Sunday, September 23, 2007

Why are Retail Milk Prices so High?

Higher milk prices remain a top concern for consumers. As we've noted before, higher milk prices have been caused by strong demand both here in the US and abroad, a reduced supply caused by reduced herds and increased energy, labor and marketing costs at the retail level.

But the media still inaccurately blames higher priced corn earlier this year for the higher dairy prices.

The state of California's Department of Food and Agriculture has an informational page HERE which explains the increased costs of dairy products. Perhaps the reporters will take the time to find out the truth before they just blindly regurgitate the pablum of critics of corn and ethanol producers. They also offer tips for consumers on how to reduce their dairy costs through smarter shopping.

Q: Why are retail milk prices so high?

The Department regulates the transaction between dairy farmers and milk processors and sets a minimum price that must be paid to the farmers. That is where price regulation ends, however; retail stores are free to set prices as high as they determine to be appropriate. In short, there is no maximum price that can be charged.

The Department reviews the relationship among farm price and retail price regularly. As recently as May 2006, the percentage of retail price that was paid to dairy farmers ranged from 32% to 39%. The same analysis shows that retail store costs and profits (combined) account for 36% to 41% of the retail price of milk. Obviously, the percentages will change every time retail prices or the regulated minimum farm price changes. The Department has also noted that retailers are quick to pass on to consumers any increases in the regulated farm price by increasing retail prices.

The Department monitors the retail prices for milk that are announced by club stores. The Department uses club store prices because they generally have the lowest retail prices for milk. Clearly, club stores do not sell milk at a loss, and as such, their prices provide a reference for what other retailers could be charging for milk. What we have noted is that there appears to be about $1.00 per gallon amount above the minimum farm price that accounts for processing costs, distribution costs and store selling costs. Over the last 2 years, this amount has remained remarkably constant. We can surmise that any price charged for milk over and above the farm minimum price plus $1.00 per gallon is likely to be tied to stores' own pricing policies.
Consumers are urged to compare milk prices in stores carrying more than one brand of milk. They may save up to $0.50 per gallon by selecting the lower-priced brand. This is particularly true in major chain grocery stores where the prices on first label brands (or store brand) are among the highest in the California. However, major chain grocery store prices for the second label (or off-brands) milks are typically priced competitively with membership stores, such as Sam's Club or Costco. We also recommend that:
  • When possible, consumers should take advantage of milk that is priced to be sold in two-packs, i.e., two one-gallon units. Membership stores throughout the state offer two-pack pricing on whole, reduced fat and nonfat milk and have the lowest retail prices available.
  • When milk is purchased in single gallon units, consumers should be aware that prices vary by store, and significant price differences may exist within the same city. Retail stores that don't specialize in grocery sales often have the lowest milk prices.

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