Market Update
April 30, 2010
Market Update: Farm Share of Retail Dairy Price Not Declining over Time
By Bob Yonkers, IDFA Chief Economist, Ph.D.
A great deal of attention in the dairy industry has focused lately on farm milk prices and their relationship to retail prices for milk and dairy products. Data from two U.S. Department of Agriculture resources demonstrate that the farm value of a dairy retail market basket varies from year to year, but it is not declining over time.
Last June, for example, this column took a close look at data from the Bureau of Labor Statistics for retail fluid milk prices and the cost of Class I milk to processors as reported by USDA data. That data and chart was updated recently by the Daily Dairy Report, a service of the CME Group.
USDA's Economic Research Service (ERS) offers another way to look at these price relationships. The ERS data is only annual and covers four individual dairy product categories (whole fluid milk, ice cream, butter and cheddar cheese), but it also creates a market basket for milk and dairy products to represent the average of all dairy products (see Table 1).
While 2009 data is not yet available from ERS, the data since 2000 is revealing. Historically, there is clearly an upward trend in the milk and dairy product market basket retail cost, reaching a high in 2008 (similar for all foods that year). The farm-value varies more from year to year, but it reached the same record-high value in both 2007 and 2008. The farm-to-retail spread, which represents charges for services like processing and marketing, also varies from year to year and also reached a high in 2008.
The farm-value share of the retail cost is the last column of Table 1. It is interesting to note that in relatively low milk price years, such as 2000, 2002, and 2006, the farm value share was lower than in other years. In relatively high milk price years, like 2001, 2004, 2007 and 2008, the farm-value share was higher than in other years. A key reason for this, according to the individual milk and dairy product data, is that the farm-to-retail spread remains somewhat more constant than either the retail cost or farm value (see Chart 1). In other words, these more constant farm-to-retail price spreads represent a smaller share of the retail price when the retail price is high and a larger share when retail prices are lower.
It is important to remember that this farm-to-retail price spread must cover all costs other than the farm milk price in the supply chain. Dairy farmers may want to see a higher farm-value share when both farm and retail prices are low, but that can only come at the expense of not paying for some other real costs like research, new product development, marketing and promotion - all of which are designed to build consumer demand and increase consumption. That's important for every segment of the industry.
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