Milk Money

Additional information (Updated 9/10/07)

Background

The backbone of the Upstate economy is agriculture with dairy farming being the largest component. Farms are economic engines as many rural communities depend on a healthy dairy industry to employ workers and keep local businesses operating, such as building supply stores, fuel suppliers, insurance businesses, feed and dairy supply businesses, financial services, and veterinarian practices. New York’s dairies not only improve the Upstate economy, they are beneficial to consumers in metropolitan areas. Consumers are guaranteed an abundant supply of affordable, healthy, locally produced milk on their store shelves when the dairy industry remains strong in New York State.

While Americans continue to spend the least amount of disposable income on food than any other country consumers are aggravated by the fact that milk prices are at all-time highs.

How Milk Is Priced

Dairy farming is a unique business as dairy farmers are price takers and cannot pass along any increase in operating costs. When milk is loaded onto the truck at the farm, the farmer does not know what price will be received for that milk until the payment arrives the following month.  Milk is priced on a per hundredweight (cwt) basis, unlike at the consumer level where it is priced on a per gallon basis. There are approximately 12 gallons in one hundredweight of milk. Over the past few years, prices received have ranged from $13/cwt-$17/cwt. A price of $14/cwt, equates to approximately $1.20 per gallon received by the producer.  

The price that farmers receive is based on a federal formula derived from the price of four globally traded dairy commodities -- butter, dry milk powder, whey powder (a byproduct of cheese-making) and cheddar cheese sold on the Chicago Mercantile Exchange (CME) and is administered by the USDA Federal Milk Marketing Order Office.  Then a value is added based on the amount of protein, butterfat and solids in each individual farm’s milk.  These 2 values are added together, along with any quality premiums the farm may qualify for, and lastly, transportation costs are deducted.  This is called the mailbox price, or the price that the farmer actually receives.  Being that this pricing mechanism is federally based, there is no recognition of the fact that farm businesses in the Northeast are operating in a higher cost environment than other parts of the country. 

Fuel vs. Food  

A lot of press has been focused on the rising costs of corn as the cause of higher food prices, including milk.  Corn is a staple feed on large dairy farms, and it was about 44 percent more expensive in 2006 than the year before, largely due to the demand from new ethanol plants. Feed costs are not part of the formula that determines the price of milk, so there's no direct way for dairy farmers to pass on their costs.

As the price of corn rises it increases the cost of feeding an animal until it becomes unprofitable.  After suffering a loss for a long enough period of time---both corn prices and income from milk fluctuate so losses must accumulate for some time to convince the producer this is not just a temporary situation---producers decide to adjust their production downward. At some point the production of milk is reduced. The farm price of milk---or related product---will eventually rise to a higher level that makes production profitable and induces producers to expand production, thereby renewing the cycle.

Milk, experienced a rapid run-up in production in 2005 and early 2006.  Consequently, in 2006 milk prices literally “fell out of bed”, declining 15% from a year earlier.  Predictably, dairy farmers slowed the rate of increase in milk production and by 2007 milk prices began to rebound. New York production in 2006 was down only slightly from 2005. Approximately 460 dairy farms went out of business due to record low milk prices and ever increasing feed and fuel costs. In the long run, if this trend were to continue, a lower supply of milk could lead to higher prices of retail milk in the state. But currently, the price increase of retail milk has absolutely nothing to do with ethanol and corn prices. 

Why the $ of Milk is Going Up

The prices of milk powder and whey, used to calculate the federal order price -- are very high right now, thanks to a supply shortfall driven by a variety of global trends, including dairy policies in Europe, a long-term drought in Australia, growing world demand for milk protein and the rapid growth of cheese consumption in the United States. U.S. export of milk byproducts has virtually exploded in recent months. These trends have raised the base price of milk paid to New York dairy farmers.  Until the late 1990s, the federal government maintained huge stocks of milk powder and cheese that dampened price fluctuations in world markets. Without those stocks, prices have become more volatile.

Threshold Price vs. Retail Price

Each month the New York State Department of Agriculture and Markets (NYSDAM) releases the threshold price for milk sold in New York State. This price is the maximum a retail store can charge for milk relative to the milk price gouging law. The threshold price is calculated by multiplying by two the total of two components, the minimum federal order price and the premium paid for Class I (fluid drinking) milk. Effective July 2007, the threshold price in the Upstate Region is $4.18. Statistics collected by NYSDAM show that from January 2003 until June 2007 the average retail milk price has not reached the threshold price, as seen in Figure 1. What does this mean? Even though the media has been saying that milk prices are going up $0.53, retailers do not have to charge the threshold price. As seen in previous years, chances are consumers will not have to pay the maximum threshold price per gallon for whole milk.

Average Mailbox Price

The average mailbox price that farmers receive, also known as the all milk income price, comes from combining the payments made to farmers for all classes of fluid milk and reflects all premiums, as well as marketing costs, including hauling. This information from the USDA’s National Agricultural Statistics Service (NASS) shows the average price that farmers in New York State receive per hundred weight (cwt) of milk sold at the farm gate

in any given year. The average mailbox price can be seen in Figure 2 below. This information is then calculated to show how much income comes from each gallon of milk produced. If $2.40 were paid for a gallon of whole milk, which was the average retail cost in 2006, the income paid to the farmer for that gallon would be $1.09 a difference of $1.31 or 45%.

Operating Costs & Net Income

Farms, like any business, have costs. Operating costs, according to the USDA Economic Research Service (ERS), include feed, veterinarian expenses, bedding, marketing, fuel, electricity, repairs, and other miscellaneous costs. Using data from ERS and NASS we can calculate the net income to farmers after factoring in operating costs, as seen in Figure 3. According to this data, farms in New York State, after deducting operating costs, received a net of $0.03 per gallon of milk sold in 2006.

Conclusion

The bottom line is that out of each dollar a consumer spends on a gallon of milk the dairy farmer nets a very small percentage of that dollar. In 2006, consumers paid an average of $2.40 on a gallon of whole milk, while the threshold price was $2.64. Farmers grossed an average of $1.09 per gallon while the remaining dollar spent went to the dairy processors and retailers. After subtracting operating costs, farmers only saw a net of $0.03 per gallon of milk. This net is what the farmer is left to live off of, to send their children to college with, to pay for health care with, and to save for retirement.

Additional Information on How Milk Pricing Works

Information regarding the increase in the retail price of milk and dairy products

According to the New York State Department of Agriculture and Markets statistics, the average retail price for a gallon of milk in New York State during the year 2000 was $2.46. Today, milk and dairy products are still an affordable nutritious choice for consumers. Even if the retail price for milk is at $3.50/gallon, that’s only $ .44 per 8 oz. serving for a wholesome, nutritional food product that contains many valuable vitamins and minerals.

Why has the price increased?

Today, even with higher retail prices, farmers are only receiving approximately $2.10 per gallon for their milk produced on the farm. In 2006, which saw historic low prices received, farmers were paid an average of $1.20 per gallon. In the past 18 months, operating costs on dairy farms has increased by as much as 34%, especially the cost of animal feed, fuel and electricity. Last year, nearly 500 dairy farms went out of business in New York due mainly to harsh financial conditions. Because of these conditions in 2006, cow numbers have not increased, therefore, milk production has not increased, all while commercial sales of milk and dairy products has increased.

A second factor influencing the price of milk is one of global proportions. World demand for dry whey and nonfat dry milk has increased, as has the demand for milk proteins. Severe drought in Australia coupled with changes in EU dairy policy has meant more demand for US milk products. The demand for milk proteins has increased as the demand for nutritionally enhanced food products and power drinks has also risen.

How milk is priced

Dairy farming is a unique business as dairy farmers are price takers and cannot pass along any increase in operating costs. Milk is priced on a per hundredweight (cwt) basis, unlike at the consumer level where it is priced on a per gallon basis. When milk is loaded onto the truck at the farm, the farmer does not know what price will be received for that milk until the payment arrives the following month.

The price that farmers receive is based on a federal formula derived from the price of cheese and butter sold on the Chicago Mercantile Exchange (CME) and is administered by the USDA Federal Milk Marketing Order Office. The farmer’s price is determined by the cheese price on the CME. Then a value is added based on the amount of protein, butterfat and solids in each individual farm’s milk. These 2 values are added together, along with any quality premiums the farm may qualify for, and lastly, transportation costs are deducted. This is called the mailbox price, or the price that the farmer actually receives. The price per hundredweight is then multiplied by the number of hundredweights of milk the farm produced. Being that this pricing mechanism is federally based, there is no recognition of the fact that farm businesses in the Northeast are operating in a higher cost environment than other parts of the country.

At the retail end, in New York State, milk bottlers are sanctioned by law, to charge a 200 percent margin on milk, a higher margin than consumers pay for most any other staple item on the Consumer Price Index, which is compiled by the US Labor Department.

Snapshot of New York’s dairy industry

Dairy farming in New York State is the largest component of the agricultural industry, with New York ranked #3 in the nation in milk production behind California and Wisconsin. NY’s dairy farms continue to provide consumers with a source of locally produced, affordable supply of nutritious product that is needed for all ages. The state’s dairy farms are also economic engines as farms employ 22,000 people statewide while also supporting locally owned businesses in many small communities. The money generated from dairy farms is also spent locally, turning over at least 3 times in local areas. Farms also provide many environmental benefits such as providing habitat for wildlife, open space, and scenic vistas for all New Yorkers to enjoy.