The Amazing Success of Organic Milk

This post will look at the success of organic milk.  Is it a niche dairy product?  How does it financially compare to conventional milk?  Who is making money with organic milk?  The retail price of organic milk is more than double the price of conventional milk.  However, even with this huge pricing difference, consumption of organic milk is growing while consumption of conventional milk is shrinking.  See the recent analysis of fluid milk sales in this recent post.

Organic milk currently makes up about 6.3 percent of total milk consumption.  It has grown from 5.6 percent at the beginning of 2018.  The growth rate appears to be accelerating (Chart I). 

Chart I - Growth of Organic Milk as a Percent of Total Milk

Chart II and Table I below compare the retail prices of conventional and organic milk.  The data covers the years 2018, 2019, 2020 and the first months of 2021.  Organic milk has an average retail price of $8.12 per gallon during this time.  The price has been very consistent with no visible trends.  There is almost no price difference between whole and two percent milk.

By comparison, conventional milk has an average retail price of $3.40 per gallon for whole milk and an average price of $3.34 per gallon for two percent milk.  The lower price for two percent milk has been consistent.  Conventional milk is selling for just 42 percent of the price of organic milk.

Chart II - Retail Prices of Conventional and Organic Milk

Table I - Retail Prices of Conventional and Organic Milk

CONVENTIONAL MILK PRICING

Conventional milk is a commodity.  It is purchased from producers, processed, packaged, delivered, and sold as a commodity.  Chart III and Table II below compare the retail price of conventional milk to the producer price for Class I milk.  Chart III adds the weighted average primary Class I differential to the Class I base price to better compare what the processor pays for this milk vs. the retail price it is sold for.

The average producer price is 41 percent of the final selling price.  That leave 59 percent for pasteurizing, homogenizing, packaging, delivering the milk to grocery stores, and the grocer's retail markup.  Overall, the whole process is very indicative of a commodity with low margins through the entire process. 

Chart III - Retail and Producer Prices for Conventional Milk

Table II - Retail and Producer Prices for Conventional Milk

ORGANIC MILK PRICING

Chart IV and Table III compare organic milk retail pricing and producer Class I milk pricing.  In this case, the producer price is not strictly the Class I price.  Organic producers do receive a higher price because of the costs to get certified and produce the milk to organic standards.  The amount of the higher price is not public, but those in the business discuss the bonuses as originally around 50 percent but decreasing over time to about 30 percent.  The chart and table below use these amounts in the comparison.

All in the chain benefit from the higher prices.  However, the greatest beneficiaries are the processors who have taken a strong marketing stance based on the popularity of organic products.  With organic milk, whole milk and two percent milk are closely priced.  This is not true of conventional milk.

Chart IV - Retail and Producer Prices for Organic Milk

Table III - Retail and Producer Prices for Organic Milk

The spread between the retail prices and the producer prices are very different for conventional milk and organic milk.  The spread between retail and producer prices for conventional whole milk is $2.01 per gallon.  The spread for organic whole milk using the 30 percent producer organic up-charge is $6.00 per gallon.  Over time the significant organic spread between retail and producer prices will likely decrease with competition.

Over time, niche products can become commodities.  Currently, that is not the case with organic milk as the retail prices have remained stable.  That does appear to be happening to the producer prices as more organic producers have added to the available supply of certified organic milk.

Organic Valley has done an excellent job of promoting and getting placement for their organic milk with a strong brand name.  However, as success comes, so does competition.  Other brands are showing up in stores like Safeway, Costco, Walmart, and Target.  They are selling their own branded organic milk.  It's hard to tell for how long organic milk will be a niche product with high prices. For now, the store brand organic pricing is in line with the organic prices quoted in this blog. However, over time, organic milk will likely become more commoditized and prices will likely drop.