Producer Milk Prices are Down, but Retail Prices have not Followed.

The U.S. CPI has come down with March showing .1% overall inflation month to month.  That brought the overall 12-month index to 5%.  That is still well above the desired 2% annual level.  In the December 2022 post, retail price inflation for food was at 10.9%, well above the overall inflation rate of 7.7%.  Where do the dairy products stand now?  Have they reduced their prices or at least not increased prices?  Three major dairy products are reviewed below; whole milk. Cheddar cheese, and butter.  The retail prices will be compared to the wholesale prices, which are the basis of producer milk prices.

The wholesale prices, as calculated by the Agricultural Marketing Services (AMS) show a significant price reduction.  The retail prices from the Bureau of Labor Statistics (BLS) are flat. 

The three products below do show a leveling of retail pricing, but no reductions.  The AMS prices for whole milk and butter do show significant price drops. 

WHOLE MILK

Milk for drinking saw a near 50% retail price increase beginning in 2019, and ending in mid 2022 (Chart I).  Since then, retail milk prices have remained stable between $4.10 and $4.20 per gallon. The retail inflation has stopped in fluid milk prices, but there is still no deflation. 

By comparison, the Class I fluid milk prices paid to producers fell by 24% from its May 2022 peak of $2.22 per gallon to $1.68 per gallon in March 2023 (Chart I).  The skim AMS price is based on a mixture of Class III and Class IV prices.  AMS milk prices are usually quoted as a price per cwt.  To allow a comparison with the BLS, the AMS prices have been converted to price per gallon at 8.6 pounds per gallon.

Chart I - Prices of Class I milk and its retail price

The spread between the retail and wholesale price of milk is shown in Chart II.  The spread has grown significantly, with wholesale prices declining and retail prices remaining stable.  The spread has grown by over 50% since 2019.  Processors, logistics, and retailers have seen a huge revenue increase.

Chart II - The Spread of Pricing Between Retail and
Wholesale Prices of Whole Milk

So where will fluid milk prices go from here? As mentioned above, the AMS price of skim fluid milk is calculated based on Class III and Class IV pricing.  Class IV skim milk pricing is based on nonfat dry milk which is an export product, and the international prices will go wherever international events takes them.  The Class III skim price is primarily based on the price of domestic Cheddar cheese.  Cheese prices were on an upward trend in 2021 but are on a downward trend in 2022. lowering the price paid for Class I milk. 

So far, the lower prices paid to producers for milk have not lowered retail prices.

CHEESE

The spread between retail and wholesale prices of cheddar cheese are big.  The prices used in Chart III by BLS and AMS are based on Cheddar cheese only.  The prices show that producer milk makes only about ⅓ of the total consumer retail price for cheese.  Cheese making, delivery, packaging, and marketing make up the rest.  Similar to whole milk, the retail price continues to maintain its price, while the wholesale price has dropped.

Chart IV plots the spread for the years 2014 through 2023.  It varies by $1 per pound with a lot of volatility.  In 2022 cheese retail prices increased to a high while AMS prices were flat to down

Chart III - Cheddar Cheese Retail and Wholesale Pricing

Chart IV - The Spread Between Retail and Wholesale
Prices of Cheddar Cheese

BUTTER

Butter prices have had wild swings.  In 2022, the retail price of butter increased by 40%, from $3.47 per pound to $4.88 per pound.  Wholesale prices of butter increased by 48% over the same time span.  The wholesale price has dropped from its high in October 2022 to March 2023 by $.77 per pound, a 24% drop.  The wholesale price of butter is falling quickly with adequate supplies of butter, but this has not materially changed the retail price.

Chart V - The Retail and Wholesale Prices of Butter. 

The spread between the wholesale and retail prices (Chart VI), shows an increase of 128% in just one year.  When will the extreme volatility slow down?   

Chart VI - The Spread between Wholesale and
 Retail Prices of Butter

The retail changes in butter prices will soon find further price reduction as new lower cost butter replaces the current butter on the grocery shelves.  Will the retail price of butter come down to the 2021 levels?  If so, butter will have to go through a deflation cycle.

 SUMMARY

These three dairy products make up the majority of U.S. milk production.  The COVID policies implemented in 2020 did have a major influence on disrupting the U.S. dairy business from milk producers to processors and to retail sales.  Then inflation came in to further disrupt the dairy business.  With volatility comes more concerns that can slow down any industry.   

Have dairy products contributed to the lower CPI overall?  It may lower the CPI but will prices return to 2021 prices?  There seems to be enough spread between wholesale and retail to lower the retail price of dairy products.