Critical Success Factors

in a Competitive Dairy Market

MICHAEL BOEHLJE* and WILLIAM SCHIEK
*Department of Agricultural Economics, Purdue University,
1145 Krannert, West Lafayette, IN 47907-1145
Dairy Institute of California, 1127 11th Street, Suite 718, Sacramento 95814

ABSTRACT
Dramatic changes are occurring in production
agriculture, particularly in livestock production. In
this rapidly changing and increasingly competitive
environment, successful production units utilize and
embrace modern manufacturing concepts and principles to improve their competitive position and increase their efficiency and productivity. These concepts have not replaced the well-recognized concepts
of commodity production that were used in the past,
such as an emphasis on cost control through a combination of increased size, improved efficiency, and
adoption of the latest technology in all phases of the
production process. However, the traditional techniques of obtaining efficiency, reducing cost, and increasing margins are no longer sufficient to ensure
successful agricultural production. The manufacturing concepts discussed in this paper suggest additional strategies that are necessary for success in
modern agricultural production.
( Key words: industrialization, manufacturing, integrated systems, success factors)
Abbreviation key: r = recombinant.
INTRODUCTION
Production agriculture, particularly livestock
production, is experiencing dramatic change, much of
which is driven by the trends summarized in Figure 1
( 4 ) and in the literature (1, 2, 3, 4, 5, 6, 7, 8). In this
rapidly changing and increasingly competitive environment, successful production units utilize and
embrace modern manufacturing concepts and principles to improve their competitive position and increase efficiency and productivity. These concepts and
principles do not replace the well-recognized concepts
of commodity production that emphasize cost control
through increased size, improved efficiency, and adoption of the latest technology in all phases of the

Received July 15, 1996.

Accepted January 26, 1998.
1998 J Dairy Sci 81:17531761

production process. The manufacturing concepts discussed here suggest additional strategies that are
necessary for success in modern agricultural production.
RESULTS AND DISCUSSION
The Manufacturing Mentality
Food products versus commodities. The transition of agriculture from a commodity industry to one
of differentiated products, especially when combined
with a focus on the consumer and a manufacturing
approach to production, indicates a dramatic
paradigm shift in the industry ( 7 ) . Instead of producing a product and then trying to sell it, the current
strategy increasingly is to first ask consumers what
they want as attributes in food products and then
creating or manufacturing those attributes in the
products. Such an approach may require changes in
how the raw material is produced and in what is not
contained (i.e., chemical or other residues) as well as
what is contained. This manufacturing mentality has
become more predominant and has the potential to be
increasingly successful as more is learned about the
biological production process and as the capacity is
improved to control and manipulate that process
through genetics, nutrition, building and facility design, and health management programs.
With respect to the dairy industry, milk producers
will increasingly be called upon to produce milk of
varying composition for specific food uses. Obviously,
producers shipping to cheese plants will need to be
concerned about delivering milk with high casein contents. For producers shipping to ice cream plants, fat
may be the most important component, but, for those
shipping to fluid processing plants, delivering milk
with low bacterial counts may be paramount. The
overall theme is that producers must consider the
final market for the products made from the milk
they produce and make decisions on the farm with a
view toward that market.
Systemization and routinization. The predominant characteristics of the manufacturing

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Internationalization

Greater Diversity

Greater reliance upon international trade and foreign comGreater diversity in farm size, volume, efficiency, enterprise
modity markets, substantial foreign sourcing of agriculture inspecialization, financial performance, managerial ability, and
puts, globalization of financial markets, and loss of United
production technology, which results in increased focus on marStates dominance in agriculture research and development.
ket segments and niches and more potential conflicts between
competing segments of agriculture.
The Restructuring of Farm and Agribusiness Firms

New Financing Options

Mergers and consolidations in input supply, production and

processing industries; restructuring of farm operations (e.g.,
downsizing, part-time farming, and owner-operators becoming
renters); increased contract production and greater vertical
integration of production processes; and more diversified marketing and financial strategies.

Increased use of alternatives to debt (leasing, for example) and

modified forms of debt such as adjustable term loans. Greater
involvement in US agriculture by international financial institutions.

Consumer-Driven Production

Strategic Planning

Consumers increasingly expect agricultural producers to meet

their preferences regarding taste, texture, color, nutritional
characteristics, and packaging and processing methods.

Increased long-term strategic planning. Mapping responses to a

wide variety of long-term future occurrences. Planning for alternative business scenarios.

New Technology

Environmental Importance

Further development and adoption of biotechnology and information technology. Ideas and innovation replacing strict reliance on mechanical technology and physical labor.

Heightened interest in sustainable agriculture as well as increased state and federal regulation in the areas of water quality and soil erosion. Incentives to encourage environmentally
sound farming practices.

Lower Production Costs

Changing Public Policies

Lower costs attributable to lower prices and greater efficiency

in the use of both purchased inputs (e.g., fertilizers and
chemicals) and contributed inputs (e.g., labor and facilities).

Present and future policy debate likely to influence agriculture

substantially; international trade policy; government standards
on food safety and quality; commodity price support policy;
animal rights and animal welfare issues; and environmental issues.

Figure 1. Megatrends affecting agriculture ( 4 ) .

process include a movement toward systems and routines. With increased understanding and ability to
control the biological production process, it becomes
increasingly possible to routinize, as tasks become
more programmable. Routines generally foster more
efficient use of facilities and personnel and require
less managerial oversight and lower overhead. Hourly
work schedules that identify specific tasks to be done
at specific times on specific days in the modern dairy
operation are examples of the systems and routines in
modern livestock production. In essence, agricultural
production is becoming more of a science and less of
an art.
In the dairy industry, there currently exist a handful of producers who have taken this view of their
dairy farming operations. For these operators, dairy
farming is a production system, not a craft or art
form. These farmers have replicated their operations
not just in their home region, but in other areas of the
country as well. This type of business organization
appears to be growing, particularly in parts of the
Southwest.
Specialization. Modern production systems also
require specialization, not only with respect to busiJournal of Dairy Science Vol. 81, No. 6, 1998

ness venture and focus but also with respect to individual employee tasks or function. As more of the
output of the swine, dairy, beef, and poultry industries is being produced by larger scale, specialized
units, employees within these units are becoming
more specialized in their tasks or functions; for example, some are focused only on breeding, some on feeding, and some on health maintenance. This specialization of function of personnel as well as business focus
of the firm again is increasingly feasible because of
better understanding and control of the biological
process.
In some parts of the country, particularly Florida
and the western states, the raising of grain and concentrate feed, the growing of forages, and the raising
of replacement stock each have emerged as separate
business enterprises often with separate ownership.
Areas where this type of specialization has occurred
seem to be garnering a larger share of national
production while areas where traditional dairy farming combined with feed and heifer raising is practiced
are losing market share. In the future, specialization
could take on another dimension, as dairy farmers
cater to one business segment or another. For exam-

SYMPOSIUM: UNITED STATES DAIRY INDUSTRY

ple, some farms will concentrate on producing for and

selling to cheese plants exclusively, and others will
service only fluid processing plants. This type of
specialization is a natural outgrowth of the different
needs for raw products of the various customer
groups.
Scheduling and utilization. A further implication of the manufacturing paradigm in agricultural
production is increased emphasis on facility utilization, flow scheduling, and process control. In the past,
the variability associated with the lagged dynamics of
output response to current and expected prices and
the biological production processes has made facility
use, scheduling, and process control difficult if not
impossible. Many production units have in essence
maintained excess plant capacity as one means of
accommodating the uncertainty of the output of the
biological production process. But again, as a result of
the increased ability to predict and control that
process, facility use can be more accurately predicted
and controlled, and process control to improve efficiency and reduce cost is more applicable and useful
than in the past.
Of course, with respect to scheduling and utilization, the biggest problem in the dairy industry is the
seasonality of milk production. Adequate processing
capacity must be maintained to handle milk during
the peak part of the season, but plants are often idle
during autumn and winter months. This excess capacity adds substantial system costs, which are paid for
by dairy producers, processors, and ultimately consumers. As milk producers enter into coordinated arrangements with processors, it will be more likely
that financial incentives will exist for producers to
use all means possible to ensure continual, even
production throughout the year by staggering
freshening times and employing selective use of
recombinant ( r) bST. Pursuing a more level production pattern is costly to dairy producers, and current
arms-length marketing arrangements provide little or
no reward for such activities.
A Systems Approach
Systems process flow. The manufacturing mentality places increasing emphasis on the entire value
chain from raw materials supplier to end user. This
system focus, rather than stage or segment focus,
reduces the chances for suboptimization within a
stage or sector and for dead weight losses because
stages are not well matched in terms of product flow,
characteristics, quality, or other critical attributes.
Matching milk production capacity to processing
plant capacity is but one example in dairy production.

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Dead weight losses can be particularly large in biological production processes because many attributes
naturally vary widely because of variation in genetic
and other inputs as well as growing conditions. Thus,
the potential exists for a very high payoff if manufacturing processes can be used to reduce the dead
weight losses in the system.
Systems cost. Although cost control is critical in
any production system, a manufacturing approach
that is focused on end user products recognizes total
costs for production and distribution systems as being
more critical than the cost at each stage of the value
chain. And, as more resources are out-sourced, the
cost structure of the business changes, and a higher
proportion of the cost is variable. With this changing
proportion of fixed and variable cost, each stage becomes more responsive to the changing demands of
the end user and to competitive pressures. Because
the short-term costs that influence production adjustment decisions are variable, the smaller the proportion is of variable costs to total costs, the more prices
must decline before a firm reduces output. Consequently, firms with a high proportion of fixed costs
are quite lethargic in adjusting to changes in market
conditions, and conversely, firms with a higher
proportion of variable costs are more responsive to
changing market conditions.
In the US dairy industry, the contrast between
operations with high fixed costs and those with relatively low fixed costs can be illustrated by comparing
the milk production systems in place in the Midwest
and in the Southwest. Traditional dairy operations,
where feed and forage production is a large part of the
enterprise (the Midwest), have considerable capital
tied up in planting and harvesting equipment and, in
many cases, feed storage. The colder climate in the
Midwest also necessitates a greater investment in
buildings to shelter animals and equipment. Dairy
drylot operations in the Southwest have a larger
proportion of their total costs in purchased feed and
labor. Consequently, output in western and southwestern operations is more responsive to changing
market conditions.
Input packages. As the capacity increases to control and understand the biological process through
biotechnology and genetic engineering techniques,
producers will be more capable of developing optimal
input combinations that match nutritional and biological attributes to obtain the optimum quality and
characteristics of output. Livestock genetics are being
matched to feed ingredient genetics to obtain the
proper ration and nutrient contents to produce the
most efficient production system as well as specific
animal product attributes. In this situation, the
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strategy of the past, by which producers could buy

feed or nutritional inputs from one firm and genetic
material from a second, may become increasingly
difficult. In some cases, the producer will purchase
prespecified input packages that have been optimized
in biological and chemical characteristics; in other
cases, the producer will be instructed that certain
nutritional and genetic inputs respond better when
used together or that performance may be suboptimal
if used in other than the recommended combinations.
This strategy of matched inputs has the risk of
reduced flexibility and response if supplies of an input
decrease or prices increase.
Companies such as Monsanto, which markets a
form of rbST, may find it advantageous to bundle feed
additives, animal health products, and management
plans for herds and individual animals in order to
ensure optimal performance of their products.
Producers using this and similar technologies will
find it necessary to purchase the entire input bundle,
rather than putting together feeds and animal health
products from separate suppliers, in order to get the
kind of performance that justifies the investment in
the technology.
Separation and Realignment
Separation of production stages. The old
paradigm in production agriculture has been to combine various stages of production within one firmfor
example, to combine in swine production the breeding, gestation, farrowing, nursery, growing, and
finishing activities in one firm at one location and,
furthermore, to integrate these activities with feed
production and processing. The new paradigm is geographic and stage separation of many of these stages
of production. In dairy production, milking is increasingly separated from production of replacement heifers, and feed production is separated from milking
and breeding activities. The advantages of this separation are not only economies of scale and specialization of both human and capital resources, but also
disease control and improved herd health. A further
dimension of this separation is in the ownership and
operation of the resources. More assets in production
agriculture are being out-sourced; for example, 41% of
the farm land today is owned by a nonoperator compared with 22% in 1945 ( 8 ) . Separation of the various stages of production does not necessarily imply
separate firms, although stage and geographic separation may facilitate separation of ownership as well.
Geographic and stage separation, in turn, frequently
implies larger scale and more specialized capital,
labor, and management resources at each individual
Journal of Dairy Science Vol. 81, No. 6, 1998

plant site or facility location. The implications of

separation on flexibility are unclear. More specialization in resource use decreases flexibility, but participation in only one stage may increase the options for
negotiating with other partners in other systems if
there are other systems in the market.
Partners and alliances. At the same time that
geographic and stage separation is occurring, various
forms of alliances are being formed. In the traditional
approach to agricultural production, an independent
producer purchases inputs and sells products through
various market mechanisms to other independent
businessmen. Increasingly, producers form various
types of partnerships with other resource suppliers to
expand volume with limited capital outlay. In
livestock production, this phenomenon is occurring
through contracting arrangements; a dairy operator
may own the milking facilities but contract the feed
production and replacement heifer growing phases. In
essence, the dairy producer leverages volume by investing his funds in only part of the total fixed assets
needed to produce milk while maintaining a high
degree of control of the other phases through the
specification of the growing conditions. The critical
dimension of such partnerships or alliances is that
more resources and services are out-sourced if that is
a less expensive technique for obtaining production
inputs, and more linkages up the value chain to the
end user are used to capture value in additional
stages of the chain ( 3 ) .
Negotiated Coordination
Open access markets. Production agriculture has
traditionally focused primarily on commodity
products with coordination through impersonal open
access markets. The increased specificity in requirements for raw materials combined with the potential
for producing specific attributes in those raw materials is transforming part of the agricultural market to
a differentiated product market rather than a commodity product market. The need for greater diversity, more exacting quality control, and flow control
will tax the ability of open access markets to coordinate production and processing effectively. Open
access markets increasingly encounter difficulty in
conveying full information concerning attributes
(e.g., quantity, quality, and timing) of a product and
characteristics (including services) of a transaction.
When open markets fail to achieve the needed coordination, other options, such as contracts, integration,
or joint ventures, will be used (5, 6).
Currently, processors have the ability to purchase
open market loads of raw or pasteurized milk from

SYMPOSIUM: UNITED STATES DAIRY INDUSTRY

cooperatives. There is no guarantee, however, that

this milk has the attributes desired by the processor,
which, in a world of generic commodities, would not
be an issue because the processor would have no other
option for obtaining the desired raw materials.
However, increasingly, not all milk is equal for a
given end use. As consumers and processors begin to
demand milk with special attributes, such as high
casein contents, extra low somatic cell counts, high
lactose contents, or from cows that have not been
treated with rbST, open markets increasingly are
woefully inadequate mechanisms. The options available to the processor are to develop its own shippers by
forming partnerships directly with selected milk
producers or with a dairy cooperative that will deliver
milk with the desired attributes. In either case, the
system requires more coordination than does the spot
market.
Information flow. Related to the difficulty of open
markets to convey proper information is the speed of
information flow and the rate of adoption with different coordination mechanisms. In general, negotiated
coordination results in more rapid transmission of
information among the various economic stages and,
consequently, enhanced ability of the system to adjust
to changing consumer demands, economic conditions,
or technological improvements. The ability of the
production and distribution system to be more responsive and to adjust rapidly to changing conditions is
increasingly important because of the increased rate
of change in economic and social systems worldwide.
The ability to respond quickly to economic changes
is critical to maintain profit margins and to extract
profits from innovation. Quick recognition of erroneous decisions, followed by appropriate adjustments
and corrections, are essential to survival and success.
Market coordination of systems characterized by biological lags cannot respond to changing conditions as
quickly as an integrated or contract coordinated system.
The response at one stage can be initiated only
after price signals the need for change, and the
change in quantity or quality is realized only after a
full production cycle. By their nature, negotiated coordination systems require more frequent and direct
communication between the decision makers at each
stage on a wider variety of product and service
characteristics than is typically possible with more
traditional open markets. Thus, the improved information flows and more rapid adoption and adjustment allow negotiated coordination systems to function more effectively in rapidly changing markets.
These arguments suggest that traditional open
commodity markets can function quite effectively and

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efficiently when specific attributes are not demanded,

when supplies are fully adequate and can be obtained
from various sources, and when information flow between the various stages is minimal. With deviation
from these conditionswhich is increasingly the case
with more specificity in raw materials, information
flows, and fewer potential sources of acceptable
suppliesvarious forms of negotiated coordination
systems become more effective and necessary for efficient functioning of the production and distribution
system.
In the dairy industry, coordinated systems are superior at directing high casein milk to cheese plants
where it is most useful. Coordination also is superior
at directing milk with low somatic cell counts to fluid
processing plants where it can be part of the process
of extending bottled milk shelf-life. Coordinated systems will also be better at identifying and addressing
problems created by antibiotic residues in milk and
will make adoption of HACCP (hazards analysis critical control point) systems more feasible.
Risk
Sources and strategies. Risk has been a
hallmark of the agricultural sector, and the industrialization of agriculture is both a result of the business
strategies to reduce risk and has implications for
future strategies to reduce risk. One risk is that of
prices of inputs or products. A common business
strategy is to reduce the risk of high input prices by
contracting for supplies. A related strategy is to contract product sales. Some firms reduce price risks by
vertically integrating into the input supply or product
distribution channels. These coordination methods attempt to reduce the impact of market fluctuations
that are part of the open market pricing system.
A second source of risk is related to quantity and
quality features. Food packaging and processing unit
costs have become very sensitive to operating at full
plant capacity; thus, flow scheduling is critical to
being cost competitive. Matching the physical capacity of various stages (for example, milk supplies with
processing plant capacity) is critical to the overall
efficiency of the system. This coordination may be
more difficult to attain in open markets. Furthermore, some food distribution channels may require
particular quality characteristics that may not be
available in predictable quantities in open markets.
The coordination that is needed to ensure both quality and quantity for efficient operations can be
achieved through contracts, ownership of more than
one stage, joint ventures, or similar arrangements in
the food production and distribution chain.
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With respect to attributes such as protein content

and bacteria content (somatic cells), regulated pricing structures can be adapted to give economic signals
to appropriate parties, but regulation is slow to
respond to changing market conditions. Third-party
relationships can also present problems. For example,
dairy cooperatives often have difficulty delivering
milk with specific attributes because members who
produce milk that does not have these attributes are
hesitant to support economic rewards to producers
who do produce such milk.
A third source or type of risk in the food chain that
has become more serious in recent years is that of the
safety and health risk in food production. This risk
has two dimensions, the health risk from food-borne
disease and the risk for pollution of water, air, and
land resources during the food production processes.
These risks can result in significant direct costs and
liability exposure, not only for the responsible firm in
the food chain, but also for firms that supply related
inputs and purchase products from the responsible
firm, such as in the case of strict (joint and severable) environmental liability related to chemical use.
Thus, system coordination to reduce or control these
risks may be in part a response to the broad sweep of
laws pertaining to product and environmental liabilities.
With respect to food-borne disease, the structural
changes in the industry are making these problems
easier to identify and solve. For example, if an ice
cream manufacturer detects an antibiotic residue in
its product, the problem will be easier to trace and
solve if the manufacturer has contracts directly with
four large dairy farms for milk supply than if it
purchases from a cooperative that commingles milk
from 6000 producers. With respect to environmental
risk, the increased scale of dairy farming has increased the likelihood of groundwater contamination
from runoff because of higher concentrations of
animals in small spaces, but these larger enterprises
are probably more able to manage waste from the
dairy operation, as well as to invest in the necessary
equipment to handle and process dairy waste. Large
dairy farms have even greater advantages in managing these problems to the extent that they receive
assistance in quality control and waste management
from their partners in food processing.
Relationship risk. The expanding use of contractual and other forms of negotiation-based linkages
between the various stages of the agricultural production and distribution system, and the decline in impersonal market-based transactions, will result in
price risk being replaced by relationship or contracJournal of Dairy Science Vol. 81, No. 6, 1998

tual risk for many agribusiness firms. At a minimum,

the shift from impersonal open markets to
negotiation-based closed markets will have an impact
upon the organizations that use the risk allocation
system offered by the futures and commodities exchanges and, possibly, the product that is traded in
those exchanges. Alternatively, the volume of activity
may be changed to make exchanges less efficient and
effective in risk allocation. This shift may eliminate
the usefulness of exchanges completely, as is the case
for the production of fruits, vegetables, and poultry.
Niche markets. The food and industrial use markets for agricultural commodities are increasingly
characterized as segmented or niche markets that can
appear and disappear rapidly. This phenomenon of
market volatility (i.e., markets developing and then
disappearing literally within weeks or months) does
not characterize the generic commodity markets. For
many agribusiness firms that are in the food processing and distribution business, the risk of changing
consumer preferences or a food safety scare may be a
much more critical and important risk to manage
than price or availability of raw materials. One reason for a contractual arrangement to obtain raw
materials is to reduce risks from price, availability,
and food safety from chemicals while simultaneously
obtaining the attributes needed in the final product
from the specific attribute raw material. This technique for strategically managing exposure to multiple
risks is likely to become increasingly important in the
industrialized agriculture of the future at the expense
of using futures exchanges to manage the single
dimension of price risk exposure.
In the dairy industry, organic dairy products and
products made with milk from cows that were not
treated with rbST are examples of niche markets.
Although these markets may not appear and then
disappear overnight, their size and relative importance may wax and wane as information regarding
the benefits of consuming organic or natural foods
appears in the media.
The Role of Information
An increasing role. Although numerous forces
and drivers contribute to the structural changes that
are occurring in agriculture, information and
knowledge are significant. As in other industries
characterized by negotiated or personal linkages,
those individuals with unique and accurate information and knowledge have increasing power and control in the agricultural production system. With
power and control comes the capacity to garner profits
from and transfer risk to others with less power, as

SYMPOSIUM: UNITED STATES DAIRY INDUSTRY

well as to influence the rate of technological and

institutional changes in the industry.
The role of knowledge and information in obtaining
control, increasing profits, and transferring risk in
the agricultural sector is increasing for two fundamental reasons. First, the manufacture of food and
industrial products has become an increasingly
sophisticated and complex business, especially when
contrasted with commodity production as in the past.
Because of this increased complexity, those individuals who have more knowledge and information about
the detailed processes and about how to combine
those processes in a total system (i.e., the value chain
approach) will have a comparative advantage. The
second development is the dramatic growth in
knowledge of the chemical, biological, and physical
processes involved in agricultural production. This
vast expansion in knowledge and understanding
means that those who can sort through that
knowledge and put it to work in a practical context
have a further comparative advantage. Thus, the role
of knowledge and information in achieving success in
the agricultural industry is more important today
than ever before.
Technology has developed and is continuing to develop in the dairy industry whereby it is possible to
fractionate milk into its constituent components. At
the same time, food and industrial uses are developing for these components, thereby increasing the demand for milk with high levels of one or another of
these constituents. Examples include casein in
cheese, lactose for use in processed foods, and serum
(noncasein) milk proteins that can be used to fortify
a variety of foods. One of the difficulties in developing
a system that transmits signals to producers in a way
that rewards those who produce milk with high
specific component content is the ability to measure
the components in the milk coming off the farm. New
methods that use infrared measuring devices are
making it easier to measure components in raw milk.
Thus, technology and the information made available
through the use of that technology are driving the
flow of information back to producers that will allow
them to make changes in management and herd
genetics to favor the production of one component or
another.
Access to information. The logical question, then,
for individuals in the manufacturing chain for food
and industrial products is how to obtain access to
knowledge and information. Historically, particularly
for the independent producers in the farm sector,
knowledge and information have been obtained from
public sources and from sources such as genetics and
chemical companies, feed companies, machinery and

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equipment manufacturers, packers, and processors.

In general, independent producers have obtained
knowledge and information from external sources in
much the same fashion as they have contracted physical and financial resources and inputs. In contrast,
ownership or contract-coordinated production and distribution systems receive knowledge and information
from a combination of internal and external sources.
Many of these firms or alliances of firms have an
internal research and development staff to enhance
the knowledge and information base. The knowledge
obtained is proprietary and not shared outside the
firm or alliance; it is a source of strategic competitive
advantage.
Integrated systems. The research and development activities in coordinated systems are more focused on the efficiency and effectiveness of the total
system than on individual components of that system
and are focused on integration of areas (e.g., nutrition, genetics, building and equipment design, health
and disease control programs, and marketing
strategy) than on these areas or topics separately. In
addition to more effective research and development,
such alliances or integrated firms have the capacity to
implement technological breakthroughs more rapidly
over a larger volume of output to obtain larger profits
as an innovator. In the case of a defective new technology, ownership or contract-coordinated systems
generally have more monitoring and control procedures in place and can consequently detect deteriorating performance earlier and make adjustments more
quickly than is possible with a system with impersonal market coordination.
With respect to the previous example of milk fractionation and milk component marketing, it is likely
that some particular combination of technologies and
management practices will be necessary to obtain
optimal product and component yields from raw milk.
For an individual processor and its milk suppliers,
there is obviously an advantage to retaining information about the methods used to optimize milk component delivery as privileged. Benefits in terms of
higher profits on the sale of components will accrue to
the participants in this coordinated system, and those
firms that are not privy to this information will not be
as successful. Again, this arrangement introduces an
element of risk if one of the raw milk producers
breaks its relationships with the food processor and
begins supplying a competing firm, thereby transferring the knowledge and information that had previously been privileged.
As knowledge and information become more important as sources of strategic competitive advantage,
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tion will be more successful than those who do not.

Given the declining public sector funding for research
and development and for the dissemination of
knowledge and information, the expanded capacity of
integrated systems to generate proprietary knowledge
and technology and to adapt it rapidly enables the
participants in that system to capture and create
innovator profits while simultaneously increasing
control and reducing risk. This ability provides a
formidable advantage to this coordinated production
system over the system of independent stages and
decision making.
This discussion of integrated systems would appear
to contradict our earlier discussion about the need for
specialization and separation of business enterprises.
However, these two strategies are not mutually exclusive. It is possible for a firm to integrate or coordinate
some activities (if the benefits are there) while outsourcing other activities for which there is little or no
benefit to integration.
Value of information. As information has become
increasingly context specific and decision focused, it
has become more valuable. And, as information becomes more valuable, the incentive increases for the
private sector to provide that information and capture
some of that value. Consequently, the growth in the
private sector of data gathering and information service firms is not surprising given the growing value of
information.
This increased value of information and the expanding role of the private sector in providing it
increases the importance of the issue of the
proprietary nature of and access to data and information. With the increasing value of information and its
use as a strategic competitive advantage, data and
information are less freely exchanged, and the issue
of ownership becomes critical. For example, with
respect to site-specific information about soil characteristics, who owns itthe grower who paid for it, or
the service company that gathered it? Can a grower
obtain this information from one company, such as a
fertilizer or chemical dealer, and then provide it to a
competitor who might have a lower price on fertilizer
or chemical products? Does it make a difference if the
grower pays for the service, how much is paid, or
whether the information service is provided as part of
a bundled package with the product? If coordinated
production systems have the potential to obtain superior information, how can a producer who is not
part of that system obtain access to similar information to remain competitive? Does a producer need to
become part of the system to obtain access to the
latest information needed to stay competitive?
Journal of Dairy Science Vol. 81, No. 6, 1998

Public policy. In a broader context, the public

policy issues of intellectual property rights and the
role of the public sector in making information a
public good that is broadly available to all potential
users become critical (1, 2). The debate about intellectual property rights has historically focused
more on research and development and new innovations that are protectable under patent or copyright
law. Particularly in agriculture, the public sector has
played a major role in the research and development
activity and thus provided broad access to new technology and ideas. In this context, part of the public
purpose was developing and disseminating new ideas
in a sufficiently broad fashion so that a wide spectrum of users benefited and so that individual firms
could not restrict access to the new idea or capture
the value associated with it. The role of the public
sector was that of leveling the playing field, so that
all participants had the same access to new ideas and
information.
As increasingly more of the research and development and, thus, more of the new ideas come from
private sector firms, and, as more of the information
dissemination system becomes privatized, individual
firms have more potential to capture value at the
expense of end users. Those firms have the potential
to restrict access to new ideas and information to
particular users, thus favoring some producers and
excluding others from the ideas, technology, or information necessary for them to be competitive. The
concepts of intellectual property rights, including patent and copyright law as applied to agriculture, were
developed in an era of domestic markets and national
firms; a relatively large public sector system for
research, development, and information dissemination; and a limited role of information as a critical
resource. These concepts should be reevaluated in the
current context of global markets and multinational
business firms; the shrinking role of the public sector
in research and development and disseminating information; and the increasing importance of information
compared with other resources as a source of strategic
competitive advantage.
CONCLUSIONS
The structural changes that are expected to occur
within the agricultural sector over the next decade
will be profound. These changes will include both
technological and institutional innovations. Production agriculture has readily accepted technological
innovations; for example, farmers have generally
been eager to try new hybrids, new chemicals, new
tillage practices, new feeding regimens, and new

SYMPOSIUM: UNITED STATES DAIRY INDUSTRY

equipment. Institutional innovations or new ways of

doing business have met with more resistance, possibly because they change relationships and frequently
substitute interdependence for independence in the
decision-making process. But the economic benefits of
the combined technological and institutional innovations will likely result in a rapid movement of the
livestock sectors followed by grain sectors to an industrial model of production and distribution.
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Journal of Dairy Science Vol. 81, No. 6, 1998