175 59,833 65,008

1955 3,147 74,480 77,627

1956 2,533 70,674 73,207

1957 (1) 74,604 - 

1958 (1) 91,265 - 

1959 (1) 94,459 - 

1960 (1) 92,155 - 

1961-70

Average (1) 105,959 - 

1 Fewer than 3 plants since 1957 until 1970, the last year reported

by the Agricultural Statistics, 1972. Since then, no data has been

reported ("-" denotes no data).

Sources: Agricultural Statistics, various years
reported in USDA’s Agricultural Statistics. Thereafter

until 1970, Agricultural Statistics (1972) showed fewer

than 3 plants made casein and no production volume

was reported. Subsequently, the data series was

dropped altogether.

Both casein and nonfat dry milk use skim milk as

the raw material for production. This, in effect, dictates

that in order to compete for milk supply, casein and

nonfat dry milk enterprises must be equally profitable

per hundredweight of skim milk. However, since the

late 1930s, government programs have provided incentives for the production of nonfat dry milk but not

casein.

War-time (World War II) programs provided

incentives to processors to operate (then) large-scale,

state-of-the-art plants to produce nonfat dry milk. The

casein industry could not match the profitability of

making nonfat dry milk and was neglected. After the

war, the casein industry could not resume the pre-war

level of production and could not justify new investment in the sector.

Since 1949, the Milk Price Support Program

specifically offers to purchase nonfat dry milk, but not

casein. The support purchase price incorporates a

“make allowance” that ensures an average manufacturer of nonfat dry milk can recover the processing

cost. Market security provided by the Milk Price

Support Program ensures that nonfat dry milk production is almost without market risk. This enables

processors to invest, with confidence, in nonfat dry

milk plants that are of very large scale and very efficient and incur low unit-manufacturing cost. This, conceivably, widens the profitability gap between the two

products.

In addition, import tariff systems, to a large

extent, shield nonfat dry milk from import competition, while casein, caseinates, and MPC are not accorded such protection and have to compete with low-cost

foreign production.

Thus, public policy provides incentives (guaranteed margins and a guaranteed market with low risk)

to nonfat dry milk production. No such incentives for

casein production or for the recent advent of milk protein concentrate production.

Relative value of casein to nonfat dry milk.

Another factor inhibiting ventures into the production

of casein, caseinates or milk protein concentrate may

be the uncertainty concerning the results of getting

into competition with foreign production. The milk

used in producing these protein products is usually

considered “surplus” milk. Some farmers say that

international competition could drive down the price

of milk or products to next to nothing—“racing for the

bottom,” in their words. However, an examination of

the history of casein and nonfat dry milk prices does

not validate such apprehension (table 6).

During the 22-year period of 1935-56, when

domestic casein was produced, the ratio of casein price

relative to nonfat dry milk price ranged between 1.64

and 2.90. During the last nine years (1995-2003), when

there was no domestic casein production and all casein

was imported, the ratio of casein price relative to

low/medium-heat nonfat dry milk price was between

1.80 and 2.59. The ratio was between 1.78 and 2.48 if

high-heat nonfat dry milk price is considered. (1995

was the first year when the two most recent consistent

price series for [low/medium-heat and high-heat] nonfat dry milk used in table 6 became established.)

The casein and nonfat dry milk covered in the

two time periods may not be identical. Nevertheless,

the rather stable relative price of casein to nonfat dry

milk—when there was domestic casein production and

no price support for nonfat dry milk and when all

casein was imported and nonfat dry milk was supported—suggests that the prices of casein and nonfat dry

milk did reflect the component values of the two products. This may serve to refute the notion that producing casein domestically would amount to competing

with foreign suppliers, the result being prices racing to

the bottom—as long as nonfat dry milk has market

value.

Protein Ingredient Production Prospects

The prospects of producing protein ingredients in

the United States should be assessed against the following backdrop:

● Technological advances will continue to devise

new and better ways of harvesting milk components for uses as dairy ingredients in an

ever-expanding array of food, beverages, pharmaceuticals, and other products.

● Among the dairy ingredients that concern

dairy farmers the most are protein products,

including casein, caseinates and milk protein

concentrate. These milk protein products have

all been imported, although there were two

domestic startups of MPC production in 2003.

● Manufacturing process technology invariably

looks for more efficient and economical ways

to make dairy products. Technology, such as

the wheyless process of making various non10
11

Table 6—Casein and nonfat dry milk prices, 1935-56, and 1996-2003

Nonfat dry Relative 

Casein, milk for price,

ground, New human food, casein/nonfat

Year York City f.o.b. factory dry milk

--------------------------Cents/pound-------------------------- Ratio

1935 12.8 6.65 1.92

1936 16.6 8.73 1.90

1937 15.2 7.65 1.99

1938 9.0 5.47 1.65

1939 12.4 6.12 2.03

1940 13.1 6.87 1.91

1941 21.8 9.00 2.42

1942 21.5 12.94 1.66

1943 23.2 13.81 1.68

1944 24.0 14.26 1.68

1945 23.0 14.06 1.64

1946 30.1 14.51 2.07

1947 29.8 10.86 2.74

1948 32.0 15.10 2.12

1949 22.6 11.95 1.89

1950 29.5 11.91 2.48

1951 41.7 14.40 2.90

1952 30.5 16.25 1.88

1953 30.0 15.18 1.98

1954 28.7 14.95 1.92

1955 28.6 15.35 1.86

1956 32.2 15.24 2.11

Relative price, Rrlative

Nonfat dry casein/nonfact price

Acid casein, milk,West, Nonfat dry dry milk, casein/nonfact

edible low/medium milk,West, low/medium drymilk, high

nonrestricted heat high heat heat heat

-------------------------Dollars/pound-------------------------- ----------------------Ratio----------------------

1995 1.9035 1.0549 1.0721 1.80 1.78

1996 2.5472 1.1708 1.2049 2.18 2.11

1997 2.1003 1.0715 1.0979 1.96 1.91

1998 2.0383 1.0549 1.0852 1.93 1.88

1999 1.9009 1.0128 1.0450 1.88 1.82

2000 2.1890 1.0056 1.0419 2.18 2.10

2001 2.5506 0.9860 1.0281 2.59 2.48

2002 1.9983 0.9197 0.9433 2.17 2.12

2003 2.0200 0.8412 0.8409 2.40 2.40

Souces: For 1935-56 prices, Agricultural Statistics, various years; for 1995 on, Dairy Market Statistics, annual Summaries, various years,

Agricultural Marketing Service.
standard products (or permissible standard

products), tends to promote use of dry ingredients and has many advantages over the conventional method of using fresh milk as the

main input. Milk protein products—such as

casein, caseinates, and milk protein concentrate—are ideal ingredients for this kind of

technology due to their properties and functionalities.

● Between 1989 and 2003, imports of milk protein

(in casein, caseinates, and milk protein concentrate) grew at an annual rate of 9 million

pounds of protein (273 million pounds of milk

equivalent). In 2003, total imports of these protein products were 279 million pounds (8.5 billion pounds of milk equivalent). More imports

of these protein products can be expected with

the advances of the manufacturing process

technology.

It seems that the U.S. dairy industry would want

to supply at least a share of a market that uses 8.5 billion pounds of milk and grows at a rate of 273 million

pounds a year. If so, somehow a way must be found to

make it economically feasible to venture into the production of protein products such as casein, caseinates,

and milk protein concentrate. For this to happen, a

processor’s return from the protein products production per hundredweight of skim milk must be at least

equal to the return from drying the same amount of

skim milk into nonfat dry milk because both enterprises use skim milk as the raw material.

As explained earlier, largely due to the incentives

provided by the Milk Price Support Program, producing nonfat dry milk has a higher return than processing protein products and is free of market risk. To

equalize the return, some incentives would have to be

provided to the would-be processors of the protein

products. There are many proposals as to how this

could be achieved, such as production subsidies or

import restrictions, but their discussion is beyond the

scope of this report. (See the proposal by National Milk

Producers Federation. For a thorough review of the trade

issue, see USITC Publication 3692.)

Some advantages of domestic production. When

comparing returns from domestic production of milk

protein products vs. imports, foreign supplies have a

price advantage over domestic production. However,

the comparison also should take into account that

domestic production may have advantages over

imports in other aspects:

● Domestic production would supply fresher

protein products at a lower transportation cost

to customers than imports.

● Proximity to end-users would enable domestic

protein producers to provide better services

and have closer interactions with customers

regarding their changing needs.

● Some end-users may prefer to use the protein

products in the fresh, wet form without having

them dried and then reconstituted for further

processing. Domestic producers would be in a

good position to supply these accounts.

● Some end-users may prefer caseinates made

from fresh milk, rather than caseinates made

from further processing of imported casein.

Location of protein ingredient plants. Both nonfat dry milk and milk protein ingredient products use

skim milk as the main raw material for production.

Therefore like nonfat dry milk plants, the logical location for new protein ingredient plants should be a

region where an abundant and growing volume of

milk needing last-resort handling is available.

In the 10 years since 1993, nonfat dry milk production in the West more than doubled (increased 117

percent) to 1.25 billion pounds in 2003, or 79 percent of

the U.S. total (table 7; table 8 for regions). Production

in other regions, except the Atlantic, declined. The

increase in the Atlantic region was 11 percent in 10

years.

Likewise, milk production has seen major growth

in the West during the same period, increasing by 25.7

billion pounds (or 62 percent), to 67 billion pounds.

The volume accounted for 39 percent of U.S. total milk

production in 2003. The East North Central was the

only other region to show milk production increase,

but only by 400 million pounds in 10 years. The

remaining three regions all showed decreases in milk

production.

The trend is likely to continue, as indicated by

the costs and returns of milk production (table 7). Milk

producers in the West had the lowest operating costs,

the lowest ownership costs and, therefore, the lowest

total costs among the five regions in 2000, the year of

the most recent national survey of milk producers.

Although their returns above operating costs, at $3.33

per hundredweight, were the median of the five

12
13

Table 7—Production of nonfat dry milk for human consumption, milk production and milk production costs

and returns, by region.

East North West North South 

Atlantic Central Central Central West U.S. total

Production of nonfat dry milk 

for human food1:

-----------------------------------------------------Thousand pound------------------------------------------------------

1993 141,405 63,860 71,291 102,783 575,146 954,485 

1998 192,045 56,961 87,151 59,034 740,192 1,135,383 

2003 157,620 43,314 67,313 68,615 1,247,179 1,584,041 

Region vs. U.S. total in 1993 15% 7% 7% 11% 60% 100%

Region vs. U.S. total in 2003 10% 3% 4% 4% 79% 100%

Milk production2:

-----------------------------------------------------Million pounds-----------------------------------------------------

1993 36,330 37,668 21,329 14,148 41,162 150,636 

1998 36,573 36,928 19,959 12,308 51,580 157,348 

2003 35,127 38,107 19,047 11,157 66,875 170,312 

Region vs. U.S. total in 1993 24% 25% 14% 9% 27% 100%

Region vs. U.S. total in 2003 21% 22% 11% 7% 39% 100%

Milk production costs and returns, 20003:

---------------------------------------------Dollars per cwt. milk sold---------------------------------------------

Total operating costs 10.53 9.65 13.18 13.73 9.52 

Total ownership costs 3.91 4.75 4.91 4.50 2.06 

Total costs 14.44 14.40 18.09 18.23 11.58 

Returns above operating costs 4.75 4.62 1.22 1.92 3.33 

Returns above total costs 0.84 (0.13) (3.69) (2.58) 1.28 

1 From Dairy Products, annual summaries, USDA/NASS.

2 Summarized from Milk Production, Disposition and Income, annual summaries, USDA/NASSS.

3 From Short, table 2; regions are defined on page 3 of the Short's report and are here used as proxies to represent those used in Dairy

Products: Northern Crescent-East (Atlantic), Northern Crescent-West (East North Central), Heartland (West North Central), Eastern Uplands

(South Central) and Fruitful Rim-West (West). Costs and returns reported are based on the 2000 Agricultural Resource Management

Survey, the most recent national survey of milk producers.
14

Table 8—Milk production by State and region, 10-year changes

State by region 1993 2003 10-year change

--------------------------------- Million pounds --------------------------------- Percent

CT 543 413 (130) (24)

DE 147 136 (11) (7)

FL 2,558 2,161 (397) (16)

GA 1,535 1,444 (91) (6)

MA 478 332 (146) (31)

MD 1,400 1,232 (168) (12)

ME 663 624 (39) (6)

NC 1,498 1,044 (454) (30)

NH 325 305 (20) (6)

NJ 363 216 (147) (40)

NY 11,415 11,952 537 5

PA 10,181 10,338 157 2

RI 32 22 (10) (32)

SC 418 318 (100) (24)

VA 1,995 1,731 (264) (13)

VT 2,504 2,637 133 5

WV 275 222 (53) (19)

---------- ---------- ---------- ------

Atlantic total 36,330 35,127 (1,203) (3) ---------- ---------- ---------- ------

IL 2,514 2,047 (467) (19)

IN 2,255 2,944 689 31

MI 5,435 6,360 925 17

OH 4,620 4,490 (130) (3)

WI 22,844 22,266 (578) (3)

---------- ---------- ---------- ------

East North Central total 37,668 38,107 439 1 ---------- ---------- ---------- ------

IA 4,054 3,780 (274) (7)

KS 1,080 2,115 1,035 96

MN 9,693 8,258 (1,435) (15)

MO 2,840 1,886 (954) (34)

NE 1,125 1,129 4 0

ND 918 554 (364) (40)

SD 1,619 1,325 (294) (18)

---------- ---------- ---------- ------

West North Central total 21,329 19,047 (2,282) (11) ---------- ---------- ---------- ------

AL 515 252 (263) (51)

AR 769 352 (417) (54)

KY 2,120 1,464 (656) (31)

LA 935 519 (416) (44)

MS 745 423 (322) (43)

OK 1,257 1,312 55 4

TN 1,897 1,205 (692) (36)

TX 5,910 5,630 (280) (5)

---------- ---------- ---------- ------

South Central total 14,148 11,157 (2,991) (21) ---------- ---------- ---------- ------

continued
regions, the West was the most profitable region in

terms of returns above total costs, at $1.28 per hundredweight (Short).

The returns above operating costs were all positive in the other four regions, and these returns in the

Atlantic and the East North Central regions were even

higher than in the West. But the high ownership costs

in the four regions resulted in only the Atlantic region

having positive returns above total costs, at 84 cents

per hundredweight. The East North Central region

could hardly break even, while the West North Central

and the South Central regions had substantial losses.

In the short run, dairying is sustainable for the

existing farmers in all regions. For the long term, some

dairy farmers in the West North Central and the South

Central regions may find it difficult to justify investing

in expansion or replacement of obsolete major farm

structures or equipment, and milk production in the

two regions most likely will continue to decline. Milk

production in the Atlantic and the East Central regions

may or may not grow. Farmers in the Atlantic region

may or may not find the 84 cents per hundredweight

margin high enough to induce production expansion,

while in the East North Central, they may be able to

overcome the small losses and improve their long-term

milk production prospect. Thus, the West is the region

that is most certain to see continued growth in milk

production that would support new plant capacity.

In fact, the growth in milk production in the West

requires that every year the region have new plant

capacity capable of handling at least 7 million pounds

of milk a day. This is the region (especially California,

Idaho and New Mexico) where new milk protein

plants should be located, if they were to be built. In

fact, the first two plants in the United States for MPC

production are located in this region.

Location of end-users. End-users of milk protein

ingredients, such as manufacturers of dairy products

using wheyless process, would have much flexibility

in locating their plants. The manufacturing process

would use dried or shelf-stable dairy ingredients and

some, but probably not a large volume of, fresh milk.

Manufacturers would look to locate their plants where

it is most convenient and at the least transportation

cost to receive the ingredients (including milk) and

serve customers. In other words, the plants do not

have to be in or near milk-producing areas.

Regional specialization of milk use. Because the

West has abundant and growing milk production, it is

the region where new capacities for making commodity dairy products have been located in recent years.

The advent of milk protein ingredient production

would accentuate the trend.

In the regions outside the West, milk production

is generally holding steady, if not in decline. The milkuse trend shows demand mainly for fluid purposes

15

Table 8—Milk production by State and region, 10-year changes (continued)

State by region 1993 2003 10-year change

--------------------------------- Million pounds --------------------------------- Percent

AK 12 17 5 40

AZ 1,876 3,454 1,578 84

CA 22,924 35,437 12,513 55

CO 1,454 2,177 723 50

HI 142 92 (50) (35)

ID 3,229 8,774 5,545 172

MT 307 346 39 13

NV 348 485 137 39

NM 2,766 6,666 3,900 141

OR 1,692 2,177 485 29

UT 1,332 1,615 283 21

WA 4,980 5,581 601 12

WY 100 54 (46) (46)

---------- ---------- ---------- ------

West total 41,162 66,875 25,713 62 ---------- ---------- ---------- ------

Source: Milk Production, Disposition and Income, annual summaries, USDA/NASS.
and for making traditional (standard) dairy products.

There still would be nonfat dry milk plants in these

regions, mostly for last-resort processing and milk

supply balancing. There may be sufficient milk volume

in States such as Kansas, Michigan, Indiana and New

York to support some new milk-protein ingredient

production facilities. But they probably would be an

enterprise within a dairy plant’s operations for serving

customers in the local areas rather than large scale,

stand-alone plants that could take full advantage of

the economies of scale.

Roles of Dairy Cooperatives

If the growth of the industry is going be driven

by the new technologies involving manufacturing

ingredients and making products using alternative

methods, then how do cooperatives fit into the scheme

of things? 

Augmented first-handler role. Dairy cooperatives would continue to be the first-handlers, marketing members’ milk to fluid and other processors and

manufacturing the remaining volume into various

products in their own plants. Even more of the firsthandler functions may fall on cooperatives if end-users

of dry milk ingredients adopt wheyless processes and

do not need much fresh milk, thus having the option

of not having to locate their plants close to dairy

farms. These end-users most likely would not want to

deal with milk procurement, field services, producer

payrolls, milk hauling, weather-induced intake variability, and seasonality of milk production and composition.

Besides marketing milk, dairy cooperatives’ firsthandler role also includes marketing dairy products

produced in their plants as dairy ingredients to food

manufacturers. These include fluid skim, cream, condensed products, mixes, UF milk, nonfat dry milk, butter or cheese for further processing. In the future it

would also include milk proteins.

Cooperatives are potential producers of milk

protein ingredients. One important function of dairy

cooperatives is supply balancing and last-resort processing of surplus milk, usually carried out in nonfat

dry milk plants (or butter-powder plants) owned and

operated by dairy cooperatives. Making milk protein

ingredients would be an alternative outlet for such

milk. Dairy cooperatives are certainly going to play a

prominent role in a milk protein ingredient sector if it

becomes economically feasible to produce such products domestically.

In 2002, dairy cooperatives owned and operated

43 dry milk plants and marketed 86 percent of the

Nation’s nonfat dry milk (Ling, 2004). As milk production continues to grow, more nonfat dry milk plants

must be built to handle the “last-resort” volume,

unless alternative uses of the milk could be found.

Making milk protein ingredients requires a high volume of skim milk as the input and would be a promising alternative. As a matter of fact, dairy cooperatives

have been actively exploring the feasibility of making

such alternative products (Ling, et al), and two have

taken the step towards actual production. The Tempe,

A.Z. plant is owned and operated by United Dairymen

of Arizona, and the MPC/ingredient plant in Portales,

N.M. is a joint venture of Dairy Farmers of America.

California Dairies also has studied the feasibility of

making milk protein concentrate (Cotta; Kozak, et al).

More such efforts by dairy cooperatives are likely in

the future.

Cooperatives as end-users of milk ingredients.

Besides marketing members’ milk and making milk

ingredients for further processing, many dairy cooperatives also use milk and milk ingredients to produce

end-products for the wholesale market, food service

industry, or the consumer market. These end-products

are usually standard traditional dairy products.

However, some cooperatives have been making

nontraditional dairy or related products to satisfy consumers’ shifting demand or to have a complete line of

dairy and related products to offer customers. In most

cases, the nontraditional products are dairy-based, and

dairy ingredients constitute the major share of the

manufacturing inputs. They are seldom far afield from

the dairy base, because it would be difficult for a dairy

cooperative to justify to its milk producer-members the

rationale of using their precious equities to market

products other than milk and milk products.

When cooperatives have ventured into unconventional or trendy new products—such as niche beverages, sports drinks, nutritional food products, or

nutraceutical foods, etc.—they often have relied on

joint-venture partners who have the technical knowhow to make and market the products and to share the

substantial market risk. The main purpose of cooperatives in these ventures is to sell milk or milk ingredients.

Dairy Cooperatives’ Challenges

In a future that is driven by technology, dairy cooperatives face many challenges. Chief among them are:

● Research and development.

● Product development and marketing.

16
● Acquiring manufacturing and process 

technology.

● Equity Financing.

Research and development. Research and development is the foundation of manufacturing and

process technology, product development and marketing. Through check-off dollars, dairy farmers have

funded many research projects that provide information pertaining to the development of process technology. Many other projects have actually resulted in new

or improved products being developed by applying

the attributes of various dairy ingredients (Dairy

Management Inc., 2004).

Valuable as they are, however, such generic

efforts by dairy farmers need to be complemented by

research and development work of individual cooperatives or processors in the final stages of new product

formulation. Only through its own research and development efforts can a cooperative (or processor) identify and have a full grasp of its market niches and develop the products to satisfy the customers’ demand. (For

a look at one firm’s research and development, see

USITC Hearing Proceedings and Dairy Companies

Association of New Zealand.)

Product development and marketing. Every

year, hundreds of new dairy products are introduced

to the consumer market by processors, including cooperatives. In 2003, a total of 794 new products (butter,

cheese, milk, yogurt, ice cream/frozen yogurt, and

other frozen desserts) debuted. The number of new

products was 874 in 2002 (Prepared Foods).

New products may be developed by modifying

the flavors, taste, colors, forms, packaging or shelf-life

of existing products, or by fortifying them for desired

functionality. Some may be the organic versions of the

products. Genuinely new varieties of specialty cheese

or products also have been introduced (Roberts, Jr.). In

many areas of the country, efforts by dairy farmers to

add value to milk have produced many kinds of artisan/farmstead cheeses, yogurts, and other dairy products.

Product development also refers to using dairy

ingredients (or dairy products as ingredients) to develop or improve foods and beverages. Successful development of dairy ingredients depends on finding ways

(or helping customers to find ways) to apply the functionality and health benefits of the ingredients in the

formulation of new products. (See Haines for some

recent development.)

Developing new products is only the first step in

opening up new markets for the dairy industry.

Consumer acceptance of newly developed dairy products or new products that are formulated to exploit the

functionality of dairy ingredients is vital to ultimate

success.

Marketing new consumer products requires market research, test marketing, advertising and promotion, consumer education, shelf space acquisition (possibly by paying slotting fees to retailers to put

products on the shelf), merchandizing, and servicing

the products. Although the rewards of developing and

marketing new consumer products may be substantial,

the risks involved also may be great.

In marketing new dairy ingredients, the challenge is to provide end-users (processors) with information on the attributes and functionality of an ingredient. Such information must be scientifically

documented. The marketer also must be ready to serve

the needs of the processors. For example, the marketer

may have to show the processors, or work with them,

on the best way to use the ingredient in formulating

end products and the best way to process the end

products.

Acquiring manufacturing and processing technology. Machinery and equipment are the embodiment of manufacturing technology. Cooperatives usually acquire new manufacturing technology by buying

new machinery and equipment. However, as the scale

of dairy plants grows larger, the cost of building a new

plant with new machinery and equipment is substantial. The challenge is whether dairy cooperatives could

afford the new plant, both in financial terms and in

terms of milk volume that is needed to sustain the

operations, to keep up with technology advancement.

This is a particular challenge for cooperatives that

engage in processing commodity dairy products. (See

box 2 for examples of the required milk volumes and

costs of some recent plants.)

To differentiate value-added products and gain

competitive advantages, cooperatives, like other

processors, adopt new ways to manufacture or package them or enhance the particular attributes of the

products (nutritional benefits, functionality, flavors,

shelf life, etc.). Such undertakings often require modifying the manufacturing or packaging process. The

challenge for cooperatives is to devote adequate

resources to develop or acquire the process technology.

The other aspect of process technology development is finding new ways to make existing products.

An example is the wheyless process for the production

of “mozzarella cheese” cited earlier in this report.

17
The Ultimate Challenge—Equity Financing

All of this—building new plants, buying new

equipment, developing and modifying manufacturing

processes, developing and marketing new products,

and engaging in research and development to compete

in a technology-driven industry—requires adequate

financing.

Unique equity financing of cooperatives. There

are two broad sources of financing: debt financing

(borrowing) and equity financing. A dairy cooperative’s debt financing may work much the same way as

any business. Its equity financing, however, is unique

and may have the following features:

● Common stock: Some cooperatives may issue

common stock to cooperative membership

which is usually of nominal value.

● Retained patronages: Net savings that are allocated to members based on patronage but are

retained to finance the cooperative’s operations

after paying members the cash portion.

Members must treat the entire allocated patronages as income for tax purposes. Cooperatives

usually revolve retained patronage back to

members after a certain period of time.

● Capital retains: Money that is withheld at a

certain rate per hundredweight of milk to

finance the cooperative’s operations. Members

must treat capital retains as income for tax purposes. Capital retains are also revolved back to

members after a certain period of time.

● Base capital plan: Under the plan, a target base

capital level is established at a rate per hundredweight of milk marketed during a representative period. This provides an adequate

level of equity capital for the operations of the

cooperative. The base capital may be funded by

retained patronage and/or capital retains, or by

other means of member contribution. Once a

member attains the prescribed base capital

level, patronage earnings allocated to the member are paid in cash.

● Retained earnings: Retained net savings that

are earned on non-member business. (A cooperative may jeopardize its Capper-Volstead status if its non-member business is more than 50

percent of the total.)

18

Milk volume and the costs of some new

cooperative plants

A new plant for making Cheddar cheese in 640-

pound block packages is being built in Clovis,

New Mexico, at a cost of $190 million. When fully

operational, the plant will process 2.4 billion

pounds of milk a year, or about 7 million pounds

of milk a day (Dairy Farmers of America). Also, two

new mozzarella cheese plants in California will

each have a capacity of 6 million pounds of milk a

day when in full operation (Dairy Foods, Vol. 104,

No. 2 and Vol. 105, No. 4).

A new butter churn commissioned in 2003 in

Washington has a capacity of 28,000 pounds of butter per hour (Northwest Dairy Association). That

amount of butter is equivalent to the butterfat contained in 625,000 pounds of milk per hour or 5 million pounds of milk in an 8-hour day.

A plant capable of handling 5 million pounds

of milk a day to make nonfat dry milk and MPC is

estimated to cost more than $108 million (Cotta). A

state-of-the-art “green-field” (instead of add-ons)

nonfat dry milk plant would handle 5 million

pounds of milk a day and would cost about $70

million.

On the other hand, plants that engage in making “value-added” products (vs. commodity products) are usually of smaller scale, although they

may be similarly expensive. An example is a block

cheddar cheese plant with a capacity of 1.6 million

pounds of milk a day that was completed in late

2001 in Oregon at a cost of $50 million (Phillips).

Another example is a cooperative organized by a

group of Amish dairy farmers in northern Iowa

and southern Minnesota five years ago. It has

invested more than $1 million in a plant that has a

capacity of processing about 20,000 pounds of milk

daily into specialty blue cheese (Perkins).

For an example of a milk-protein fraction plant,

Fonterra, a New Zealand cooperative, started

lactoferrin production in September 2004 in a new

plant in Hautapu, New Zealand, that cost $15 million (Fonterra News).
Financing challenges. Managing the cooperative’s unique way of equity financing is a constant

challenge that is three-pronged:

● Member-producers—Members must treat the

retained patronages, when allocated, as income

for tax purposes. The same applies to capital

retains. Although the retains are revolved back

to members as permitted by cooperative earnings, their value is heavily discounted because

the revolving period is usually several years or

longer. The retains also compete with the capital needs on the farm. It is only natural that

members want as little retains and as short a

revolving period as possible.

● Cooperative operations—Cooperatives require

an adequate level of capital to finance their

operations and satisfy the covenants of lending

institutions. This capital need is in conflict with

members’ desire of having little retains and a

short revolving period.

● Lending institutions—To lower the risk of loan

exposure, lending institutions usually require a

cooperative to maintain a certain level of equity

vis-à-vis its assets and have ample working

capital for operations. This again runs counter

to members’ desire for as little retains as possible. Furthermore, because cooperatives usually

revolve retains to members after a certain period of time, some lending institutions may not

consider member equity as permanent capital

and would rather cooperatives have as long a

revolving period as possible. (This is one reason why cooperatives need special lending

institutions that understand the cooperative

form of business.)

The base capital plan may be viewed as a compromise among the three conflicting interests. Under

the plan, a target base capital level that would adequately finance a cooperative’s operations is established. An advantage of the plan is that once the prescribed base capital level is attained, a member can

expect to receive all allocated patronage earnings in

cash. Furthermore, base capital is revolved only after a

member is retired from the cooperative. This gives

base capital a certain degree of permanency that helps

relieve the risk concerns of lending institutions. The

decision-making process of setting the base capital

level may be easier for members to understand and

may help allay members’ anxieties over whether all

the capital retained by the cooperative is necessary.

Equity financing alternatives. In 2002, equity per

hundredweight of milk averaged $2.10 for cooperatives that responded to a marketing operations survey

by USDA Rural Business-Cooperative Service

(Liebrand). For that same year, the survey showed that

milk volume per member-producer was 2.3 million

pounds (Ling). Therefore, average equity per memberproducer was $48,000 (rounded). This was an increase

of 60 percent from $30,000 in 1997, based on the findings from the same survey conducted 5 years earlier

that equity per hundredweight was $2.07 and milk per

member-producer was 1.4 million pounds.

It is noteworthy that the 60-percent increase in

equity per member-producer from 1997 to 2002 was

almost entirely attributable to the 59-percent increase

in per-producer milk volume. On a per hundredweight

basis, the equity needed to market members’ milk

barely changed in 5 years. It increased by about 1 percent, from $2.07 in 1997 to $2.10 in 2002.

However, during the same 5-year period, cooperative assets per hundredweight of member milk

increased by 97 cents (18 percent) from $5.25 to $6.22,

while cooperative liabilities increased by 95 cents per

hundredweight (30 percent) from $3.18 to $4.13. On a

per hundredweight basis, almost all increases in capital needs of cooperatives were from debt financing.

Contribution by cooperative member-producers to the

increased capital needs was close to nothing.

Cooperative growth was mostly financed by debts.

Depending on the type of operations a cooperative is engaged in, its equity per hundredweight may

vary widely from the average. In 2002, although the

average was $2.10, equity in bargaining cooperatives

was only 27 cents per hundredweight; commodity

manufacturing cooperatives, $1.60; niche marketing

cooperatives, $5.80; and diversified and fluid-processing cooperatives, $2.80. Nevertheless, the fact remains

that financing cooperative operations is a major financial commitment for all member-producers.

There have been various alternative equity

financing methods proposed for reducing cooperative

members’ fiscal burden and investment risks. Except

for the joint-venture model, none of the alternatives is

particularly useful for dairy cooperatives.

● Public stock corporation—Cooperatives may be

organized as a stock corporation and sell some

or all stock to the public. The idea is to attract

investors’ capital into the cooperative to lessen 

19
the financial burden of member-producers.

And, if the business performs well, stock

would appreciate in value and member-producers have an efficient stock market to cash

in.

However, it is difficult to operate a public

stock corporation on a cooperative basis

because of one or all of the following: (1)

Investors would have problems with operating

the corporation on a cooperative basis, especially its one-person-one-vote democratic control; (2) Producers support the cooperative’s

business by patronizing it while investors do

not; (3) With investor capital, the cooperative

is likely to lose its Capper-Volstead status; (4)

In a dairy cooperative, the distinction between

milk pay prices and premiums on the one

hand and profits on the other is not clear-cut,

and the conflicts between producers and

investors may be very difficult to reconcile;

and (5) There are fundamental conflicts

between benefits for member-producers and

investors’ focus on returns on investment.

There was one known case of public offering

of a dairy cooperative’s common stock. In

April 1988, a dairy cooperative converted its

fluid business subsidiary into a publicly traded stock company with the idea of using

investor financing and stock as tools for

expansion and growth, while maintaining the

majority ownership of the business (Farmer

Cooperatives). However, by the end of 1991, the

cooperative bought back all outstanding stock

from minority owners.

● Some cooperatives may issue preferred securities or bonds to tap non-member capital. But

these usually carry a fixed interest rate and do

not have bearing on ownership issues and

should be considered as debts rather than equity capital.

● Limited liability company (LLC)—An LLC is a

state-approved, unincorporated association,

just like a partnership except that it protects its

owners and agents from personal liability for

debts and other obligations of the LLC.

Earnings pass through to the owners (no nonqualified retains) and enjoy single tax treatment. An LLC may operate on a cooperative 

basis. Or it may allocate earnings and losses

and assign votes among themselves as they see

fit (Frederick).

The LLC form of business organization became

popular after tax rules over them were modified in 1997. Some producers perceive the flexibility provided by an LLC as a vehicle for tapping outside capital. However, the

combination of producers and investors in an

LLC would encounter the same issues as in a

publicly traded corporation that attempts to

operate on a cooperative basis. There is no

dairy cooperative known to have been organized as an LLC.

● Joint venture—The LLC may be a useful model

for established cooperatives to form joint ventures with other cooperatives or with other

firms. On the marketing side, a joint venture

LLC may be used by a cooperative and its partner to develop and market certain dairy products. The cooperative supplies the milk and the

partner its technical and marketing know-how

to the LLC.

The joint-venture partners share the financing

and the risk of the business activities of the

LLC. This organizational model reduces cooperative members’ financing burden and risk

exposure, while a market outlet for milk is

secured.

Many recent joint ventures formed by cooperatives with other business entities are organized

as LLCs.

● “New-generation” cooperative—A new-generation cooperative usually requires significant

equity investment as a prerequisite to membership and delivery right, in order to ensure that

an adequate level of capital is raised and the

plant capacity is fully utilized. The delivery

right is in the form of equity shares that can be

sold to other eligible producers at prices agreed

to by the buyer and seller, subject to the

approval of the board of directors. The transferable delivery right is appealing to members

because it allows them to cash in any increase

in the value of their cooperative upon retirement.

20
Interest in new-generation cooperatives surged

in the 1980s and 1990s, largely in response to

the market condition prevailing during that

time period. Cooperative development leaders

believed that this form of cooperative organization would solve the problem of depressed

farm income by engaging in value-added processing.

The new-generation cooperative model has its

strengths, but its characteristics also have created a host of problems. After the turn of the

21st century, the so-called fever for it has

cooled down substantially. (For a succinct evaluation of new generation cooperatives, see

Torgerson.)

There was only one dairy cooperative known

to have been organized using the new-generation model. In 1995, Dakota Dairy Specialties

was established to make specialty cheese

(Campbell, 1995). But its remote location, the

capital investment needed to renovate its plant

and the skill required to make and market specialty cheese posed major problems, and the

new-generation model proved no help. It suffered the same fate as Hebron Cooperative

Creamery, the struggling cooperative it was

formed to replace. By 1999, Dakota Dairy

Specialties ceased to operate.

Conclusion

Technology opens up opportunities for using milk and

dairy ingredients in new ways and in new products.

Along with its advances, dairy industry dynamism

also evolves. The promising rewards of adapting to

new technology could be exciting but the necessary

industry adjustment could be challenging to dairy

farmers and their cooperatives. This report suggests

that success depends upon:

● Adequate member equity capital.

● Well thought-out business strategy and plans

that focus on the core business of marketing

milk, milk products and milk-based ingredients.

● Identification of new products and markets

through research and development.

Epilogue: Parallel to Processing Tomato

Industry

Advances in technology have caused milk production to undergo dramatic changes and induced the

westward production expansion (table 7; also see

Blayney). The abundant milk supply in the West makes

the region most conducive to manufacturing commodity dairy products. The West has become the major

supplier of milk-based ingredients (commodity dairy

products and, potentially, fractionalized components)

for further processing across the United States, while

the traditional dairy regions now mostly provide fresh

milk to satisfy the demand of the fluid market and the

demand of the manufacturing sector that makes

cheese, butter and other value-added or niche dairy

products. The evolution of the milk industry has a

striking resemblance to the development in the tomato

industry.

Like milk, tomatoes are produced in every State

in the Nation and have two use categories: tomatoes

for fresh market and tomatoes for processing (ERS).

In 2003, commercial-scale production of fieldgrown tomatoes for fresh market was reported in 17

States, a decrease from 32 States in the 1950s. (Cherry,

grape, tomatillo and the fast-expanding production of

greenhouse tomatoes are excluded from reporting.)

However, production increased 70 percent over the

time period. Florida, with 43 percent of the Nation’s

production in 2003, was the leading producer of freshmarket tomatoes, followed by California’s 28 percent

(table 9). Fresh-market tomatoes are hand-picked and

sold on the open market, at prices that are far higher

than tomatoes for processing.

In contrast, production of tomatoes for processing is highly concentrated in California, usually under

contracts between growers and processors. The State

has accounted for around 95 percent of the Nation’s

production since the mid-1990s (table 10). In 2003, only

six other States were reported to have some significant

but very minor shares of production. This is a far cry

from the 1950s, when the production of 33 States was

reported and California’s share was 55 percent. Three

broad categories of technological advances changed

the landscape: (1) Development of tomato varieties

that were able to withstand the rigors of machine harvesting and bulk handling; (2) development of a

mechanical harvester; and (3) development of bulk

storage of tomato products.

Efforts to develop a variety of tomato able to

withstand the rigors of machine harvesting and bulk

handling started in the late 1940s in California, followed by the development of a mechanical harvester.

21
By 1962, both the machine and the tomato plant were

ready to be implemented. Subsequently, the U.S.

Government in 1964 refused to extend the provision of

a law by which foreign nationals were allowed to come

into this country to help with crop production and harvesting (Webb, et al). This gave impetus to adopting

harvesting machines by tomato growers. By 1970, 100

percent of California growers had shifted to mechanical harvesting (Busch, et al).

California has several advantages over other

regions in producing processing tomatoes. California’s

growing season is from 250 to 300 days, longer than

the East and Midwest (Gould, p. 103). The crop is

grown almost entirely on irrigated ground and the

moisture is easier to control. The high-yield tomato

varieties developed for California may not be suitable

for other areas. At harvest time, there is generally no

rainfall and the condition is ideal for machine harvesting (King, et al).

The mechanical harvester further enhances

California’s advantages, because the State is most suitable to meet its requirements of operating on a large

scale: The machine is capital-intensive and tomato

farms must specialize; fields must be flat and well

graded; the rows must be long (recommended no less

than 600 feet) to minimize turning the harvesting

equipment (Busch, et al).

As a result, California became a low-cost producer of tomatoes, which led to rapid development of the

processing industry in the State. Improvements in bulk

storage and transportation technology have created

the situation in which processors in the Midwest and

East serve as final fabricators of raw product grown

and partially processed in California (King, et al).

Tomato products may be stored in bulk containers by

various methods: aseptic storage or freezing storage

of concentrated products, or acidified bulk storage of

whole tomatoes. These methods allow the processors

to store products during the harvest season and make

various finished products on a year-round basis. This

enables the industry to match finished product production with market demand and save on transportation cost by producing finished product close to its distribution point (Gould, pp. 227-228).

In essence, the tomato industry has developed

into two separate sectors—fresh market and the processing sector—each with its specific varieties of tomatoes and distinctive characteristics. While the milk

industry conceivably may not be differentiated to such

extremes, the evolution of the tomato industry nevertheless provides some food for thought as milk producers ponder the future brought about by technological advances.

22

Table 9—Tomatoes for fresh market, production by

State, average 1951-60 and 20031

Average Share of Share of

State 1951-60 U.S. 2003 U.S.

1,000 cwt Percent 1,000 cwt Percent

FL 4,865 25.3 13,984 42.8

CA 5,655 29.5 9,240 28.3

VA 502 2.6 1,482 4.5

TN 218 1.1 1,225 3.8

OH 509 2.7 1,155 3.5

SC 295 1.5 1,023 3.1

NC 157 0.8 896 2.7

NJ 806 4.2 682 2.1

GA 387 2.0 544 1.7

PA 328 1.7 420 1.3

MI 706 3.7 396 1.2

AR 183 1.0 384 1.2

NY 786 4.1 322 1.0

AL 270 1.4 303 0.9

IN 328 1.7 248 0.8

MD 280 1.5 171 0.5

TX 1,566 8.2 169 0.5

MA 256 1.3

WA 210 1.1

CO 150 0.8

IL 110 0.6

MO 109 0.6

OR 98 0.5

NM 95 0.5

HI 58 0.3

LA 47 0.2

RI 46 0.2

MS 44 0.2

DE 44 0.2

KY 38 0.2

CT 34 0.2

IA 21 0.1 –––– –––– –––––– –––––

United States 19,201 100.0 32,644 100.0

1 Cherry, grape, tomatillo and greenhouse tomatoes are excluded.

Sources: Agricultural Statistics, various years; Vegetables, Annual

Summary, various years, USDA/NASS.
23

Table 10—Tomatoes for processing, production by State, selected years 1951-2003 (tons)

State Average 1951-60 1965 1970 1975 1980 1985 1990 1995 2000 2003

CA 2,044,030 2,468,300 3,362,950 7,270,550 5,540,780 6,102,040 9,306,200 10,606,820 10,286,500 9,252,000

IN 281,970 315,200 295,200 209,300 106,560 140,080 193,040 157,450 229,020 202,290 

OH 224,830 544,300 545,650 423,000 252,000 404,970 434,510 269,670 158,710 173,280 

MI 70,070 80,900 55,150 63,300 73,680 166,320 169,860 135,000 84,000 117,800 

PA 170,610 131,100 151,000 108,100 40,390 54,460 34,920 36,600 42,560

CO 25,260 6,000 8,600 6,110 17,300 2,390 1,840NJ 227,810 349,700 280,000 154,000 61,990 92,190 57,020 

NY 135,560 89,600 39,300 39,800 MD 103,480 105,000 59,850 53,300 26,900 41,170 

VA 51,710 66,600 35,300 33,850 17,960 25,200 DE 30,920 35,900 24,750 13,940 TX 42,840 46,800 30,200 37,900 9,940 

NM 4,240 3,300 7,000 8,600 FL 40,520 55,400 43,500 IL 115,240 140,800 71,900 

SC 3,140 3,500 UT 63,450 16,100 

Other States1 50,940 42,640 57,200 133,250 74,280 119,460 117,520 78,660 57,450 66,740 

————— ————— ————— ————— ————— ————— ————— ————— ————— —————

United States 3,686,620 4,501,140 5,058,950 8,503,750 6,210,590 7,177,130 10,355,260 11,286,040 10,858,240 9,812,110 

CA share of U.S. 

production: 55% 55% 66% 85% 89% 85% 90% 94% 95% 94%

1 Other States in 1951-60 - 16; 1965 - 13; 1970 - 14; 1975 - 12; 1980 - 9; 1985 - 10; 1990 - 8; 1995 - 7; 2000 - MD and NJ; 2003 - MD, NJ and PA.

Sources: Agricultural Statistics, various years; Vagetables, Annual Summary, various years, USDA/NASS.
References

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Blayney, Don P. The Changing Landscape of U.S. Milk

Production, United States Department of

Agriculture, Economic Research Service,

Statistical Bulleting Number 978, June 2002.

Campbell, Dan. “Temperature Rising: Co-op Fever

Still Sizzling Across North Dakota,” Farmer

Cooperatives, United States Department of

Agriculture, August 1995, pp. 10-16.

Cessna, Jerry. Milk Protein Products and Related

Government Policy Issues, Agricultural Marketing

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Chandan, Ramesh. Dairy-Based Ingredients, Eagan

Press, St, Paul, M.N., 1997.

Childs, Terry (Fonterra (USA)). Statement before the

International Trade Commission, Concerning

Investigation No. 332-453, Conditions of Competition

for Milk Protein Products in the U.S. Market,

December 11, 2003.

Cotta, Richard. Testimony of California Dairies, Inc.

Before the United States International Trade

Commission Concerning Investigation No. 332-453,

Conditions of Competition for Milk Protein Products

in the United States, December 11, 2003.

Dairy Australia. Pre-hearing Brief, regarding United

States International Trade Commission Investigation

#332-453, Conditions of Competition for Milk Protein

Products in the United States, December 1, 2003.

Dairy Companies Association of New Zealand. Posthearing Brief, in the Matter of Conditions of

Competition for Milk Protein Products in the U.S.

Market, United States International Trade

Commission Investigation No. 332-453, December

23, 2003 p. 3.

Dairy Farmers of America. “DFA Breaks Ground on

Joint Venture,” DFA Leader, March 2004, p. 1.

Dairy Foods. “Leprino Starts Production in Lemoore,”

Dairy Foods, Volume 104, Number 2, February

2003, p. 11.

———————. “LO’L Tulare Plant to Double

Capacity,” Dairy Foods, Volume 105, Number 4,

April 2004, p. 10.

Dairy Management Inc. “Whey Points The Way To

More Effectively Using Milk As A Raw

Material,” Dairy Dimensions, Volume 5, Issue 3,

2002, pp. 5-6.

———————. Dairy Research and Applications for

Your Business, 1998-2004 Program Overview, 2004.

Farmer Cooperatives. “LOL Resumes Stock Sales,”

Farmer Cooperatives, United States Department of

Agriculture, May 1988, p. 22.

Fonterra News. “Fonterra Plant Advances Value-Add

Manufacturing Technology,” Fonterra News,

October 19, 2004.

Frederick, Donald A. “The ABCs of LLCs: Limited

Liability Companies Offer New Option for Rural

Businesses,” Rural Cooperatives, United States

Department of Agriculture, July/August 1997.

Frierott, John (Slim-Fast Foods Company). Testimony

before the International Trade Commission,

Concerning Investigation No. 332-453, Conditions of

Competition for Milk Protein Products in the U.S.

Market, December 11, 2003.

Haines, Bill. “New Directions in New Dairy,” Prepared

Foods, January 2004, pp.97-104.

Hendrickx, Toine (DMV International). Statement before

the United States International Trade Commission,

Concerning Investigation No. 332-453, Conditions of

Competition for Milk Protein Products in the U.S.

Market, December 11, 2003.

Jesse, Ed. U.S. Imports of Concentrated Milk Proteins:

What We Know and Don’t Know? Marketing and

Policy Paper No. 80, Department of Agricultural

and Applied Economics, College of Agricultural

and Life Sciences, University of WisconsinMadison, February 2003.

24
Koph, Henry. “Closed Loop Filtration Leads to

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Kosikowski, Frank V. Cheese and Fermented Milk Foods,

second edition, 3rd printing with revisions, F. V.

Kosikowski and Associates, Brooktondale, New

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Kozak, Jerome and Peter Vitaliano (National Milk

Producers Federation). Post-hearing Submission of

the Milk Producer Community to the International

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Products in the U.S. Market, January 15, 2004.

Liebrand, Carolyn. Financial Profile of Dairy

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Agriculture, Rural Business-Cooperative Service,

RBS Research Report #203, September, 2004.

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report to the National Milk Producers

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1983.

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Foods,

http://www.nationaldairycouncil.org/nutrition/products/milk.asp?page=4.

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105, Number 1, January 2004.

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Prepared Foods. “Dairy Products Scorecard—New

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Roberts, Jr., William A. “Defining Dairy,” Prepared

Foods, March 2003, pp.33-36.

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U.S. Dairy Operations, USDA Economic Research

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Smith, Karen E. “Background on Milk Protein

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August 2001, in Dairy Proteins, Wisconsin Center

for Dairy Research and the Wisconsin Milk

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Torgerson, Randall E. “A Critical Look at NewGeneration Cooperatives,” Rural Cooperatives,

United States Department of Agriculture,

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21 C.F.R., Part 133: Cheese and Related Cheese

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———————. “Cottage Cheese Deviating From

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December 9, 2004.

25
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(USITC). Conditions of Competition for Milk Protein

Products in the U.S. Market, Investigation No. 332-

453, USITC Publication 3692, May 2004.

———————. Hearing Proceedings, in the Matter of

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Products in the U.S. Market, Investigation No.

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References on Tomatoes

Busch, Lawrence, William B. Lacy, Jeffrey Burkhardt,

and Laura R. Lacy. Plants, Power, and Profit: Social

and Ethical Consequences of the New Biotechnologies,

Basil Blackwell, Inc., Cambridge, Massachusetts,

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November 19, 2004.

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Trends in the Processing Tomato Industry,

University of California-Davis, Department of

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Webb, Raymond E. and W. M. Bruce. “Redesigning the

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Yearbook of Agriculture 1968, United States

Department of Agriculture, pp. 103-107.

26
U.S. Department of Agriculture

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 U.S. 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.
U.S. Department of Agriculture

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 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.
United States

Department of

Agriculture

Rural Business–

Cooperative

Service

RBS Research

Report 000