Technically Efficient Movement Patterns and Manufacturing Plant Locations under Regionally Coordinated Milk Assembly

Abstract

The organization and subsequent marketing activities of regional dairy producer cooperatives in the United States have recently been the subject of public debate (Hudek, Hutt). The debate has centered on what role, if any, such regional organizations should be permitted in the assembly, movement, and processing of raw milk. To date, these public discussions have focused attention on what effect, if any, the regional dairy cooperatives have had on the level of raw milk prices. A related question within the context of these public sector concerns is how the activities of these regional organizations affect the technical operating efficiencies (i.e., the costs) involved in performing the raw milk assembly function. For the most part, this question has been ignored. It has been simply assumed that an atomized milk assembly system would also be technically efficient.The research reported in this paper is an attempt to determine the seasonal raw milk movement patterns and manufacturing plant locations that would minimize the combined costs of assembling all raw milk produced in a specific geographic region and processing the raw milk not delivered to bottling plants for fluid use into a manufactured product form. It is hypothesized that if (a) the economies of size in manufactured product processing are substantial relative to transportation costs, so that the optimal number of such plants" needed" within the region is small, and (h) the optimal movement patterns from production areas to all plants in the region are seasonal in nature, then cost minimization for the region can only be accomplished with a relatively high level of coordination in the handling of raw milk and within an organizational structure that allows individual producers to be indifferent as to the ultimate disposition of their production.The analysis is conducted within the southeastern region of the United States, roughly including the nine-state area east of the Mississippi River and extending south from Ohio and West Virginia. A regional dairy producer cooperative in the area makes ex ante commitments to deliver specified quantities of fluid eligible raw milk to the already existing bottling plants in the region. The raw milk WilliamT. Boehm is an assistant professor of agricultural economics and M. C. Conner is a professor of agricultural marketing at Virginia Polytechnic Institute and State University. produced but not sold for use in the fluid form is then processed into cheese, butter, or powdered milk by either the cooperative or proprietary handlers. Thus, taking as given the number, size, and location of the fluid bottling plants, the research problem becomes one of determining the seasonal movements for all milk and the number, size, and location of "hard-product" manufacturing plants that will minimize movement and processing costs. Obviously, the size and location of the manufacturing plants cannot be determined without simultaneously considering optimal movement patterns to the fluid bottling plants. Research Procedures and DataMathema...

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