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Marketing agencies in common: A valuable tool for dairies

Calvin Covington Published on 31 October 2013

Farmers, including dairy farmers, may act together in marketing their agricultural products. This includes collectively bargaining and establishing prices for their products. The Capper-Volstead Act of 1922 gives farmers the legal authority to do this.

This act gives farmers exemption, subject to certain constraints, from monopoly and restraint-of-trade laws. Capper-Volstead also allows farmer cooperatives to act together in marketing, bargaining and establishing prices for agricultural products.

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In dairy circles, this valuable tool is more commonly known as marketing agencies in common – two or more cooperatives joining together to market milk under a common agreement.

For many years, various dairy cooperatives have formed marketing agencies. Dairy marketing agencies may include just two cooperatives, or they may include a dozen cooperatives.

Agencies may be involved in collectively marketing any dairy product from raw milk to finished products such as cheese, butter and powder. However, most are involved with raw milk, and my article will focus on those types of agencies.

Function and benefits
Agencies involved in raw milk confine themselves to a specific geographical area. Their functions vary from one agency to the next.

For example, as a former dairy cooperative CEO, I was involved in two agencies, each with different functions. One agency was composed of cooperatives marketing milk in the Appalachian and Southeast federal orders.

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This agency established over-order premiums on Class I and II milk marketed by its member cooperatives in these two orders. The agency members agreed to charge their respective customers, in the two orders, the same over-order premiums.

Another agency was made up of the two cooperatives marketing milk in the Florida federal order. The agency established over-order premiums on all milk, pooled the expense of balancing the market and worked together to move milk more efficiently.

In addition, there were two surrounding agencies that did more than establish over-order premiums and pooling balancing expenses. One was composed of cooperatives marketing milk in the Southwest order, and the second included most of the cooperatives marketing milk in the Appalachian and Southeast federal orders.

In simple terms, these agencies pooled all raw milk revenue and related expenses, including farm hauling costs. This resulted in the same blend price for all member cooperatives, subject to location adjustments. These two agencies also consolidated milk hauling, dispatch and testing.

What are the benefits of marketing agencies? Marketing agencies are most successful in establishing Class I over-order premiums. This is due to fluid milk being a more regional market compared to other milk classes that are national and international markets.

If all the cooperatives in a common marketing area agree to the same Class I over-order premium, generally a higher over-order premium is obtained. This results in having additional dollars to cover balancing costs and to return to dairy farmers.

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In addition, all of the Class I processors in the market served by the agency have equal raw product costs. One processor does not have a price advantage over another processor.

Equal raw product costs are extremely important in dealing with a commodity like milk which is 85 percent or more of total ingredient costs in packaged fluid milk. Marketing agencies have collected millions of additional dollars in over-order premiums.

Those working together, balancing the market, and moving milk, have saved dairy farmers thousands of dollars in transportation costs.

Diminishing role
Unfortunately, during the past year or so, the role of marketing agencies has diminished. The result is lower over-order premiums and increased marketing costs due to milk moving greater distances and milk trucks passing each other.

Why is this happening? Why aren’t dairy farmers using a vital and beneficial tool? My response to those questions includes the factors required to make marketing agencies in common an effective tool.

1. Trust – All members of a marketing agency must trust each other. Each member must trust each other member to carry out the pricing decisions made by the agency.

For example, if an agency establishes over-order premiums, all members must charge and collect the agreed- upon over-order premium. Without trust among agency members, the agency will lose its credibility and effectiveness.

2. Verification – As President Reagan said, “Trust, but verify.” An effective agency must have an independent and regular audit. Members, as well as the processors served by the agency, need verification that all members are abiding by the agency decisions.

3. Transparency – Along with verification, the actions and books of the agency must be transparent. My experience has shown that dairy farmers may not agree with an agency decision or action, but if they know what took place and why, and see the numbers, they will support the decision. Plus, transparency promotes trust and verification.

4. Consensus – Agencies that approve actions by a simple majority are not effective and most likely will not last long. One or two cooperatives cannot dominate agency decision-making. A strong consensus of all members is needed for a viable agency.

5. Active dairy farmer board of directors – A board that provides prudent oversight, stays abreast of current marketing conditions, asks pertinent questions, challenges management and does not rubber-stamp management actions is an effective agency.

Most important, agency directors must be willing to set aside individual cooperative differences for the mutual benefit of all dairy farmers.

6. Equitable – Equitable is not synonymous with equal. An effective agency cannot provide equal benefits to all members, but it must provide equitable benefits to all members. For example, fluid milk marketing areas are larger today than 10 to 15 years ago.

It is common with agencies that establish Class I over-order premiums to give credits to fluid processors on the fringe areas of the agency marketing area in order to receive higher overall premiums.

To accomplish this, dairy farmers farther away from the fringe areas may need to contribute more to credits than those dairy farmers in fringe areas. Yet all dairy farmers receive a higher price by working through an agency.

7. Reasonable – Agencies need to be reasonable in what they can accomplish, especially in regard to establishing over-order prices.

An agency cannot establish a price so high it makes processors uncompetitive, opens up the opportunity for milk outside of the marketing area to come in and negatively impacts consumer sales.

An effective agency needs to remember the dairy industry is like a milk stool – it has three legs: farmer, processor and consumer. A healthy industry requires each leg to be healthy.

From my viewpoint, dairy farmers and their associations are always looking to the government for a new tool, spending millions of dollars each year lobbying the government for a new tool.

There is nothing wrong in looking for new tools. However, about 90 years ago, the agriculture industry was successful in lobbying Congress to pass, and the president to sign into law, a superior tool.

Since that legislation, the industry has successfully kept the tool available. In Capper-Volstead, dairy farmers have a tool that does not require any additional government expenditures or new legislation.

They have a tool that, if used, increases dairy-farmer income well beyond any tools currently being considered.

Dairy farmers and their cooperatives need to look beyond their individual desires and work together through marketing agencies in common to improve their income potential. The tool is there – it just needs to be used. PD

Calvin Covington is a retired dairy cooperative CEO and now does some farming, consulting, writing and public speaking.

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Calvin Covington

Retired Dairy Co-op Executive

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