Is Dairy Inflation Deflating?

In an earlier post on dairy product inflation, the consumer price index for food was shown to be higher than the overall consumer price inflation index.  That hasn't changed.  In fact, the spread between the retail food index and the overall inflation index has widened.  December 2022 overall inflation numbers dropped to 6.5 percent.  The food retail price index also fell, but not by as much, coming in at 10.4 percent in December 2022.  The spread between consumer price index for food and the overall consumer price index in November was 3.2 percent.  In December the spread was 3.9 percent (Chart I).

This data in this post is based on consumer retail prices from the Bureau of Labor Statistics (BLS) and wholesale prices from the Agricultural Marketing Service (AMS).  Producer milk prices are based on the AMS prices of dairy products.   Prices are compared to the prior year prices.

Chart I - Total Consumer Price Index Compared
to the Food Price Index 

This post will cover the inflation movement of dairy products butter, fluid milk, and cheese.  It will also cover the spreads between retail and wholesale prices.  That comparison shows where the dairy product price increases are coming from.  Fluid milk is a staple that will typically weather the storm of rising prices, but butter has alternative plant based products that mimic butter.  Due to the war in the Ukraine, the plant-based oils used in plant-based margarine have also increased in cost.

The price of cheese as calculated by the AMS is based exclusively on the price of Cheddar.  The cheese section below will cover only Cheddar cheese dynamics.

In the first half of 2022, the difference between retail and wholesale prices (the margin), fell for all the three major dairy products covered.  Apparently, retailers did not increase prices as fast as wholesale prices were increasing.  However, as the high wholesale prices continued in 2022, retail prices were increased to recover margins. 

BUTTER

Butter continues to increase the already high retail prices.  In December 2022, retail butter prices increased by 38.5 percent over the prior year.  That increase was hugely greater than the food price index and the rate of increase is record setting (Chart II).

Chart II - Retail Butter Price Increases Compared
to the BLS Food Index

The wholesale price of butter decreased in November and December of 2022, but the retail prices made only a small decrease followed by an increase.  In Chart III, it is easy to see the tightening of the margin between retail and wholesale prices in early 2022.  In the calculations below for butter there is a one-month lag between the wholesale prices and the retail prices (Chart III).

Producer butterfat prices are based on the wholesale price of butter and fell by 14 percent from $3.66 per pound to $3.15 per pound from October to December 2022.  Retail prices for butter remained high.

Chart III - Retail and Wholesale Prices of Butter

The margin between butter retail and wholesale prices ended 2022 at $1.86 per pound, just slightly below the 2020 and 2021 average margin (Chart III).  The margin includes butter churning, transportation. branding, and retail markups.  The margin did shrink to a low of just $1.16 per pound in February 2022 which means that many in the supply and retail chain did not cover their normal margins as wholesale butter prices started increasing.  By December 2022, the retail butter prices had increased enough to bring the margins to a more normal level and cover the costs to bring the butter to market.

Chart IV below, displays the margin with a one-month lag between wholesale and retail prices.

Chart IV - Butter Margins between Retail and Wholesale Prices

FLUID MILK

Fluid milk price increases peaked in May of 2022 exceeding by far the BLS increase for food.  Fluid milk is a commodity with minimal differences between brands.  The prices increases are approaching the average food index increases, but as of the end of 2022 are still showing a 13 percent increase over the prior year.

Chart V - Retail Fluid Milk Price Increases Compared
to the BLS Food Index

The margins in Chart VI below do not include a one-month adjustment between wholesale and retail as fluid milk is more perishable than butter or cheese and processing and logistics must be completed in a very short time span. The margins hit a low in mid 2022 but recovered to a more normal level by the end of 2022.

Chart VI - Fluid Milk Margins from Retail Prices and
Class I Producer Prices

CHEESE

Cheese prices, as used in the Federal Order pricing system means Cheddar cheese prices.  Cheddar cheese prices did fall in 2021, but are up significantly in 2022.  The rate of increase is now slightly above the overall Food CPI (Chart VII).

Chart VII - Retail Cheese Price Increases Compared
to the BLS Food Index

Cheddar cheese prices have been more stable than butter and fluid milk prices, but the margin spread is much bigger.  At the end of 2022, retail prices of Cheddar cheese hit a high of $6.00 per pound.  The wholesale price has fallen by 14 percent since its high in mid 2022 and ended the year at $2.06 per pound.

Chart VIII - Retail and Wholesale Prices of Butter

The Cheddar cheese margins from wholesale blocks and barrels of cheese to retail consumer packaging prices also took a fall in Mid 2022, but the margin recovered in the last half of 2022.  The margin variation for cheese was only a 14 percent. That was small compared to fluid milk with a 31 percent margin variance and butter with a 35 percent margin variance.

Chart IX - Cheese Margins between Retail and Wholesale Prices

SUMMARY of RETAIL DIARY PRODUCT PRICES

The margins between retail and wholesale for the three items reviewed seem to have reached an equilibrium with the 2020 and 2021 prices.  That part of the retail pricing is now at an established level.  That leaves an open question about where the wholesale prices may go

The inventories of American cheese are low and may prompt a higher wholesale Cheddar price in 2023.  Fluid milk pricing is based equally on skim Class III and IV pricing.  It difficult to predict where NDM pricing factors for Class IV are going because NDM is an export product.

Butter retail pricing may still have room for upward movement.  Inventories are very low.  As a result, further wholesale and retail butter inflation is possible.  Higher wholesale butter prices would bring butterfat prices to another new high improving producer milk prices.  However, as retail butter prices maintain or increase today's high prices , consumer purchases may not grow and may shrink.  This could have a lasting impact on butter domestic sales.  The U.S. may become more dependent on butter exports in the future if butter churning is to expand.