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Dairy Web News September 30, 2004 Department of Agricultural Economics and Rural Sociology 210-A CONTACT: Ken Bailey Associate Professor of Dairy Markets and Policy (814) 863-8649 MILK PRICES SLOWLY EASING The
average price of a gallon of whole milk across major The
reason for the price rise was due to a shortage of milk in the market
place. “Fewer cows, less milk from each
cow and higher feed costs pushed up the market value of milk” said Bailey. During the period January through June fluid milk
processors paid farmers 42 percent more for their milk. This is referred to as the farm cost of milk. The cost of packaged milk from processing all
the way through to the retail grocery store, called the farm-to-retail margin,
actually went down 3.3 percent during this period. The farm cost of milk plus the farm-to-retail
margin equals the retail price of milk. The
price of whole milk for major Consumers
did not like these record high retail prices for milk. According to data from the USDA, consumption
for fluid milk fell 2.9 percent during the period April – June of 2004 relative
to a year ago. “That’s way up from the
normal rate of 0.5 percent decline” said Bailey. But
what goes up must come down. Farmers
have seen their price for fluid milk fall 28 percent from an average $1.99 per
gallon in June to $1.43 per gallon in August.
At the same time, the farm-to-retail margin for milk rose 18 percent
between June and August from $1.58 per gallon to $1.86 per gallon. The impact of these two changes on the retail
price of milk was a very modest decline of 7.8 percent to $3.30 per gallon in
August. But
if lower farm costs for milk have not yet been passed on to consumers, doesn’t
that imply that retailers and processors are ripping off consumers? Not really, says Bailey
examined the fluid market since 2001 and noted that processors and retailers
have lowered their margins when farm costs of milk have sky rocketed, and then
raised their margins temporarily when the farm cost of milk falls. It usually takes a few months, but consumers
eventually get the benefit of lower retail prices when farm costs for milk
remain low. Some
expect there should be a one-to-one relationship between the farm cost of milk
and the retail price of milk. If one
goes up, so should the other, and vice versa.
But Bailey explains that if we had such an inflexible system, consumers
would see dramatic volatility in retail prices.
“Consumers don’t like to see their milk prices rising and falling
erratically every time they go shopping” Bailey says. Another
common mistake is that some people assume the government sets the retail price
of milk. The federal government is
involved at the farm and processor level, and some state laws do affect retail
prices. However, for the most part, the
market sets the retail price of milk in the The
good news for consumers is that lower prices for milk are on the way. Bailey used a Bailey
observed that the retail price of a gallon of whole milk fluctuated between
$2.50 and $3.00 per gallon over the period 1990-2003. “Milk prices have not gone up with the rate
of inflation. Outside of this year, milk
prices have remained relatively stable.
That makes it a good value for consumers.” Bailey
has other analysis on the dairy markets in his latest report, “Dairy Outlook”
online at:
http://dairyoutlook.aers.psu.edu/reports/Pub2004/DairyOutlookFall04.pdf
/ Charts and Data:
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