Consumers paid a lot more for fluid milk, butter, cheese and ice cream this spring and summer.
Although sales of fluid milk and ice cream took a hit, consumers kept buying cheese and butter, according to an analysis by Ken Bailey, dairy economist at Penn State University.
Consumers first noted a big jump in the cost of a gallon of milk this spring. The average price for a gallon of whole milk in major U.S. cities rose from $2.88 per gallon in January to $3.57 by June. The result was a noticeable reduction in fluid-milk sales. Consumption declined 1.4 percent during the first half of the year. In the latest quarter ending June 30, consumption declined nearly 3.0 percent. “Some consumers were unwilling to pay that much for a gallon of milk,” Bailey notes.
There also was a noticeable decline in the sale of ice-cream products. Sales of frozen desserts fell 0.7 percent during the first half of the year. Retail prices rose just 1.6 percent during that time period. Bailey observed that ice-cream prices had been rising steadily over the years —faster than the cost of dairy ingredients.
While the laws of economics seem to apply to ice cream and fluid milk, nothing adequately explained the modest increases in sales of butter and cheese. During the first six months of 2004, butter consumption rose almost 4.0 percent while butter prices in the grocery store rose 18.5 percent. “This was pretty good sales growth in the face of a butter shortage and strong increases in butter prices,” Bailey notes. “Consumers were willing to pay a lot more for butter than I expected.”
The same also was true for cheese consumption during the first half of the year. Sales of American cheese and Italian cheese were up 2.7 percent and 5.7 percent, respectively, despite wholesale price increases of 18 percent. Most cheese in the U.S. is sold to food processors or fast food retailers — not in the grocery store, Bailey says. Thus, a strong increase in wholesale cheese prices normally results in far fewer sales. That did not occur this year.
Bailey concluded that consumers were willing to give up fluid milk and ice cream much faster than butter and cheese because of changing perceptions of which products are better for their diet. “Consumers were surprisingly willing to pay more for butter and cheese in order to keep these items in their diet,” he said.
Consumers can expect to pay much less for dairy products in the months ahead. The milk supply is once again expanding and that means lower prices for all dairy products, particularly butter and cheese. Bailey is forecasting that the milk supply will reach normal levels of growth by the end of the year.
You can find Bailey’s analysis in his weekly “Dairy Outlook” report, located at:
Penn State University Department of Agricultural Economics and Rural Sociology