Sunday, June 7, 2009

Milk data

I have been curious about the distress that the dairy industry is in, as opposed the the consistent prices I see in grocery stores for dairy products. Typically when there is a glut of an item, the price drops, and demand increases due to the low pricing. It's an automatic self-regulating mechanism.

However something appears to be broken between wholesale prices farmers are paid for dairy products, and what the public is charged at retail. Below is a brief description of the different classifications of dairy products, and how the prices are set at the wholesale level in California. Courtesy of the California Department of Food and Agriculture

Class Prices:
To promote stability in the dairy industry, California’s milk marketing program establishes minimum prices that processors must pay for fluid grade or Grade A milk received from dairy farmers based on end product use. These prices are established within defined marketing areas where milk production and marketing practices are similar.

Currently, California operates its milk pricing plan with two marketing areas: Northern California and Southern California. Each marketing area has a separate but essentially identical Stabilization and Marketing Plan. Each plan provides formulas for pricing the five classes of milk. In general, the classes and the products they contain are:

Class 1: Milk used in fluid products.
Class 2: Milk used in heavy cream, cottage cheese, yogurt and sterilized products.
Class 3: Milk used in ice cream and other frozen products.
Class 4a: Milk used in butter and dry milk products, such as nonfat dry milk.
Class 4b: Milk used in cheese, other than cottage cheese, and dry whey products.


Now have a look at this chart I made up based on pricing provided by dairyline.com:



From what I can see, pricing has dropped about 50% in this period. However according to the Bureau of Labor Statistics (BLS), prices that consumers PAID for milk has only dropped 5%.

Here's the reason why the self-correcting market pricing mechanism of supply and demand is broken (it's Von's and Albertson's):

Milk prices, pour better or worse

In California, they're all over the map. What people pay is based on a complex combination of state regulations and retailing tactics.

Have you checked out the price of milk lately? Be prepared to be confused, baffled and amazed.

What people pay for milk in California is based upon a complex combination of state regulations and retailing strategy.

The state determines the minimum price that milk processors -- the companies that bottle milk or turn it into cheese and ice cream -- must pay farmers. The price fluctuates monthly based upon what butter, cheese and powdered milk sell for on commodity exchanges.

Retailers can set milk prices as high as they want, but state regulations prohibit them from selling milk below cost unless they can prove they are matching the price of a competitor.

Depending on the brand and how many cartons you want to purchase, you can pay anywhere from $2.70 to $6.99 for a single gallon of milk, and that's just at one grocery store -- Ralphs.

It doesn't stop there.

The Fresh & Easy Neighborhood Market chain was recently asking $2.99 for a gallon of fat-free milk and $3.18 for low-fat milk, but the price dropped to $3.08 for 2% and whole milk. It didn't charge extra for low-fat milk when purchased in a half-gallon carton.

"It's crazy," said Elisa Odabashian, director of the West Coast office of Consumers Union. "There is no reason why you should pay 50% to 100% more for what is basically the same product. The farmers aren't the ones getting the extra money. The retailers know that consumers just don't shop around for milk."

Consumers should pay attention in the dairy section, even if it just amounts to looking at the prices of the various brands where they shop, she said. It's one of the easiest ways to trim a grocery bill.

Saving just a couple of dollars a week on milk adds up to enough money to purchase about two tanks of gasoline over the course of a year, Odabashian said.

Lots of stores -- not just supermarkets -- sell milk. You can find it in Rite Aid, Target, Wal-Mart, Costco and gas station mini-marts, and the prices can be all over the map.

There are more than a dozen stores selling milk on a four-mile stretch of Los Alamitos Boulevard from Seal Beach to Hawaiian Gardens. They include small Latino grocers, multiple big-chain drugstores, large supermarkets and an upscale Sprouts Farmers Market natural food store. The price can double, depending on where you shop and how much you buy.

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