By Bob Yonkers, IDFA Chief Economist, Ph.D.
It is a common occurrence during periods of low farm milk prices to hear complaints from farm groups that retail milk prices have not fallen at the same rate. While there are many reasons why retail milk prices may not change in lockstep with changes in farm milk prices, the pattern over time is clear: available data show that retail milk price changes do tend to follow farm milk price changes over time.
One reason for confusion about this price relationship is that dairy producers receive a blend price that reflects the value of farm milk sold for all uses. However, the cost of farm milk to processors of those fluid milk products regulated by the Federal Milk Marketing Orders (and state milk price regulations) is the Class I minimum price. For any given month, the farm blend price and the Class I price do not change by the same amount, and in some months they actually move in opposite directions.
Another reason for the confusion is that retail prices are in dollars per gallon, while farm milk prices are reported in dollars per hundredweight. For example, between May 2008 and May 2009 the federal order all-market average Class I regulated milk price (as reported by the U.S. Department of Agriculture's Agricultural Marketing Service) declined from $19.50 to $13.85 per hundredweight, a drop of 29 percent. The U.S. all-city average retail price for a gallon of whole milk (as reported by the Bureau of Labor Statistics, which collects and publishes the consumer price index and other price data) fell from $3.760 to $3.068 per gallon for that same period, a drop of only 18 percent.
While some may think a 29 percent drop in the farm milk price per hundredweight must be greater in actual dollars and cents than an 18 percent drop in a retail price per gallon, they would be wrong in this case. Converting the farm milk price per hundredweight to a farm milk price per gallon, based on a weight per gallon of milk of 8.62 pounds*, would show that the Class I minimum regulated farm milk price per gallon fell between May 2008 and May 2009 from $1.677 to $1.191.
This was still a decline of 29 percent, but in actual cents it was a decline of only 48.6 cents, compared to the decline in the retail price per gallon of 69.2 cents (from $3.760 to $3.068). In reality, the most recently available data demonstrates that the retail price of milk fell by over 20 cents per gallon more than the price dairy producers received for farm milk used to process fluid milk products at the federal order-regulated minimum prices.
The figure below shows the changes in the U.S. average Class I milk price per gallon and the U.S. city average retail price per gallon for whole milk over the past two-and-one-half years. While the relationship between the two prices is not exact, they do tend to move together over time despite the many other factors that influence the difference between them.
