Old MacDonald had a farm.
That’s what he called it: The E-I-E-I-O farm. Clearly Old MacDonald didn’t have much imagination (or was it a warped sense of humor?), but he did have enough business sense to see that there was a significant unmet demand for milk in his area. So he set up his farm as a dairy.
To do so, he set up a sort of cooperative with his neighbors. They agreed to buy milk from him at a rate related to the bottles used. Then he used the strength of those commitments to borrow the money to buy the cattle and equipment he needed to set up business.
At first things went swimmingly. All the neighbors who used the milk were very pleased with its abundance and quality, even if they didn’t care much for the physical presence of a dairy in their neighborhood. But the milk sold well, and the farm thrived.
In fact the milk was so popular other people started moving to the neighborhood, and demand for the milk grew. So Old MacDonald, with the approval of the co-op, which was now much larger itself, bought some new land, equipment, and cattle, and expanded his operations.
At some point–as so often happens with these ventures–something went awry. As more and more people came into the neighborhood, Old MacDonald started running out of room to expand his dairy. There were still a few places to expand, but the cost of getting the land was rising–as was the cost of appeasing the adjacent landowners. Old MacDonald was obliged to install a good deal of smell-mitigation equipment and erect a number of farmyard beautification measures that had not been required before.
Nor was his situation helped when the co-op decided that milk bottles–and for that matter the rest of the milk delivery system–should be decorative as well as functional. It was a matter of neighborhood pride, he was told, that the co-op’s milk bottles should look better than those of other neighborhoods. The customers also required half-gallon bottles instead of quart bottles, meaning more milk was consumed without an increase in the number of bottles.
All the while, more people came into the neighborhood, further increasing demand for his milk. Finally the inevitable happened: there was no more available land for expanding the dairy. Old MacDonald went to the Co-op and explained the situation. He could buy out some of the neighbors, and use their land to expand the dairy, but it would be expensive. In fact it would require an increase in the rate that the neighborhood paid for milk…..
The Co-op voted it down.
So Old MacDonald did the best he could to meet the growing demand with what he had. He toyed with the idea of buying milk directly from other dairies and was startled to discover that the other dairies had long since gone out of business, being unable to compete. But he met the demand; and if people noticed that the milk was sometimes a little watery, they didn’t say anything. Well, that’s not true: they did say something, frequently and loudly. But given the option of putting up with thinner milk or paying a higher rate, they drank the milk.
Meanwhile the price of feed was also rising, to say nothing of the delivery costs…or the costs of fancy little milk bottles.
Eventually Old MacDonald noticed that his supply problems weren’t due entirely to the rising population of the neighborhood. His cattle were in fact producing less milk. A trip to the veterinarian confirmed his worst fears: the cows were coming to the end of their productive lives and would soon have to be replaced entirely…along with the original equipment. And that would be expensive.
Old MacDonald went to the Co-op again and explained the situation. He pointed out that the increase in revenue was not keeping up with the increase in operating costs; and that to the already-substantial operating costs was going to be added the cost of a stock replacement program. The options were to pass a rate increase or make substantial reductions in, say, the decorative bottle program, the farmyard beautification program, and the smell-mitigation program.
The Co-op listened politely, then asked why they should be expected to pay more for milk that had seen serious declines in quality in the recent past.
Needless to say, the Co-op did not approve a rate increase.
The situation altered somewhat when a third-party milk vendor (let’s call him B. King) arrived and reached a secondary deal with the Co-op. Members would continue to buy their milk at the normal, bottle-related price; but for a premium they could tap into the higher-quality milk provided by the third-party vendor.
In theory, this seemed like a good idea. The people who wanted higher-quality could pay for it, while those who didn’t require top-of-the-line milk could continue paying the lower rates. Moreover, Old MacDonald could concentrate his resources (literally) and provide a slightly improved low-cost milk. In practice, this caused something of a stir. The people who didn’t buy Mr. King’s milk complained about getting an inferior product, and the people who did complained about being charged twice.
A motion very quickly went before the Co-op to cancel the contract with Mr. King.
So how does (or should) the story end? Will the deal with Mr. King be overthrown? Will the Co-op eventually get desperate enough to pass a rate increase? Will they let Old MacDonald cut out all the frills and go back to offering just plain milk? Will they decide that thin milk (but in really nice bottles) is okay with them? Or will enough people get fed up and move to other neighborhoods, so that the demand for milk eventually balances out to match the supply?
Discuss among yourselves….