DAIRY INDUSTRY: Crying over milk prices

Retailers benefit; consumer, farm disparity widens

Michelle Monroe

By Michelle Monroe

Executive Editor

Just
The Facts

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ST. ALBANS — While farmers receive less for their milk, the prices consumers pay have remain high, particularly in St. Albans where the average price for a gallon of milk exceeds the national average by 59 cents.

In St. Albans, on Thursday, the average price for a gallon of whole milk from grocery stores, Walmart and the St. Albans Cooperative Creamery, was $4.05 per gallon, compared to a nationwide average of $3.46 in March, the most recent month for which numbers are available. There is no national data on the average price of skim milk.

Prices paid to farmers have dropped more than 30 percent since November, but prices for consumers have dropped just 10 percent nationwide in the same period.

“The consumers aren’t getting the benefit of the drop in prices,” said Faye Conte, Advocacy and Education Director for Hunger Free Vermont, which advocates for low-income families in Vermont.

The drop in the farm price of milk is giving those in the distribution chain – primarily retailers – an opportunity to make some additional money, according to University of Connecticut economist Adam Rabinowitz.

Rabinowitz’s argument would seem to be born out by the results of a Messenger survey of milk prices in the area. One of the most expensive gallons – Price Chopper brand skim milk at $4.69 – came from the exact same bottling facility as the cheapest, Costco brand skim milk at $2.19 per gallon. Both are bottled by Dean Foods in East Greenbush, N.Y.

Prices also vary widely for milk from Hood’s facility in Barre. A gallon of Shur-Shine milk costs $2.85 at the St. Albans Cooperative Creamery, while Hood brand milk, from the same plant, costs $4.99 at both Hannaford and Food City.

With the exception of a couple of smaller outlets that sell Monument Farms milk from central Vermont, all of the conventional milk in St. Albans comes from just those two bottling facilities.

Lack of competition

But when it comes to retail prices, it is not the lack of competition at the processor level that causes the price to remain high, but the lack of competition at the store level, said Rabinowitz.

With his now retired research partner Ron Cotterill, a name likely familiar to many farmers from his work for the Vermont Milk Commission, Rabinowitz performed a study which broke down milk prices in southern New England and New York to determine how much of the money a consumer spends on a bottle of milk goes to retailers and how much to farmers and processors.

They found that the bulk of the milk price, in some cases more than 50 percent, was going to the retailers. Although that research is nearly a decade old, Rabinowitz said, “All indications from talking to people in the industry are that it really is the same thing.”

He is currently following the marketing efforts of small, local dairies in Connecticut, similar to Monument Farms here in Vermont. “Their challenges are retailers have so much power,” he said.

“Milk’s got to get into that store,” said Rabinowitz. Just as farmers have no choice but to sell their milk, even if the price is a loss, because of the perishable nature of the product, processors also need to move the milk into the stores for the same reasons.

While there are many outlets selling milk , the bulk of the sales come from the grocery stores. “At the end of the day, a large majority of the milk is being sold in supermarkets,” said Rabinowitz.

While a lot of attention has been paid to the lack of competition at the processor level – a situation clearly visible in St. Albans where consumers have a choice of milk from Hood’s Barre plant or Dean’s East Greenbush plant, regardless of what the label may be – “there’s a lot of concentration at the retail level as well,” said Rabinowitz.

St. Albans is fortunate with three larger grocery stores and a Walmart, but Enosburg and Swanton, with their single grocery chain stores are more typical. Being the only game in town gives retailers a lot of power over prices, suggested Rabinowitz and Cotterill in their original study.

Flat pricing

One sign of a lack of competition, according to Rabinowitz and Cotterill, is flat pricing, that is the practice of charging the same price for skim milk as is charged for whole milk, even though the wholesale price for skim milk, due to its lower fat content (which is removed and sold in other products), is significantly less.

In April, the order price, as set by the USDA, for whole milk in the Northeast was $18.75 per hundredweight and only $12.62 per hundredweight for skim.

Most retailers in St. Albans engaged in flat pricing. At Hannaford, the price for a gallon of store brand milk is $3.62 regardless of fat content. Booth Brothers and Hood were $4.99 per gallon for all varieties. The store brand came from the same factory as Booth and Hood, as shown by the stamp on the container identifying the plant of origin.

Walmart, too, flat priced its store brand at $2.99 per gallon for all varieties, but the price for Hood milk sold at Walmart did vary based on fat content. Walmart’s store brand was one of the few brands in St. Albans to come from Dean Foods.

Price Chopper, too, gets its store brand from Dean Foods, and charges $4.69 per gallon, on sale from a full price of $4.89. The price was the same regardless of fat content.

Food City was the only grocery store in town not engaging in flat pricing. For Booth and Hood brands, the price varied from $4.29 for skim to $4.99 for whole milk. However, Food City had a single variety, Crowley 1 percent on sale for $2.99. For more detailed information on milk prices, see the accompanying chart.

The cheapest milk in the region, by far, was to be found at Costco in Colchester, where skim milk cost just $2.19 per gallon and whole milk $2.69. Interestingly, Costco’s milk also comes from Dean’s East Greenbush plant.

Costco declined to speak with the Messenger for this story. However, Jim Harrison of the Vermont Retail and Grocers Association, pointed out that Costco has a different business model from traditional retailers. Shoppers pay an annual fee to shop there; the company doesn’t advertise, and it has the highest wage rates and best benefits among large retailers, according to Business Insider magazine.

“At the end of the day, they’re another option for consumers,” said Harrison, who argued there were a lot of options for shoppers in Vermont, including cooperatives such as City Market.

“At the end of the day, it’s a competitive market,” he said.

In 2009, when prices dropped precipitously to farmers, the Messenger also reported on continued high retail prices. Retail prices eventually “did drop and were certainly more competitive,” said Harrison. “That will happen again.”

One of the reasons stores may be slow to drop prices for milk, is that milk consumption tends to be inelastic, meaning consumers don’t consume more when prices fall and don’t consume less when prices rise, explained Rabinowitz.

 

Matter of income

One group for whom that isn’t true is those with limited food budgets. For consumers receiving 3SquaresVt (Vermont’s food stamp program), a dollar or two drop in the price of milk can make a difference. “Those are the people who are certainly most affected by higher milk prices,” said Rabinowitz.

Conte said, “Milk is a really high nutrient, high quality product that we want our Vermont families to be able to afford.”

When low-income families have an increase in their food budgets the first items they add back to their diets are fresh fruits and vegetables, meat and dairy, said Conte.

“Prices are often not fair… for farmers or consumers,” said Conte, noting that many farmers in Vermont are food insecure, meaning their families are at risk for missing meals.

While options such as shopping at Costco may work for middle-income consumers, for lower income shoppers those stores are often out of reach. First, they must get to the store, which requires a car and money for gas, noted Conte, and then there is the $55 annual membership fee.

Finally, although Costco sells milk by the gallon, most of their other products are in bulk, which requires a larger upfront investment when grocery shopping. While the price per pound for flour or rice, for example, may be significantly less at Costco, consumers must have the money to purchase 10, 15 or even 20 pounds.

There is also the issue of time. “Most people who are on 3SquaresVt are working,” said Conte. They are often working more than one job, leaving less time for buying and preparing meals for their families, she explained, or searching to find the best prices from among a number of retailers.

Asked what can be done to lower retail prices, Rabinowitz said more competition. He and Cotterill previously found that the presence of a Walmart resulted in lower milk prices. That does not appear to have been the case in St. Albans, where most milk retails above the national average of $3.46 per gallon for a gallon of whole milk, and the average price was $4.05 on Thursday.

In upstate New York State, however, retail prices were just $3.05 for a gallon of whole milk in March, and skim was $3.02, according to the state’s survey of milk prices.

In New York, retail prices are kept low by a law limiting retail prices to twice what farmers are receiving for their milk. That rule has been effective at containing retail prices, said Rabinowitz.

In January, the most recent month available, the final net price for milk in New England was $19.33 per hundredweight, with farmers receiving $1.67 per gallon.

If Vermont had a law similar to New York’s the maximum price retailers could have charged in January for whole milk would have been $3.33. Skim and other reduced fat varieties would have been even lower.