Processing Stops Lower Dairy Prices Reaching Consumers in Full

ANALYSIS - Between October 2014 and April 2016, US dairy farmers watched the prices they receive for milk fall by about 40 per cent, weighed down in large part by rising domestic production, falling exports, and growing imports.

9 August 2016

2 minute read

North America

Evidence of this larger supply and reduced demand for US-produced dairy products reached consumers in the form of lower prices at US grocery stores.

Researchers from the US Department of Agriculture's Economic Research Service (ERS) analysed dairy price movements to understand how quickly and how completely swings in farm-level prices reach consumers.

Between October 2014 and April 2016, whole milk prices fell by 16 per cent in grocery stores, whilst cheddar cheese prices fell by only 3 per cent.

ERS found that processing, wholesaling, and retailing account for over half of every dollar consumers spend for dairy products.

The difference between a food’s final retail price and the farm value of the agricultural commodities used to produce the food is called the farm-to-retail price spread.

Looking at farm-to-retail price spreads for whole milk, cheddar cheese, butter, and ice cream, one sees that the spread between the retail price and farm value is noticeably larger for cheddar cheese ($3.84 in 2015) and ice cream ($3.91 in 2015) than for whole milk ($1.77 in 2015) and butter ($1.32 in 2013, latest available).

These wider spreads reflect the greater value of non-milk inputs in cheese and ice cream, such as processing, packaging, and advertising, and non-milk ingredients, such as nuts and cookie bits.

These spreads illustrate why retail prices are less volatile than farm-level prices in percentage terms.

The findings confirm that retail prices for less processed foods like whole milk fluctuate with prices received by farmers, but price changes experienced by farmers can take time to reach consumers.

If a food product is more highly processed and passes through a larger number of companies’ hands before reaching consumers, like cheddar cheese, its retail price is likely to be even less responsive to prices received by farmers.