In the News - September 2009
The complex business of milk prices
FAYETTEVLLE, Ark. - When it comes to gasoline, the public has a good grasp on
price trends, thanks to the widely reported price of a barrel of crude. However,
tracking milk prices is not so easy, even if prices paid to producers for raw
milk is at a 40-year low, said Dr. Wayne Kellogg, professor and educator for the
University of Arkansas Division of Agriculture.
"Milk producers have been hurt by the world’s economic problems - perhaps more
than any other sector," he said. "For a while milk prices were high, but
expenses for feed and fuel escalated at the same time.
"When the demand dropped, the farm price dropped dramatically," Kellogg said.
"It is a tough time."
The laws of supply and demand in the dairy industry are complex. For example,
consumers use more cheese and butter in the fall, according to the U.S.
Department of Agriculture.
Even seemingly small factors like breakfast beverage preference come into
play. Information released in 2007 by the NPD Group, a consumer research firm,
found that 15.1 percent of consumers who eat breakfast away from home order
carbonated beverages with breakfast, compared with 7.9 percent in 1990.
Meanwhile, cows keep producing milk, whether people are drinking it with
their morning coffee or not.
All of these factors make milk pricing complicated. The federal milk
marketing orders use formulas to determine the prices that are paid to the milk
producer. It is a complex system, but it was designed to set a fair price for
milk based on the use of the milk. Fluid milk demands the highest price, while
the price for milk used in other products - such as butter, cheese, ice cream, and
dried skim milk - varies with the raw materials used and the costs to make the
specific product.
USDA instituted the orders in the 1930s to promote orderly marketing
conditions. Some states, such as California, abide by their own regulations
instead of the federal orders. Critics say the federal orders are outdated;
supporters say it gives dairy farmers a level playing field.
"Ultimately, the price varies with the demand for products," Kellogg said. "If the demand is high and purchasers are bidding for milk in short supply, then
prices paid to the milk producer will increase.
"Unfortunately, the opposite condition adversely affects the prices paid by
customers," he said. "A relatively small amount of excess milk has a disastrous
negative consequence on the price."
At the consumer level, "retailers hate to reduce the prices in the store
because it is difficult to maintain sales when the prices increase rapidly,"
Kellogg said. "It may be appropriate to encourage retailers to drop prices
hoping that sales will be stimulated."
In 1985, the Arkansas Legislature voted to make milk the state’s official
beverage.
Due to low prices and other production factors, the number of dairy cattle in
Arkansas has steadily decreased. According to the National Agricultural
Statistics Service, there were 482,000 head in 1943. By 1969, the number had
dropped below 100,000 head and last year that number had declined to 15,000,
NASS said.
California is the nation’s leading dairy state, its production surpassing the
former No. 1, Wisconsin, in 1993. The state had 1.8 million head of dairy cows
in 2007, the latest numbers available from the NASS.
The Cooperative Extension Service is part of the University of Arkansas
Division of Agriculture and offers its programs to all eligible persons
regardless of race, color, national origin, religion, gender, age, disability,
marital or veteran status, or any other legally protected status, and is an
Affirmative Action/Equal Opportunity Employer.
September 11, 2009
By Mary Hightower
U of A Division of Agriculture
Media Contact: Elizabeth Fortune
Extension Communications Specialist
U of A Division of Agriculture
Cooperative Extension Service
(501) 671-2120
efortune@uaex.edu
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