The afternoon panels testifying in USDA’s and the U.S. Department of Justice hearing on dairy market consolidation in Madison, Wis. June 25 offered a fascinating lesson in the dynamics of fluid milk markets. Though numerous speakers in both the morning and afternoon railed against large firms—both proprietary and co-op—empiric evidence was often lacking.
Part of the problem is that firms are not required to release market share information, particularly on a market by market basis. So University economists often must rely on the scraps of information that are publicly released. Occasionally, a Federal Agency such as the Government Accountability Office will be charged by Congress to investigate some aspect of the industry, and with its subpoena power, can often shed more light.
The total revenue of dairy co-ops is less than $40 billion, with the top 10 co-ops claiming 57% of co-op market share. Dairy Farmers of America claims 20%, California Dairies 9% and Land O’Lakes, 7%. “Any co-op alone doesn’t have the market power to affect prices,” says Bob Cropp, an ag economist with the University of Wisconsin.
Marketing agencies in common (MAIC), in which two or more co-ops join together, gives them additional market power, he notes. In 2009, the MAICs did exert some upward buoyancy on prices, notes Cropp, with mailbox prices averaging 38¢/cwt more than Federal Order minimum prices. This was not true for all Federal Orders, but was true for most, he says.
The other point many fail to realize is that there is far more Grade A fluid milk available to meet fluid needs than demand requires. Across all orders, the Class I utilization averages 37%. But more than 90% of milk is produced under Grade A permit, meaning there’s nearly 2 ½ times more fluid milk available than fluid demand.
Fluid markets are not national but regional, says Ron Cotterill, an ag economist with the University of Conneticut. As such, any entity, whether proprietary or cooperative, can exert their will on prices regionally if they hold sufficient market share.
Another disproven myth is that company mergers lead to greater efficiencies with benefits passed on to consumers. “Instead, mergers coalesce market power and exploit both ends—the consumer and the farmer,” he says. “Profits stay with the processors and the retailers, and cheap food becomes cheap for corporate America.”
“Now, milk is the cash cow, with 40% to 45% margins on milk. It used to be 20%. Milk used to be a loss leader [to attract customers into stores],” Cotterill says.
Cotterill also disparages flat milk pricing, where retailers offer skim, 1%, 2% and whole milk all for the same $2.99/gal. “That should stop. It does not give the consumer the opportunity to buy healthier milk at lower prices,” he says.
Brian Gould, another University of Wisconsin ag economist, notes that the largest co-ops are increasing their market share. In 1987, only two co-ops were marketing more than six billion lb. annually. At that time, these two co-ops were marketing 24% of all co-op controlled milk and 17% of the nation’s milk supply.
Ten years later, four co-ops were marketing more than six billion lb. annually. These four controlled 48% of all co-op milk and 40% of the nation’s milk supply.
He also notes that the level of concentration is increasing the fluid market. Gould uses an HHI concentration index, in which 1,000 is moderate concentration and 1,800 is very concentrated. In 1987, the HHI for national fluid milk concentration was 195. In 2002, it had climbed to 1,060. “It went from being extremely low to moderately concentrated in just six years,” says Gould. “These numbers are based on the total U.S. market,” he acknowledges, “so they may not be relevant in regional markets.”
Gould also notes that the HHI numbers have actually gone down for cheese since 1987, meaning cheese markets are becoming less concentrated as more firms and specialty producers enter the market.
Finally, Gould looked at fluid milk concentration ratios (CR), the percent of market the top four firms control in a market. In 1987, the CR4 (for the top 4 firms nationally) was 33.4%. By 2008, it had had climbed to 48.7%. But the CRs can vary widely by market. In 1999, for example, the Federal Government Accoutability Office found the CR4 in New Orleans to be 52.4%, in Boston, 88.1% and in Phoenix, 97.4%.
Perhaps Professor Cotterill summed it all up best: “Ultimately, fairness in dairy pricing requires a political answer, not an economic answer.”
