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Four key factors impact dairy price spread

Maggie Gilles, Kansas Dairy Farmer

March 25, 2021

Who sets the price of milk, and why don’t dairy farmers see a larger part of the profit from dairy products? That was the question commentators tried to answer during the March 24 Hoard’s Dairyman DairyLivestream.

“There’s some seller effect that comes into play sometimes; there’s some buyer effect that comes into play sometimes; and then somehow it works together and out pops a price,” Cornell’s Andy Novakovic said of the way most people think of milk pricing.

While this is true at the most basic level of economics, there exist several factors that contribute measurably to the spread in farm gate and store pricing. Novakovic outlined four key pricing contributors during the webcast.

  1. Channel distribution

  2. Nature of the product

  3. Transformations and transportation

  4. Storage

“The first is channel distribution. Is it going to retail or wholesale? Secondly, what’s the nature of your product?” the esteemed dairy economist said of the first two keys.

Specifically, these two pieces set the basis for where pricing can go once the product reaches the store.

Novakovic gave the example of a higher-end cheese. In the case of that type of product, a lot of time is spent developing the brand and making a product that has inputs beyond a deli or value brand cheese. Those become embedded costs in the product and affect what type of retailer might market them.

To the third key, transformation and transportation, Novakovic did some myth busting. It’s often true, but not always, that processing an original farm product results in a lower farm share price of the final item. “The example I always like to give is buying a fresh orange versus buying a frozen concentrated orange juice,” he shared. “I can tell you right now that the farm share of frozen orange juice in New York City is a hell of a lot higher than the farm share of a fresh orange delivered to New York City. Guess why? There are not a lot of oranges grown in New York City, and getting anything that started its life as an orange into New York City takes some transportation costs.”

Novakovic’s final key to consider is also relevant in the example of orange juice concentrate – storage. In the case of cheese, anything that is stored is inherently going to carry higher prices in the store because of the amount of time it’s going to spend in the aging facility, which, of course, costs money.

“There are a lot of factors that go into the difference between my price and what I see in the grocery store,” he concluded. “Some of them are influenced by who’s selling the product. A lot of it is influenced by who’s buying the product.”

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