High retail milk prices puzzle farmers

UNIVERSITY PARK, Pa. – Dairy farmers are noticing strong retail prices for many dairy products and wondering why the increases aren’t showing up in their milk checks from wholesalers.

A milk marketing specialist in Penn State’s College of Agricultural Sciences said while there are extenuating circumstances, the unusual dairy market raises tough questions for producers and consumers.

“Dairy farmers are facing three crushing blows: low milk prices, rising feed costs and the after-effects of drought conditions that have limited their feed production,” said Ken Bailey, associate professor of dairy marketing and policy.

“And consumers facing a tough economy are paying more for milk and dairy products than the ingredient costs would suggest they should.”

Rising price. For example, between June and August 2002, retail prices for ice cream rose 1.4 percent.

But, Bailey said, the modest increase was added to prices already elevated due to rapidly rising butterfat prices in 2001. But butterfat prices this year are down 50 percent from last year.

“One would expect ice cream prices to have fallen back to their pre-2001 Ievels,” Bailey said. “That did not occur. The same also is true for natural cheese: its price is up 6.7 percent through August, while protein, the main ingredient in cheese production, fell in value this year. Cheese processors June through August paid farmers 14.6 percent less than a year ago, yet retail prices rose.”

Bottled whole milk prices for major U.S. urban markets actually fell 5.7 percent between June and August when compared to the same months a year ago. On the other hand, lower federally regulated fluid prices meant processors paid farmers 30 percent less for milk used for bottling purposes.

Facing factors. Someone is keeping this difference, Bailey concedes, but consumers and producers wondering about price discrepancies should know that many factors play into the scenario.

“First, many ice cream processors saw their margins squeezed in 2001 because they could not fully pass along all of their costs,” he said. “Also, retail milk prices haven’t always gone up as high as the increase in raw milk costs (Class I prices) when milk prices are rising, and they don’t go down as fast when milk prices are plummeting. Also, the federal retail price data may not account for sales discounts that are so common today in retail.”

Weak demand. Bailey cites U.S. Department of Agriculture data for the first eight months of 2002 indicating that strong milk production and weak demand have lead to unusually large butter and cheese inventory levels that could “hang over” the market next year, depressing future prices for butter and cheese.

In addition, the federal government currently has 1.1 billion pounds of nonfat dry milk in storage, more than enough to meet domestic needs for an entire year.

The outlook for the holiday shopping season clearly is uncertain. While the economy has consumers cautious, Bailey points to automotive and computer manufacturing as industries that have found creative ways to deal with tough economic conditions and consumer reluctance.

Other strategies. “Dairy retailers have a rare opportunity to offer quality dairy products to their customers at favorable prices,” he said. “Wholesale prices for milk, butter and cheese are very low, and that should translate into opportunities to offer these products to consumers at reduced prices, employ sales promotions and use other strategies to give the consumer a better deal.

“Strong holiday sales this last quarter could do wonders for the U.S. dairy industry, mainly by reducing inventory levels and allowing the market to jump-start into a new year,” Bailey said.

“Farm gate milk prices then will be able to recover early next year if inventories are lower and if the growth in the milk supply slows. This concern over the farm-retail price spread shouldn’t be an issue if dairy product sales are increasing. If sales are going up each year, everyone is better off.”