Challenges of Changing Market Dynamics: Comments on Consequences in Product Pricing

By Bob Yonkers, IDFA Chief Economist and Director of Policy Analysis

If you are buying milk and dairy ingredients, you know that farm milk prices have hit an all-time record high level. Last week, the U.S. Department of Agriculture (USDA) reported that "the revised June all milk price of $20.20 per cwt was a record high, $0.90 above the previous record high of $19.30 set in May of 2004. The July preliminary all milk price of $21.70 per cwt will be a new record high, up an additional $1.50 from last month and $10.00 per cwt higher than July 2006."

However, due to the complex regulated minimum prices milk processors must pay to dairy farmers, the increased cost of farm milk used to make many specific dairy products compared to the previous record highs of 2004 can be higher or lower than what was reported last week by USDA. Federal Milk Marketing Orders (FMMO) regulate minimum milk prices paid to dairy farmers in many parts of the country, and the few areas of the country not under FMMO regulation often have similar state milk price regulations.

FMMO's use price formulas to assign values to the different components of farm milk. These values vary depending on what dairy products are made from farm milk. For example, farm milk used in fluid dairy products has two component values, one for the butterfat component and a second for the skim milk component. Computing the minimum cost to processors of whole milk using the minimum USDA component price information results in a price of $23.26 per cwt for the previous record high month of June 2004, while using the same information yields a lower cost in July 2007 of only $21.40 per cwt.

For nonfat milk, the USDA minimum component price in June 2004 was $15.69 per cwt, while the July 2007 value was higher at $16.74. That means while the average price paid to dairy farmers in July 2007 was much higher than in June 2004, the federally regulated minimum price for farm milk used to make whole milk was lower in July 2007 than June 2004, and the federally regulated minimum price for farm milk used to make nonfat milk was higher.

These differences in fat and skim pricing are driven by market demands for the various components of milk. This year, for instance, market demand for products made from the skim component of farm milk, like nonfat dry milk and dry whey products, have soared to record levels largely because of new overseas demand for U.S. exports.

The use of complex price formulas in milk price regulations for FMMO's and state agencies add to the difficulty in explaining to customers the changes in the minimum regulated prices which processors must pay for farm milk. In today's dynamic marketplace, the consequences of these price regulations can create new challenges for dairy product companies buying farm milk and dairy ingredients and selling dairy products.

Posted August 6, 2007