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Showcase CONCENTRATION ISSUES IN TODAY'S DAIRY INDUSTRY Hal Harris Clemson University Southern Dairy Conference Atlanta, GA February 2005

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CURRENT SITUATION Latest Studies, Dairy Processing USDA-ERS-1997 GAO-2001

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US MARKET SHARE, TOP FOUR COMPANIES 1992 1982 Fluid Milk 22 16 Butter 49 41 Cheese 42 34 Ice Cream 24 22 Source: ERS

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MARKET SHARE, TOP FOUR PROCESSORS, 1999 AND 1997 1999 National 22 - Atlanta 38 52 Dallas 85 79 Minneapolis 84 83 Denver 69 67 14 Markets 69 76 Source: GAO

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MY ESTIMATES, 2002-2003 Methodology: Top 50 Lists of Dairy Foods, Dairy Field, Hoards Dairyman, Compared to Industry Estimates of Total Sales in Sector

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Fluid Milk Sales, mil. $ Dean 8,120 Kroger 2,793 NDH-DFA 3,885 Prairie Farms 1,425 Total 16,223

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Cheese Sales, mil. $ Kraft 4,100 Land O' Lakes 2,900 Schreiber 2,000 Leprino 1,501 Total 10,501

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ADDITIONAL THOUGHTS: True Fluid Milk Top 4 Market Share Possibly 58-69 Percent

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Cheese Market is Highly Segmented

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CHEESE MARKET SEGMENTS Dominant Firms Supermarkets – Kraft Italian-Leprino LOL-Deli Schreiber-Fast Foods Kraft – real purchaser and in addition dealer

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Concentration in Butter is Also Very High Concentration in Ice Cream???

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Bigness Begets Bigness

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SUPERMARKETS!!! Around 70% of Foodstore Sales are Through Supermarkets: Annual Sales (2000) $484 bil. Essential Outlet for Dairy Sales

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THE BIG FOUR Current Sales (bil) Walmart 53 Kroger 51 Albertson 38 Safeway 35 Total 177

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Conclusion: The Top Four Account for 35% of Foodstore Sales, 51% of Supermarket Sales

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2000 Four Firm Concentration Reported by ERS to be 27.4% Since then Walmart Food Sales Have Increased from $22.9 Billion to %53 Billion

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Going Back in the Market Channel - Cooperatives Handle 86% of Marketings

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THE TOP 4, 2002 Bil. Lbs. Ranches DFA 35,108 14,329 Cal. Dairies 14,639 672 Land O'Lakes 12,185 4,610 NWDA 8,400 732 Source: Hoards

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MARKET SHARE Top Four 41% Top Eight 58%

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It abandons saying, as past studies & judgment skills let us know, neighborhood and territorial markets at all three levels of the market channel are considerably more focused.

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RECENT EVENTS Parmalait Bankruptcy (No. 25), No. 23 Hood Purchase of Crowley, Marigold Ahold (No. 5 Supermarket) on Sales Block DFA Purchase No. 2 Butter Firm

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Conclusion: Relevant Dairy Markets are Highly Concentrated and Concentration Levels are Increasing

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Should this Concern Us?

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The Answer: MAYBE!!!!

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THE THEORETICAL MODEL Structure Conduct Performance More Specifically: Concentrated Anticompetitive Poor Market Structure Conduct Performance

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In the 1960's & 70's, The Dairy Industry Was a Hotbed of Antitrust Activity Phase 1 : The National Dairies Phase 2 : Co-Ops

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Post Reagan: Very Little Aggressive Antitrust Activity Except Computers, Communications

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NATIONAL DAIRY COMPANIES, 1975 Fluid Sales (Mil.$) Kraft 2,280 Beatrice 1,374 Borden 925 Foremost 452 Carnation 813 Pet 312 Fairmont 218

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WHO BENEFITS, WHO LOSES FROM MARKET POWER? Effectiveness – Everybody Wins Gains May Be Wrested from the Bargaining Opponent Gains May Be Passed Along – Consumers Lose

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WHO BENEFITS, WHO LOSES FROM MARKET POWER? (cont.) Difficult to Separate Efficiency, Bargaining Gains Farmers No Longer at the Mercy of Processors Gains May Be Shifted Within the Sector

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FIVE LAWS OF Power Fills Any Vacuum in Human Organization Power is Invariably Personal Power is Based on a System of Ideas, Philosophy Source: Berle

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FIVE LAWS OF POWER (cont.) Power is Exercised Through, and Depends on, Institutions With Power Goes Responsibility Source: Berle

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IMPLICATIONS FOR FEDERAL, STATE Agencies Watchdog Role More Critical Need for Better Price Data Pooling Issues Regulator/Regulatee Interrelationships

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CONCLUSION " Lots of individuals had agonized over this issue (fixation), however no one had thought of quite a bit of an answer . . . corporate force was overwhelming to the point that no one had done quite a bit of anything by any means. What's more, Carol Loomis was not by any means beyond any doubt that it was terrible. In any case, it agitated her." Source: Tobias, Eastern Review