[MUSIC] This is Jim Dunn again, and I'm going to be talking about milk marketing. Marketing milk is a challenge, especially for small farms. For this reason, in many countries farmer cooperatives market most of the milk. The specifics vary by cooperative and country, but the essential services provided are that the cooperative finds a customer, arranges transportation, collects the revenue from the milk sales and pays the farmer the difference between the milk receipts and the cost of the cooperative services. Because milk needs to be processed in a timely manner, the cooperative collects it at least every other day at the farm. Some bigger farms can fill an entire truck in one day, so their milk is collected daily. In areas where the farms tend to be very small, there's often a village collection station. In this instance, the farmers will transport a few cans of milk to the collection station, where it is measured and poured into the bulk tank. Generally, there is no sample taken of each can, so any quality problems are commingled in the village milk production of the day. In warm weather, this milk is kept at room temperature until the tank's cooling system lowers the milk to a temperature that will deter bacterial growth. This photograph shows somebody delivering milk to the village collection station in Serbia. In this case, three milk cans per day on their bicycle with a little cart behind it. People also brought milk in single cans, wheelbarrows and on the back of motorcycles and various other things. This next slide is a milk truck that was collecting milk at a farm that had ten cows. It was going to make 70 stops with this truck. In contrast to that, the following slide shows the typical milk truck in the United States, which might fill this 40,000 pound truck with milk from a single farm or several farms. Perhaps as many as 10 or 20, but generally not very many compared to the 70 farms in the preceding slide. Because a cooperative must find a market for every member's milk, it must have a variety of customers including factories processing milk for drinking, making cheese, ice cream, butter, and powdered milk. On any given day each of these factories has a need for a particular amount of milk. The cooperative must balance its supply with the needs of each customer. The amount that the factory is willing to pay and the delivery cost to get the milk to that factory. You must also have a prearranged procedure for determining quality, getting paid, and other requirements. Since the milk truck will usually contain milk from several or many farms, there must be a trace back procedure in place to determine which farm is the source of any quality problem the milk in the load has. This may involve traces of pharmaceutical products, high bacteria, or other issues. One challenge for the cooperative is governance. Is each farmer equally important? Do some get special status? In the United States, the largest farms have thousands of cows and the smallest, perhaps, as few as ten. These differences mean that some of the farmers have a much larger role in the viability of the cooperative, and perhaps different priorities about the future direction for the cooperative. An important determiner of milk prices in the United States are now futures markets. The Chicago Mercantile Exchange hosts trading of contracts for cheese, butter and nonfat dry milk. These publicly traded contracts are used to guide market participants about present and future milk supply and demand for these products and milk in general. The US farm prices are derived from the prices of these contracts at various times. And a formula is applied to compute the value of milk use to make the cheese, butter, and other products. The price the farmer receives is a weighted average of the farm milk prices, used to make the different the types of products in their region. Most countries make a distinction between drinking milk in further processed products with a higher farm price for milk used for drinking. This is to encourage farmers to produce milk during the off season. Because the demand and supply for milk are so seasonal, farmers and processors face considerable price uncertainty. The futures market offers a method of controlling this risk. You can see by this slide that the price of milk has varied considerably over the last decade, and it can sometimes lose as much as 50% of its value over a couple of months. Cooperatives often help farmers to control price risks by offering forward contracts for milk. They do this in two ways. For example, the cooperative may find a customer such as a pizza company, that knows it'll be making a lot of pizzas in the next few months, and does not want the costs of these pizzas to vary greatly. The pizza company may approach the cooperative about a fixed price contract for the cheese, for 100,000 pizzas over the next six months. The cooperative can offer its farmer members the opportunity to fix the price of a portion of their milk production, generally up to 75% over that period. A farmer will get stable prices and a predictable income from the sale of the milk. The pizza company can make better plans, and the cooperative provides a valuable service to the members and guarantees a market for a portion of its milk sales. In addition to these pass-through contracts, cooperatives will also provide risk management services for farmers to obtain contracts for forward pricing of dairy products. These contracts are for the milk prices themselves and for cheese, butter, and powdered milk prices. Depending on where the farm is located, the farm milk price may be more related to one or more of these products. Of course, the farmer can also use a regular commodity broker for these transactions. Using the cooperative as the intermediary simplifies the process and allows smaller farms to control price risk in this manner. The cooperatives often provide other services such as record keeping, various supplies, and insurance. The bigger cooperatives can vertically integrate into manufacturing. Land O' Lakes for example, is a long time butter manufacturer of the United States. And Dairy Farmers of America, another large cooperative, has joint ventures with many dairy processors, producing cheese and many other products. In the process, these cooperatives offer their farmer-members the opportunity to share in the profits of the dairy industry beyond the farm gate. Occasionally, dairy farmers can vertically integrate in direct consumer sales and dairy product manufacturing. Small on-farm cheese plant may produce a storable product that the farmer can sell directly to the consumer at a farmer's market or at the farm gate itself. Others may bottle milk, or make yogurt, or other customer dairy products. This allows a farmer to realize more value for the milk, and to use some surplus time to get a greater return from the milk produced. This opportunity is very location specific and not available to all producers. But for those in the right situation and with entrepreneurial skills, it can increase and stabilize income, and increase the viability of the smaller operation. These opportunities depend on regulations about food safety and licensing, which can vary greatly by country. Milk marketing is a challenge, and the farmers rarely have the time or skills to manage it as individuals. Thus a system of intermediaries is often needed, generally cooperatives. [MUSIC]