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Dairy Market Update: The Farm-to-Retail Milk Price Myth Revisited Yet Again

May 29, 2013

By Bob Yonkers, IDFA Chief Economist

The myth that retail fluid milk prices never go down when farm milk prices do is very pervasive in the dairy industry. In late 2011, Robert J. Gray, a senior policy advisor to a dairy producer group, made such a claim in public comments submitted to The Wall Street Journal, which led me to research the issue in my December 2011 column, “Retail Milk Prices Do Track with Farm Milk Costs.” Then a press release from the National Milk Producers Federation last summer made a similar claim, and I responded in my July 2012 column, “The Farm-to-Retail Milk Price Myth Revisited.”

Just this past month, Representative Collin Peterson (D-MN), the ranking member of the House Committee on Agriculture, made this comment at the mark-up for the 2013 Farm Bill: “You tell me the last time that you remember anybody in the IDFA, the processor community, lowering their prices. Every time the prices go up at the farm level, we get a price increase. But when the prices go down, for example when they went from $21 to $10 a hundredweight, when we were at $21 they went up; when they went to $10, nothing went down. Not anything.”

Figure 1 shows just how much of a myth this is by using data published by the U.S. Department of Agriculture’s Agricultural Marketing Service on the cost of milk used by processors of fluid milk products and the U.S. Bureau of Labor Statistics on the average retail price per gallon for whole milk. During the large drop in farm milk prices between the summer of 2008 and late-winter 2009 mentioned by Representative Peterson, the farm cost of milk to fluid milk processors dropped by about 94 cents per gallon, while the retail price of whole milk dropped by even more, over 98 cents per gallon

It’s important to correct the record on the congressman’s statement. The last time the USDA’s National Agricultural Statistics Service reported a national average all-milk price below $11 per hundredweight for dairy producers was in September 1978, so saying farm milk prices nationally dropped to $10 per hundredweight is an exaggeration. The only time the national average farm milk price dropped by anything near the amount of $11 per hundredweight suggested by Representative Peterson was between July 2008 and June 2009, when the reported price fell from a peak of $19.40 to a low of $11.30 per hundredweight, a drop of just over $8, not $11.

There are short-term periods where the retail price of milk does not change by as much as the farm milk price, but over time the two price series track very closely. For example, more recent changes in the cost of farm milk to fluid milk processors have not been fully reflected in retail price changes, but that is true for both periods of farm milk price increases and farm milk price decreases.

If you are looking for a more rigorous examination of the how farm and retail milk prices change together over time, other economists have come to similar conclusions. In an April 2012 briefing paper, Andrew Novakovic, Ph.D., the E.V. Baker professor of agricultural economics at Cornell University and chair of USDA’s Dairy Industry Advisory Committee in 2010-2011, said, "Whenever the farm price of milk hits the downward part of the cycle, natural and obvious questions are frequently raised about whether wholesale and/or retail prices are following. For many, it is taken for granted that consumers will not see lower prices, either in the grocery store or the pizza parlor, even when the farm price decreases are large. The fact is that the data available on farm, wholesale and retail prices simply do not support that assumption or hypothesis. But, there is also plenty of opportunity to get confused."

Read Novakovic's paper, "Comparing the Prices of Milk Across the Dairy Value Chain."

In addition, two USDA economists, Hayden Stewart, Ph.D., and Don Blayney, Ph.D., shared their perspective in a peer-reviewed article appearing August 2011 in "Agricultural and Resource Economics Review." Here's an excerpt: "We find that farm and retail prices move together in a long-run relationship for both whole milk and cheddar cheese. There is likewise no evidence that farm price volatility increases the farm-to-retail price spread for either dairy product over the long run."

Read their journal article, "Retail Dairy Prices Fluctuate with the Farm Value of Milk."

The U.S. Department of Agriculture, the U.S. Bureau of Labor Statistics and three respected and renowned economists all state that prices for farm and retail milk move together. It’s time to let that well-worn farm-to-retail milk-price myth expire and instead let the data reflect the true market facts.