Industrial Organization, Livestock Production/Industries,

Liebrand, Carolyn

English

Research Papers in Economics

Agricultural Outlook Forum 2002          Presented: Friday, February 22, 2002 
 
STRUCTURAL CHANGE IN THE DAIRY COOPERATIVE SECTOR, 1992-2000 
 
Carolyn Liebrand 
Agricultural Economist 
Rural Business-Cooperative Service 
United States Department of Agriculture 
 
 
Farmer-owned dairy cooperatives, as you well know, have played an important 
role in milk marketing from the earliest days of our Nation. While dairy 
cooperative numbers have shrunk, as have the number of dairy farmer members, 
cooperatives continue to handle a predominant share of all milk marketed in 
the U.S.(83 percent in 1997). And for the past 50-years or so they have 
distributed a majority of the dry milk products, butter and cheddar cheese 
produced in this country.  
 
As a refresher, just what is a “dairy cooperative”?  Basically, it is a 
business that is owned, operated, and controlled by the dairy farmers who 
benefit from its services. Beyond that, they vary widely in size and in the 
type of activities they undertake in order to provide members an assured 
market for their milk.  Some are made up of a handful of producers, while 
others have tens of thousands of producer-members.  Some solely arrange for 
the sale of members’ milk, perform few services and do not own milk 
manufacturing or processing facilities.  In sharp contrast, others manufacture 
a wide variety of dairy products in an expansive system of plants. 
 
Changes in dairy cooperative numbers, 1992-2000 
RBS-Cooperative Services is the Nation’s storehouse of statistics on farmer 
cooperatives.  The number of dairy cooperatives in the United States fell from 
265 in 1992 to 213 in 2000.  However, the adjustment was more dynamic than the 
net loss of 52 cooperatives indicates.  A closer look reveals that 84 dairy 
cooperatives (32 percent) went out of existence and 32 new dairy cooperatives 
were formed by 2000.   
 
First let’s look at the exiting cooperatives.  Of these, less than half 
dissolved or ceased operations all together.  Some 48 cooperatives (57 percent 
of the exiting cooperatives) continued in operation, so to speak, in one 
fashion or another. Some cooperatives sold their operations to investor-owned 
firms (eight).  In a few cases (four), the cooperatives’ operations changed 
such that they were no longer classified as “dairy” cooperatives by RBS-
cooperative Services.  In these few cases, the cooperatives’ other operations 
(such as feed or supplies) came to generate more total sales than their dairy 
sales.  
 
A large segment exited by merging with other cooperatives (36 cooperatives or 
43 percent). In many mergers, one or more cooperatives were absorbed into an 
on-going or “surviving” cooperative. Other mergers, or rather, consolidations,  
resulted in entirely new cooperatives being formed. Between 1992 and 2000, 26 
of the cooperatives that exited by merger ended up being part of 6 new 
cooperatives that had emerged by the end of the period. 
 
Characteristics of the exiting cooperatives 
There were some differences in the characteristics of the exiting cooperatives 
depending upon how they exited.  The ones that dissolved and left no successor 
organization tended to be small (had handled less than 50 million pounds of 
milk annually). They were usually bargaining-only cooperatives that operated 
no manufacturing or fluid processing plants.  Most had exited by 1996 and were located in the Upper Midwest or North Atlantic.  Former members then joined 
other cooperatives, formed new ones or resorted to selling their milk directly 
to milk plants. 
 
In contrast, the cooperatives that exited by merging with or into another 
dairy cooperative were mostly medium (36 percent) or large (42 percent) sized 
(handled 50 to 999 million pounds of milk or 1 billion pounds or more 
annually, respectively).  While a majority of the merging cooperatives were 
manufacturing/processing cooperatives—cooperatives that sell raw bulk milk and 
operate one or more plants to manufacture milk into various products, quite a 
few merging cooperatives were bargaining-only cooperatives (42 percent).  One 
half merged in 1997 or later.  The cooperatives that merged were headquartered 
in every region of the U.S. 
 
Cooperatives combined with other dairy cooperatives for various reasons such 
as: to take advantage of scale economies; to better configure and utilize a 
system of manufacturing plants and to reduce operating overhead; to foster 
marketing clout; and to secure milk supplies, often eliminating overlapping 
activities, such as milk pick-up routes. Another driving force behind the 
mergers was to keep pace with consolidation in the fluid processing and retail 
sectors, thereby allowing the unified cooperatives to supply larger volumes 
and meet customer product requirements through horizontal integration. 
 
Also, the increased ability to transport milk due to improvements in trucking, 
milk quality and milk handling– as well as advanced packaging technology—may 
have facilitated this consolidation between dairy cooperatives. Furthermore, 
the increased merger activity the last three years of the century may have, in 
part, been a result of cooperatives anticipating and reacting to the new, 
consolidated Federal Milk Marketing Orders (FMMO), which went into effect Jan. 
1, 2000. The mergers expanded the geographical reach and market power of the 
surviving/emerging organizations and by 2000 some dairy cooperatives’ 
memberships spanned multiple regions or were even nationwide, while the number 
of states housing dairy cooperative headquarters shrunk. 
 
Those cooperatives acquired by Investor Owned Firms (IOF) were mostly small 
(75 percent) and owned or operated manufacturing/processing plants (75 
percent).  Most had exited prior to 1996 (75 percent).  They were located 
mostly in the North Atlantic (50 percent) and Upper Midwest (38 percent). 
 
Characteristics of the new cooperatives 
In the last 9 years of the 20
th century, 32 new dairy cooperatives formed.  
Six of these were formed by consolidations. The rest (26 cooperatives) were 
formed by new groups of producers. 
 
As could be expected, the new cooperatives resulting from merger activity were 
mostly large and none were small.  Three were bargaining-only associations and 
three were manufacturing/processing cooperatives that produced a wide variety 
of products. 
 
The 26 cooperatives formed by new producer groups were mostly small (62 
percent), bargaining only (69 percent) cooperatives.  A large number of them 
(39 percent) were formed in the North Atlantic region and most (69 percent) 
were formed in the last 4 years of the 9-year period.  The minimal financial 
commitment required to form and operate a bargaining-only cooperative 
contributed to their ease of formation and dissolution. 
 
These new groups of producers banded together for a variety of reasons. Some 
formed to capture marketing margins by further processing their milk, focusing 
on a particular market niche. Commonly, the market niche was specialty cheese— 
a unique variety or product with distinguishing characteristics (perceived or 
real) such as “organic,” “rBST-free,” “locally produced,” “grass-based,” etc. One group formed with the intention of processing branded fluid milk and 
capitalizing on similar types of attributes. And some of these efforts were a 
small-farm survival strategy. 
 
Additionally, some dairy farmers may have been seeking other alternatives to 
the “mega-cooperatives” for their marketing needs in forming a few of these 
new organizations. Others were formed by groups of new dairy operations that 
were similarly situated. Several of the new dairy cooperatives may have been, 
in essence, successors to cooperatives that had gone out of business for a 
time. 
 
Adjustment in Dairy Cooperative Operations 
Dairy cooperatives have taken diverse roads to address their specific 
marketing needs, but each has its merits.  Cooperatives engaged solely in 
bargaining activities increased their share of total cooperative numbers.  
They made up 74 percent of the Nation’s cooperatives in 2000. However, they 
represent just one-fourth of the milk handled by cooperatives.  
 
Underlying the changes in cooperative numbers is a shift away from operating 
manufacturing plants on a small scale for market balancing. As the 20
th 
century wound up, many of these balancing cooperatives closed their aging 
manufacturing facilities but continued their bargaining activities. 
Maintaining small, under-utilized and old balancing plants is costly, while 
building new, large-scale plants is also expensive, particularly for small 
cooperatives.  
 
Similarly, there was also a move away from cooperatives operating large, high 
volume plants for the production of a single or limited variety of commodity, 
or undifferentiated, dairy products, such as butter, powder and bulk cheese. 
The limited flexibility of a narrow product line probably left them more 
vulnerable to inventory losses arising from the volatile milk prices of the 
1990s than a more diversified product line would have. Many of these commodity 
manufacturing cooperatives merged with diversified cooperatives — cooperatives 
that own a system of plants to make a variety of products — both 
differentiated and commodity, while at the same time selling a large portion 
of their milk supply to other handlers and performing the requisite bargaining 
services. The consolidation of commodity manufacturing cooperatives with (or 
into) diversified cooperatives improved flexibility in product mix and 
efficiency with a more rationalized system of plants. Some plants were closed 
when they could not be utilized efficiently within the new system of plants. 
Diversified cooperatives offer milk and dairy product buyers a full range of 
services while securing marketing margins and security for their members. 
 
Diversified cooperatives are the least numerous of the operating types but 
they account for over one-half of all milk handled by the nation’s dairy 
cooperatives. Their shrinking numbers truly reflect the fewer-but-larger trend 
and represent increasing horizontal, as well as vertical, coordination. An 
indication of their vitality is that none of the exiting diversified 
cooperatives dissolved or went out of operation. Instead, all but one merged 
or consolidated with other cooperatives. 
 
 
Taking an alternative approach, some cooperatives manufacture selected 
products on a smaller scale for a particular market niche—typically cheese. An 
equal number of cooperatives making specialty products for a “niche” market 
exited as were formed in the last 9 years of the decade.  These are the second 
most common type of dairy cooperative today. They are mostly small 
cooperatives, hence represent a small portion of the milk handled by 
cooperatives. 
 The number of cooperatives engaged in processing fluid milk is small and 
shrunk further between 1992 and 2000.  The exiting fluid processing 
cooperatives merged into other dairy cooperatives or were acquired by an IOF. 
 
 
Summary 
In conclusion, dairy cooperatives have shown their ability to successfully 
adapt to the changes in the marketing environment. Thus, dairy producers will  
continue to have a variety of cooperative avenues to meet their needs and 
preferences in marketing their milk.  
 
The strength of the Nation’s dairy cooperatives has allowed milk producers to 
maintain the independence of their farm firms.  They have been able to 
maintain their autonomy while gaining some “muscle in the marketplace” through 
their cooperatives. Dairy farmers likely will continue to employ the 
cooperative business form to market their milk long into the future.  
 

STRUCTURAL CHANGE IN THE DAIRY COOPERATIVE SECTOR, 1992-2000

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