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Food Chain Integration and Fluid Milk Marketing

CED, ESCE, U.S. Department of Agriculture, Washington, DC 20250
University of Kentucky, Lexington 40506

ABSTRACT

Major structural changes in marketing are occurring with the integration of food chains into the processing and distribution of fluid milk. Thus, the objectives of this study were 1) to determine the extent of vertical integration by food chains and 2) to explore the implications of such for the dairy industry. The study was confined to the Southern Region. Response to a survey indicated that 60% of the food chains were involved in some type of vertical integration with 84% of these initiated during the past 15 yr. Lower cost and uniform merchandising were the most prominent reasons for having some type of central milk buying programs.

Vertical integration leads to increased market power of food chains and can affect both price and market structure. The actual vertical integration of food chains into fluid milk processing through ownership of processing facilities tends to increase the barriers to entry into a market. For processors, the barrier is the nonavailability of market outlets. For the food chain, the number of stores and ownership of processing facilities for fluid milk necessary to compete economically may be the barrier. A continuation of these structural trends can be expected.