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Farmers And Consumers: Milked By The Market

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Farmers And Consumers: Milked By The Market

By Nancy K. Crevier

There are two things that people in Newtown want: inexpensive gas for their cars and affordable milk for their lattes. After spending the last year cringing at the fuel pump prices, locals have become resigned to paying well over $3 a gallon for gasoline. Now, to add insult to injury, milk lovers are paying even more than that for a gallon of milk.

“I have absolutely noticed the increase in milk price,” said Joann Sherwood of Newtown. Her family of four goes through approximately two gallons every three days, she said. “I do always try to buy milk on sale, but I have seen it up to $4 a gallon in local markets,” Ms Sherwood said. “The price has steadily been going up, especially the last few weeks.”

The rising cost of milk has not affected how much milk the Sherwood family buys, though. Primarily Ms Sherwood seeks out milk that is free of growth hormones. “Then I look at the price. I would say, hormones, price, and taste determine what I buy and how much I spend,” she said.

It is the high cost of feeding cows, energy costs, and an increased domestic and international demand for dairy products that has pushed milk prices up over the past several weeks, said Christopher Galen, spokesperson for the National Milk Producers Federation (NMFP). Consumer demand for milk produced without the use of growth hormones has also added to decreased milk production. In addition, low wholesale prices paid farmers in 2006 for their milk caused dairy farmers, already struggling to make ends meet, to lose ground. “Last year was a bad year for dairy farmers,” said Mr Galen. “More dairy farmers were forced out of business or did not expand their business.” Less milk production and increased demand means a higher price for milk.

This year, the USDA regulated price paid to farmers for their milk has increased, but the price paid to farmers still does not cover production costs in most cases. According to an April 2007 report from the NMFP, farmers receive only about one-third of each consumer dollar. The wholesale price of whey, cheese, and butter is determined by trading on the Chicago Mercantile Exchange and regulated by the USDA, so prices can vary from month to month. “It is complicated,” said Mr Galen, but farmers are not allowed to pass on production costs. As the prices of corn, soy, and gas continue to rise, consumers can expect to see the cost per gallon of milk go up, at least through the early part of summer, Mr Galen said. Regional pricing trends among retailers also affect the final cost consumers pay for milk, he said.

Agri-Mark is a farmer-controlled New England cooperative that processes millions of gallons of milk every year. “Everyone’s costs have gone up,” said Douglas DiMento, spokesperson for Agri-Mark. “The cost of feed, fertilizer, and seed, and the health insurance and labor costs have gone up tremendously [for dairy farmers],” he said. “The ethanol craze has affected the corn price, too.”

Connecticut farmers feel the pinch of rising costs for other reasons, said Mr DiMento. “Most everything that the dairy ^farmer needs for production is trucked into Connecticut. Connecticut also has the highest value acreage, according to a USDA survey,” he said. That translates into higher taxes for farmers. Land availability for farming has decreased over the years, as well. “In Connecticut, there are simply more opportunities for farmers to sell the land for nondairy uses.” Less land, fewer farms, and lowered production affects the supply and demand. Higher milk prices in the store is the result of these many intertwining issues, explained Mr DiMento.

“Agri-Mark, of course, wants to see farmers get a better price for their milk. We want the farmer to get a fair share, but not at the risk of people not buying milk [because it becomes too expensive],” he said. There is, he said, no direct relationship between farm prices and the retail prices.

According to a report published in February of this year by Ronald W. Cotterill, Adam N. Rabinowitz, Michael A. Cohen, Melanie R. Murphy, and Charles R . Rhodes of the Food Marketing Policy Center (FMPC) at the University of Connecticut, four of the largest retailers in Connecticut kept $1.81 of the November 2006 average retail price of $3.83 per gallon of milk for in-store costs and profits. That is a dollar gross margin or 47 percent of the retail price, a percentage that the group labeled “excessive” in their report. The average gross margin for all products in United States supermarkets, said the report, is only 27 percent.

Professor Cotterill, who teaches agricultural economics and economics at the university and who is the director of the FMPC, where milk price trends have been tracked for the past three years, said recently, “What has happened since November is that the farm price has gone up. Farm prices have recovered and the farmer now receives $1.50 or $1.60, up from $1.25 last year.” That is good news for the farmers, but not so good for Connecticut consumers, he said. The structure of marketing in this state, explained Prof Cotterill, always leaves a wide margin between what farmers are paid and the retail cost of milk.

“If you look at the trend over a period of 10 or 15 years, prices ratchet up, but they don’t come down [when farm prices are low],” he said. That means that even when wholesale milk prices dip, consumers in Connecticut generally do not see a comparably lower milk price. In neighboring states where there is more retail competition, or where price-gouging laws are enacted, consumers can pay substantially less for milk, said Prof Cotterill.

The FMPC is working with state legislators to come up with solutions to the milk marketing structure problem in Connecticut, said Prof Cotterill, and current legislative action to pare down the market margin is underway. Actions would include the implementation of a retail threshold price law that would be, in essence, a tax that retailers would pay to the state treasury. Retailers would not be able to pass on the cost of the tax to consumers. That money would be used to support a state program to raise the price paid for milk to farmers, thus keeping farmers in business.

“We also need to eliminate the flat milk price,” said Prof Cotterill, referring to the system of pricing skim, lowfat, and whole milk at the same price. “The cost of skim milk to the consumer should be less than the cost of whole milk, because the processor pays less for the lower butterfat milks,” he explained. A side benefit to lowering the cost of skim milk, said the professor, would be that more people might opt for the healthier, lower fat milk product.

The week of May 28, Newtown milk prices were between $3.19 and $3.99 per gallon at local stores, with the price for organic milk hovering around the $6 mark per gallon. A year ago, according to data from the Connecticut Department of Agriculture, consumers were paying on average about 25 cents less for each gallon of milk.

At The Big Y on Queen Street in Newtown, store manager Bob Rainville noted that in celebration of the opening of the Bethel Big Y last month, milk prices were actually lowered. Milk prices there the week of May 28 were under $3.50 a gallon for milk for most of the main labels carried in the store. “I suspect that it may be that gas prices are affecting the wholesale price of milk,” he said, due to higher production and transportation costs. “The Big Y customer has not been affected yet by the higher prices,” he said.

Got milk? For now, the answer is Yes, but at a cost to both producers and consumers.

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