Low milk prices don’t mean cheap retail prices

September 16th, 2016

From the fall of 2014 to the spring of 2016, the value of milk at the farm gate dropped 40 percent. Meanwhile, at the grocery store, the impact was much smaller. Whole milk dropped 16 percent in price while Cheddar cheese receded just 3 percent.

This gap in price realization was the foundation for modeling conducted by the USDA Economic Research Service that delved into the fluctuations of the two markets. The results indicated retail prices of some dairy products more closely mirrored farm-level pricing than others.

Specifically, fluid whole milk mimicked farm-level pricing most closely. In the ERS model, a one-month decline in farm value milk of 50 cents would be reflected in the store with a 23-cent price reduction within three months. Following the retail value out six months and one year, the retail price would be reduced 30 cents and 39 cents, respectively.

Some retail prices of dairy products more closely follow farm-level pricing than others.On the other hand, cheese production entails more processing, packaging, advertising, and nonmilk ingredients than fluid milk.These additions demand more of the retail dollar.

In 2014 for example, farmers received 61 percent of the retail dollar of whole milk while they only saw 39 percent of the retail dollar for cheese.

This difference accounts for the more complicated model necessary to understand how retail cheese prices react to fluctuating milk prices.

The report explained that retail cheese prices move relatively independently of farm-level milk prices, but an impact could be modeled if hypothetically cheese manufacturers were already preparing to change production levels.

In that case, a 50-cent drop in farm-level prices in a single month would drop the retail value of Cheddar cheese by 15 cents. In six months, that number would be 18 or 19 cents.

As a general observation, the report indicates that retail prices become less responsive as more processing occurs or as the product passes through more hands.

(c) Hoard’s Dairyman Intel 2016

Reprinted by permission from the August 29, 2016, Hoard’s Dairyman Intel.Copyright 2016 by W. D. Hoard and Sons Company, Fort Atkinson, Wisconsin

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