When it comes to gasoline, the public has a good grasp on price trends, thanks to the widely reported price of a barrel of crude. However, tracking milk prices is not so easy, even if prices paid to producers for raw milk is at a 40-year low, says Wayne Kellogg, professor and educator for the University of Arkansas Division of Agriculture.

"Milk producers have been hurt by the world’s economic problems — perhaps more than any other sector," he says. "For a while milk prices were high, but expenses for feed and fuel escalated at the same time.

"When the demand dropped, the farm price dropped dramatically," Kellogg adds. "It is a tough time."

The laws of supply and demand in the dairy industry are complex. For example, consumers use more cheese and butter in the fall, according to the USDA.

Even seemingly small factors like breakfast beverage preference come into play. Information released in 2007 by the NPD Group, a consumer research firm, found that 15.1 percent of consumers who eat breakfast away from home order carbonated beverages with breakfast, compared with 7.9 percent in 1990.

Meanwhile, cows keep producing milk, whether people are drinking it with their morning coffee or not.

All of these factors make milk pricing complicated. The federal milk marketing orders use formulas to determine the prices that are paid to the milk producer. It is a complex system, but it was designed to set a fair price for milk based on the use of the milk. Fluid milk demands the highest price, while the price for milk used in other products — such as butter, cheese, ice cream, and dried skim milk — varies with the raw materials used and the costs to make the specific product.

USDA instituted the orders in the 1930s to promote orderly marketing conditions. Some states, such as California, abide by their own regulations instead of the federal orders. Critics say the federal orders are outdated; supporters say it gives dairy farmers a level playing field.

"Ultimately, the price varies with the demand for products," Kellogg says. "If the demand is high and purchasers are bidding for milk in short supply, then prices paid to the milk producer will increase.

"Unfortunately, the opposite condition adversely affects the prices paid by customers," he explains. "A relatively small amount of excess milk has a disastrous negative consequence on the price."

At the consumer level, "retailers hate to reduce the prices in the store because it is difficult to maintain sales when the prices increase rapidly," Kellogg notes. "It may be appropriate to encourage retailers to drop prices hoping that sales will be stimulated."

Source: eXtension.org