An analysis of bargaining power for milk cooperatives and milk processors in Florida

Abstract

The Florida dairy market has a few fluid milk processors and many dairy farmers. The dairy farmers are represented in negotiation with the processors by a cooperative. This research builds a theoretical model of bargaining between the processors and a cooperative. The model is applied to the Florida dairy market to examine price negotiations between Florida milk processors and a dairy cooperative. An expectation maximization (EM) algorithm along with maximum likelihood estimation is used to estimate the econometric disequilibrium model with time series data for the period of October 1998 to May 2009. The results show that the class I price set by the Federal Milk Marketing Order is the major factor influencing the cooperative’s supply reservation price. Negotiated quantity and production seasonality affect the processors’ demand reservation price. The processors appear to be more patient and have higher average bargaining power (0.8804) than the cooperative (0.1196). The highest (lowest) bargaining power for the cooperative (processors) occurred in 2008 and the lowest (highest) bargaining power for the cooperative (processors) occurred in 2001.

Keywords:

• bargaining power
• milk cooperatives and processors
• expectation maximization
• bilateral model

JEL Classification:

• L13
• Q13

Notes

¹ Oczkowski (1999) suggests that in addition to the factors affecting cost for SDC and net revenue for processors, other price variables can be considered.

² See http://www.southeastmilk.org/v2/about/.

³ To ensure convergence to a global maxima, the model was estimated using a large number of starting values, which resulted in almost identical parameter estimates.

⁴ The SEs are computed from the variance–covariance matrix of residuals coming out of the expectation maximization algorithm.