How much do you pay for milk? On average it's about four bucks a gallon right now. But why? Whether you like it or not, I'm about to tell you.
The federal government sets the price farmers get for milk. But not nationally. Of course not. There are 11 regional FMMOs in the United States—Federal Milk Marketing Orders—and they all set their own price for milk:
For the rest of this we're going to ignore the regions and use a national average. But it's just an average. Here's the way prices are set.
First, the USDA surveys distributors every month to get their wholesale prices. But they don't want the price of milk itself. Oh no. They want the price of four components: butter, nonfat dry milk, cheese, and dry whey. Here's the formula that eventually turns this into a price for whole milk:
Got that? No? Let's break it down using the latest survey prices for September. Here's step 1:
Step 2: The USDA calculates the "make allowance" for each commodity. This is the production cost to make each commodity from milk. For example, the cost to make butter from milk is set at $0.1715 per pound. Subtract this from the price of butter and you get a net price of $2.98 per pound of butter.
Step 3: Calculate the yield of each commodity. For example, it takes 1.211 pounds of butter to make one pound of butterfat. Multiply this out and the price of butterfat is $3.61 per pound.
Step 4: Are we done yet? By no means. Next we have to calculate how much of each component is in milk. For example, it turns out that whole milk is 3.5% butterfat, so a pound of milk needs only $0.1262 worth of butterfat. Multiply this by 100 because milk is measured in hundredweights and you get a factor of 3.5 and a final component price of butterfat of $12.62 for a hundredweight of milk.
Step 5: We could now set a whole milk price, but that would be too easy. Instead we calculate the price of Class III skim milk (protein + other solids) and Class IV skim milk (dry whey). Then we average them and add 74¢:
Step 6: Almost done! But first we have to multiply by 0.965 because that's how much skim milk you get from a hundredweight of whole milk.
Step 7: Finally we add in the butterfat we left out of the skim milk price:
Ta da! The farm gate price for whole milk is $23.46 per hundredweight. Approximately. I left out a bit of extra complexity in the protein price and also skipped the somatic cell adjustment rate, currently $0.00114 per thousand cells. So the actual price for Class I whole milk—i.e., milk meant for drinking—is a few cents higher.
And there's more! As I said before, this is a base national price. Each region throughout the US tacks on a "differential" for Class I milk:
These differentials range from $1.60 per hundredweight in the upper Midwest to $6 in Florida and affect local prices of milk
So what does this all mean to you? As this chart shows, the average retail price of milk across the US closely follows the USDA price:
The average farm price for milk this year has been about $22 per hundredweight. There are 11.6 gallons in a hundredweight, so that comes to $1.90 per gallon. The rest of the retail price comes from distribution, processing, packaging, markups, and the regional price differentials.
Now you might wonder: if the USDA price is based on surveys to determine component prices, why go through all this rigamarole? Why not just survey milk prices and be done with it? And if, in the end, they're just setting prices based on what actual prices are, why bother with any of this?
That I don't know. The whole thing started during the New Deal and it's held on ever since with periodic refinements along the way (most recently in 2018). It probably has something to do with pooling and smoothing prices for farmers, but that's just a guess. It all seems kind of wacky to me.
It’s Fizbin…
Omg! I read this in the dark on Tuesday!
So I guess Hawaii and Alaska are not part of the USA when it comes to pricing milk?
"Freak states."
- H Simpson
Are they only setting the price of milk? If the others are at market rate, then they are trying to determine the market price of milk without it being directly on the market.
Why? Too many boom-bust cycles and they wanted to preserve farms during the great depression. The problem today is that farmers setup co-ops, but those co-ops have grown and gathered too much power over individual farmers:
https://washingtonmonthly.com/2020/09/14/milking-profits-the-dairy-monopolies-that-are-hurting-farmers/
So can we all at least agree that we should abolish this system and any rules that limit the supply of milk or that force farmers into cooperatives and just let the free market determine supply, demand, and price for milk?
I'm guessing not. Too sensible and too libertarian.
You should have stopped with "Too sensible." Libertarianism is just selfishness pretending to be an idea.
If you get beyond Econ 101 and take Econ 102, you will learn about the difference between elastic and inelastic markets and the reasons why simply allowing market pressures to have their way doesn't work well in inelastic markets, such as the market for milk.
holy cow! 🙂 i had no idea this was going on. cray cray. but there must be some reason for it all other than historical feast and famine with milk production?
I'm guessing it all has something to do with stabilizing price and supply and making it impossible for the average person to follow, so impossible to argue with.
But why are the different price structure regions shaped the way they are, elongated from east to west?
Cows milk production is very temperature sensitive so the cost of production will vary significantly as you go north south and not so much going east west.
So despite the fact that I live in an area where I'm literally surrounded by dairy farms as far as the eye can see (and nose smell), I pay twice what they do in Iowa. Roger that.
Here's the real question. Is the price set by this bewildering array of calculations enough to allow dairy farmers -- family farmers, not the 2500-head corporate behemoths in places like CA -- to survive? Or was it basically designed to encourage Earl Butz-style consolidation. You know, go big or get out?
So in figure 1, do the white areas just not get milk?
The component parts that get priced at their market rates, and whose prices are used to set raw milk pricing, are either dry, or in the case of butter, have a long shelf life. Contrariwise, raw milk will spoil extremely quickly, and even when it's refrigerated right after pumping, as the modern processing chain usually does, remains very perishable. Plus, I've seen it said that cows' milk output can vary.
This, I have to think, can make milk subject to extreme supply fluctuations that would make life pretty hard for the dairy farmers if they had to sell into a market whose supply conditions changed enough every day to affect prices in any significant way, and for the dairy buyers ditto.
So it looks to me like what USDA is doing is periodically figuring out a stable equitable price for raw milk, basing that number on market pricing for the long-term-stable derivatives of raw milk, so that farmers and dairy buyers don't have to deal with day-to-day fluctuations that could be very difficult for either side of the transactions to deal with.
IOW, it's smoothing the curve, is what it's doing. Which is familiar enough around here!
Stabilizing prices is a reasonable function for government, especially for things that are vitally necessary such as food. Food prices can be subject to extreme variation due to weather and other factors.
Unlike some commodities, milk is highly perishable and can't be stockpiled cheaply. Typical cheese and other milk product varieties can't either.
Many can't be stockpiled, but cheese is one thing the government famously stored mountains of for years; I think it was amassed as part of a school lunch program or something like that but just built up in immense amounts. Probably needs special conditions and all, and who knows what shape the oldest stock was in, but it was there. Publicity on this was quite a while ago, though.
I'd have to think the advantage of basing raw milk prices on dried and other stable derivatives is that they'd be the least likely of milk products to fluctuate in price because of supply variations, and maybe demand variations too. So it's a market-based, relatively stable benchmark.
This makes no sense.
If you stabilize prices while supply varies then you get gluts and shortages.
The appropriate action is to let prices for raw milk fluctuate. People who are price sensitive can drink long life milk (which is perfectly fine) when prices spike.
In this case at least, the point is very little about consumers and very much about both producers and processors, in the first instance. In order to serve that ultimate consumer market, both of these parties have to make investments that commit them to long-running expenses that they can each handle more effectively and safely when milk-price fluctuations are smoothed out, in the same way that your mortgage payments can become a problem for you and your lender if you're strictly commission and have a bad couple of months-- average is one thing, fluctuations make it something else. Their lenders also prefer it this way, as your mortgage-holder will.
Sometimes, if price fluctuations aren't smoothed out, producers and processors can be put out of business. That's where consumers come into this picture, and that result is sub-optimal for them too.
Can we just review something simpler like the equations for Special Relativity?
C’mon man!
In this crowd a straightforward algorithm that any of us could easily work out using our software of choice (including pencil and paper) is enough to draw snarky remarks about special relativity? Even our host calls it “kind of wacky”.
I mean c’mon man.
As Altoid explained, this is all about smoothing sharp fluctuations that used to cause unpredictable grief to farmers, sometimes driving them off their land. And threatening the rest of us with risk to an essential commodity.
It’s the kind of thing a responsible government should be doing.
Now, they may or may not be doing a good job of it. I have no idea about that. But let’s leave the snide remarks about how complicated it looks to the other team, ok?
I was only lowly accountant at one time, but that looks like going around your ass to get to your elbow.
More importantly, did you know…
Dozens of people rallied outside the Michigan headquarters of WK Kellogg Co. Tuesday, demanding that the company remove artificial dyes from its breakfast cereals in the U.S.
Kellogg, the maker of Froot Loops and Apple Jacks, announced nearly a decade ago that it would remove artificial colors and ingredients from its products by 2018.
The company has done that in other countries. In Canada, for example, Froot Loops are colored with concentrated carrot juice, watermelon juice and blueberry juice. But in the U.S., the cereal still contains artificial colors and BHT, a chemical preservative.
https://www.woodtv.com/business/ap-business/ap-protesters-demand-kellogg-remove-artificial-colors-from-froot-loops-and-other-cereals/
That’s the real scandal.
Coming to this so late my info won't help, but writing it will please me (son of a dairy farmer).
Need to remember "raw milk" is not an end product, it's an input to manufacturing. The milk you drink is homogenized and pasteurized and vitamin D added. Raw milk is the input to cheese, butter, buttermilk.yogurt, ice cream. dried milk, evaporated milk, condensed milk, etc.Some portion of these are used in further manufacturing (i.e, baked goods, pizza, etc.
The milk program you question had its roots early in the last century, which is when I grew up. ( The dairy business has changed since then, in ways I'm not familiar with.)
Also remember that the natural reproduction cycle of cows means calves are born in the spring so they can grow during the summer before winter comes. That means in the last center there was a surplus of milk in spring and summer, a scarcity in winter. (Pregnant cows cease production after 300 days or so.)
So the pattern of raw milk usage was in the 1930s to maximize the usage for manufacturing (butter, cheese, etc.) in the spring and summer and store those products for sale in winter.
Further, milk spoils quickly unless refrigerated, meaning transporting it long distances is problematic. So processing plants were located in areas with lots of dairy farms which tended to be small. (We had 12 cows in 1950, producing about 9,000 lbs per cow a year)..
All these factors meant a lot of variation in supply, with not much variation in demand, resulting in price fluctuations for farmers. In the 1930's there were "milk strikes"--farmers dumping milk in an attempt to raise prices. https://en.wikipedia.org/wiki/1933_Wisconsin_milk_strike
All of these factors, and likely others I forgot or never knew, resulted in milk marketing program (along with purchases of milk products for the school lunch program and Native American program), a program which has been changed many times over the 90 plus years since.
The reason to fix prices is to keep the dairy farmers comfortable. The reason to set the prie of milk based on the free market price of things that are made from raw milk is to assure that farmers receive comparable compensation when they sell milk to be converted into cheese, and when they sell milk to supermarkets or school lunch programs.
Supply of milk is hard to shift in the short term, since cows have to be born and reach the approprite age. When the program was developed, most homes didn't have refrigerators, so milk was usually delivered every day. Any kind of supply shortage would leave families without milk very quickly. Also it was widely believed that children needed milk every single day to stay healthy--a less universal nutritional belief these days.
With a free market, a sudden increse in demand for processed milk products, led farmers ro sell to the processors, and stiff the daily deliverers and school lunch programs. The price program made the price of milk automatically adjust when that happened.
Back in the day this solved a real problem. These days, it's absurd.