Why Dairy Demand Has Become More Elastic

With the government no longer one of U.S. dairy’s best customers, prices are more reactive to consumer demand.

You may have learned in your high-school or college economics class that dairy consumption is relatively “inelastic,” meaning that demand for food staples like milk, butter and cheese varies little with price.

But times have changed, and dairy demand is not inelastic as it once was, says Sara Dorland, managing partner with Seattle-based Ceres Dairy Risk Management. Higher prices can have a direct effect on consumption of dairy products.

“Historically a good amount of our product went to the U.S. government, which kept prices stable, especially for skim products,” says Dorland, who holds an MBA in business and finance. “Therefore, once every few years, butter or cheese would have a run-up and fall back down. As a result, milk and dairy product prices played within a rather tight range, a factor that contributed to our belief that demand was rather inelastic. Today, that is not the case as the government is no longer one of our best customers.”

Additionally, when it comes to fluid milk, there are many beverage alternatives whose prices are far more stable.

Reacting to dairy prices, quick-serve restaurants like McDonalds influence dairy demand.

“With all of those factors, we do see that consumers are price sensitive, especially when it comes to fluid milk,” she adds. “Butter and cheese are far less so. People like cheese and have been paying a good amount of money for it this year, which makes me very optimistic about domestic cheese demand this year.”

The Food Network and the Food and Drug Administration have done a lot to help butter demand, notes Dorland. “In the past, butter was vilified,” she says. “Now butter is best.”

With that stamp of approval and emerging health concerns about margarines and butter substitutes, consumers are making the switch back to butter. Given lower margarine output and the studies on transfats, people are unwilling to switch back. “Again, people are buying butter, but when it gets expensive, they buy a little less,” says Dorland. “We saw that this fall with the lower commercial disappearance figures.”

So, which food sectors help drive the fluctuation in dairy demand? Dorland points to restaurants and quick serve restaurants in the domestic market. 

“When prices begin to rise, we see a little less cheese and butter on the menu,” she says. “As an example, McDonald’s may replace the double cheeseburger with the cheese burger and eventually the hamburger. Pizza outlets run fewer promotions and ads. What appear to be very small changes can swing the market pretty quickly to an over-supplied situation. Add to this consumers buying a little less at the store and demand eases back. The opposite is also true.

“The complication today is that this happens on a global scale,” adds Dorland.