Marketing and Pricing of Milk and Dairy Products in the United States By Ken Bailey Department of Agricultural Economics & Rural Sociology Penn State University Home || Table of Contents || Order the Book

Preface

If you listen to the radio one morning and wonder why the local price of corn changed, you only need to know two things: basis, or the variation in local prices to central market prices like those of the Chicago Board of Trade, and market supply and demand. You might add in market psychology and government programs as other factors that may also affect prices. But by and large it is market forces that clearly and publicly determine market prices for corn.

But it's not that simple with milk. Dairy farmers don't really know what determines their milk prices. The fact is milk prices are largely determined by federal policies and programs, transportation costs, pricing policies of cooperatives, and overall supply and demand forces for milk and dairy products. And you may also add in overorder premiums, Class I utilization, effectiveness of tariff-rate quotas, the Dairy Export Incentive Program, state and local inspection programs, and state price control regulations. Milk pricing in the United States is a complicated business.

Dairy is the most regulated and complicated agricultural industry in the United States. Part of the reason is obvious: milk is highly perishable and has the potential to carry food-borne disease. Intensive and effective inspection programs in each of the states have made our milk supply safe and reliable. Another reason is that milk pricing policies have evolved over time and have been shaped by both legislation and court cases.

The current foundation for milk pricing was created out of marketing conditions during the first four decades of this century. Cooperatives sprang up to assist dairy farmers in bargaining with large proprietary processors in the 1920s. Then the Great Depression resulted in tremendous economic devastation to farmers. Federal milk marketing orders and the dairy price support program were developed to ensure an adequate income level for farmers and a wholesome supply of milk to consumers. In the intervening years court cases, the interstate highway system, and improvements in milk production, processing, and transportation technology all affected the milk pricing system.

The objective of this book is to clearly explain the major factors affecting milk pricing in the United States. A comprehensive and systematic approach is used to explain the basics of milk marketing. Complex subjects are broken down to their simplest terms and clearly illustrated using real-world examples. Once these subjects are mastered, their interactions are explored. In this way, the reader will gain a comprehensive understanding of how market forces, government intervention, and institutions interact to determine milk marketing in the United States.

Other reasons why milk marketing in the United States is complex are due to government regulations and policies and the diversity and market interactions of an assortment of dairy products. A thorough understanding of this subject is currently outside the grasp of but a few individuals with years of highly specialized training. This text will change that because it provides a thorough and systematic treatment of the major factors that determine milk marketing.

This book was written for persons with no previous training in the marketing of milk and dairy products. While no formal training in economics is required to read and understand major portions of this book, some exposure at the undergraduate level will help the reader understand the theory and practice of milk marketing. This book is the single source for all that a person will need to know to have a detailed understanding of how milk is marketed and priced in the United States.

The first section of this book provides a basic overview of the U.S. milk industry, including information on the historical need for government intervention in the market, where and how milk is produced, and the demand and varied uses for processed dairy products.

Chapter 2 reviews supply and demand for milk. The production of milk is briefly explained, from farm production methods to regional shifts in production over time. Seasonality of milk production and its effect on milk marketing are also discussed. The second part of the chapter deals with demand for milk and dairy products. There are two basic uses of milk from dairy farmers: for higher-valued bottled milk and for manufacturing purposes. The chapter also discusses trends in the use of milk for various dairy products and seasonality of demand. The chapter

ends with a presentation of milk-equivalent conversions from pounds of dairy product to pounds of milk used for manufacturing.

Chapters 3, 4, and 5 present a brief review of major dairy products: fluid milk; soft manufactured dairy products such as yogurt, ice cream, and evaporated and condensed milk; and hard manufactured dairy products such as butter, cheese, and nonfat dry milk. This overview describes the properties of various dairy products, including their milk-equivalent conversions, industry standards of identification, consumption trends over time, and various end uses.

The second section of this book provides a detailed description of government policies and regulations and their effect on milk marketing and pricing in the United States. Each chapter provides a discussion of the origins and history of major policies such as dairy cooperative policies, federal milk marketing orders, the federal price support program, and local and state milk regulation and legislation. This is likely to be the most tedious section of the book, but it is essential to understanding milk marketing. Each chapter explains the origins and objectives for legislation and the mechanics of how each program works. In addition, detailed examples are given in order to provide a more thorough understanding.

Chapter 6 reviews the origins and functioning of federal milk marketing orders and clearly illustrates how they work. It provides a detailed discussion of classified pricing, pooling, calculation of blend prices, and how milk is marketed between orders. Chapter 7 analyzes the history of dairy cooperatives and their impact on milk marketing. Chapter 8 covers the federal dairy price support program and its relation to federal milk marketing orders. Chapter 9 discusses the history and development of local and state milk regulation, including sanitary milk regulations and state milk control and marketing orders.

The third section of this book focuses on the future of milk marketing in the United States, specifically international trade, and, in detail, discusses attempts at domestic and international policy reform.

Chapter 10 describes the international market for milk and dairy products. This chapter surveys the world market for dairy products, including major exporters and importers, U.S. import and export programs, and recent trade agreements such as the North American Free Trade Agreement and the Uruguay Round of GATT.

The last chapter summarizes milk marketing and pricing in the United States and presents an objective assessment of government regulation of the U.S. dairy industry. Debate on the 1995 Farm Bill clearly focused attention on deregulation. One of the barriers to deregulating the U.S. dairy industry has been a lack of understanding of the complexities of current dairy policies. It is the intent of this book to shed light on an extremely complex policy regime. This chapter sorts out the pros and cons of deregulation and assesses dairy policy for the twenty-first century.