By Bob Yonkers, Ph.D., IDFA Chief Economist

While it has been only a short seven months since I last addressed this topic, many in the dairy industry continue to cite the myth that retail fluid milk prices do not change when farm milk prices do. Just this week, a press release by the National Milk Producers Federation said, “Consumers really should be asking if the price they pay at retail for dairy products have dropped by the same amount. The answer is, retail prices haven’t changed, even as the farm price this year has reflected the fact that supply has raced ahead of demand.”

NMPF is entitled to their own opinions but not their own facts. Simply put, the available data does not support that statement or any other statement claiming there is no correlation between farm and retail milk prices over time. The facts are that, over the last three years, average retail prices have risen less than farm milk prices.

Each month the U.S. Department of Agriculture publishes the average minimum price for the Class I use of farm milk, and the products included in Class I are fluid milks like whole, reduced-fat, low-fat and nonfat milk. The USDA also publishes the average premium amount above this minimum regulated price that dairy cooperatives charge processors. The combination of the two average prices represents the cost of farm milk to fluid milk processors.

The U.S. Bureau of Labor Statistics (BLS) publishes monthly data on average retail prices for a number of products, but the only fluid milk product is whole white milk in gallons. This data appears in Figure 1 below.

The most recent trend in farm milk prices is a decrease beginning in September 2011. Through June 2012 (the most recent month for which BLS average retail price data is available), the Class I farm milk cost has dropped by 57.1 cents per gallon equivalent. Meanwhile, the average retail price has fallen 31.9 cents per gallon. No doubt the Class I farm milk cost has dropped more than the average retail price, but look at the trend period just prior to September 2011.

Between August 2009 and September 2011, the Class I farm milk cost increased by $1.011 per gallon, while the retail price per gallon only increased by $0.736 per gallon. In this period, the average retail price increase was far less than the increase in the Class I farm milk cost. Looking across these two most recent periods, we see the cost of Class I farm milk since August 2009 has increased by 44 cents per gallon, while the retail price per gallon increased by only 41.7 cents during the same time period.

Contrary to the often-repeated myth, retail milk prices do change when farm milk prices change. Maybe not by the same number of pennies each month, but certainly these two price series track closely over time. Over the past nearly three years (since August 2009), milk prices have gone both up and down, but, on average, retail prices have increased 2.3 cents per gallon less than the increase in Class I farm milk prices.

Other economists have come to similar conclusions. Here's what Andrew Novakovic, the E.V. Baker Professor of Agricultural Economics at Cornell University, had to say in a recent briefing paper:

"Whenever the farm price of milk hits the downward part of the cycle, natural and obvious questions are frequently raised about whether wholesale and/or retail prices are following. For many, it is taken for granted that consumers will not see lower prices, either in the grocery story or the pizza parlor, even when the farm price decreases are large. The fact is that the data available on farm, wholesale and retail prices simply do not support that assumption or hypothesis. But, there is also plenty of opportunity to get confused."

Read Novakovic's paper, "Comparing the Prices of Milk Across the Dairy Value Chain."

Two USDA economists, Hayden Stewart and Don Blayney, shared their perspective in a peer-reviewed article appearing last August in "Agricultural and Resource Economics Review." Here's an excerpt:

"We find that farm and retail prices move together in a long-run relationship for both whole milk and cheddar cheese. There is likewise no evidence that farm price volatility increases the farm-to-retail price spread for either dairy product over the long run."

Read the journal article, "Retail Dairy Prices Fluctuate with the Farm Value of Milk."