Milk prices ticked up again recently. A gallon of 2% costs more than $4 in many local stores.
Floridians already pay more for milk than residents of most other states. The price could climb even higher in the next few months.
How’d we get here? The answer requires a dive into the fascinating and complex dairy supply chain. Milk pricing is a Byzantine mash-up of free markets and fixed prices, a kind of financial GMO. It’s the stuff of Ph.D. dissertations, but we will stick to the basics.
It helps to begin with dairy farming, where milk gets its start.
Florida’s dairy farmers own about 125,000 cows that produce about 2.4 billion pounds of milk a year. That may sound like a lot but the state ranks 18th in production, far behind leaders California at 40 billion pounds and Wisconsin at 30 billion.
Florida is a milk deficit state. We don’t produce what’s needed to supply the state’s growing population with enough milk, cheese, butter, yogurt, ice cream and other dairy products.
The climate doesn’t help. Cows don’t eat as much when it’s hot, which cuts down on how much milk they produce. Balmy weather can also interfere with breeding.
The state has more regulations than some big milk producers like Idaho, Wisconsin and Texas. Land costs are higher, too. In fact, by some measures Florida has the highest milk production costs in the contiguous 48 states.
Costs are high, and for most of the last five years, low prices have made it ever harder for farmers to profit. How hard? Alachua County dairy farmer Matthew Lussier described annual prices like this:
2017: a little better.
2019: might break even.
Lussier runs about 600 cows on a farm east of Gainesville. He takes pride in feeding people, even when he’s taking it on the chin financially. Farmers expected a drop-off after 2014 — the last good year — but no one thought it would be so deep and last so long, he said.
In part, Lussier blamed the crisis on trade tensions with Mexico, a huge importer of U.S. milk products. Last year, things looked to be turning around, he said, before the trade dispute with China erupted. China isn’t nearly as big of an importer as Mexico, but the loss didn’t help, Lussier said.
“Farmers are used to tightening their belts in hard times,” said Lussier, the president of the Florida Dairy Farmers. “They work a little harder, a little smarter. It helps the industry innovate and get better. And when the good years come, we reinvest in our farms. We haven’t been able to do that in five years. It’s not sustainable.”
The numbers are grim. Florida had about 80 dairy farms in 2018, down from 127 in 2014. Across the country, more than 7,300 dairy farms shut down in the last five years. The remaining 37,000 need higher prices to survive, analysts say.
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When a farm closes, the best cows are sold to other farms. That’s part of why milk production continued to rise despite fewer farmers. It climbed almost 6 percent from 2014 to 2018, according to the U.S. Department of Agriculture. Some analysts argue that the United States is overproducing, which is a drag on prices.
Dairy economist Chuck Nicholson doesn’t think that increasing exports will necessarily cause prices to rise very much, though he acknowledges that not everyone agrees. Milk exports are already near historic highs and prices haven’t moved up that much. Part of the reason is that U.S. dairy farmers are exceptionally efficient. They can quickly produce more milk when domestic or overseas demand rises.
“They are so good at it that increases in export demand tend to be pretty quickly filled by additional milk supplies,” said Nicholson, an adjunct associate professor at the Charles H. Dyson School of Applied Economics and Management at Cornell University. “That keeps prices from increasing much, which isn’t what farmers have wanted over the last few low-price years.”
Demand for dairy products remains fairly high in the United States, driven by a growing population and demand for pizza and other cheese-centric foods. Favorable research published over the last decade has also resurrected butter’s reputation as a healthy part of a balanced diet. Strong butter prices, in fact, have helped some farmers survive the last few years.
One downside: Consumers aren’t drinking as much milk. Farmers get paid more for fluid milk, as it’s called, compared to other dairy products. A farm might produce the same amount of milk, but it’s not selling as much milk of the highest priced variety. That means less money in their pockets.
“That’s definitely part of the story on the lower prices we’ve seen in the past four years,” Nicholson said.
In recent months, dairy farmers have been getting paid more for their milk. Peter Vitaliano, chief economist for the National Milk Producers Federation, said the prices should continue to rise into next year. He called the recovery “pretty modest” and not enough to keep more farms from closing.
“The last four or five years are going to have a permanent impact on the structure of the American dairy industry,” he said.
The government sets minimum prices for what handlers pay farmers for their milk. It’s a complicated calculation based on the price of powdered milk, cheese, butter and whey. The formula considers the region of the country and what the milk is being used to produce. Ice cream versus cheese, for instance.
The idea is to ensure that farmers in any given region are treated equitably. It also helps explain why a gallon of milk costs more in Florida, where minimum prices are higher. But it’s not the whole story.
Retailers like Publix, Walmart, Aldi, Winn-Dixie and the local corner store can all have different milk pricing strategies, which sometimes differ from region to region, or even among individual stores of the same company.
In areas with less competition, they might price milk higher to increase profits. Even in a competitive environment, they might choose to keep dairy prices high while lowering prices on other items in the store. Others will keep milk prices low to lure more customers into stores, or to ensure they keep coming back.
The price differences are noticeable. Last month, a gallon of whole milk cost $3.89 in Miami, about 50 cents more than the national average, according to a federal survey. In Dallas, it was $2.19. Kansas City, $4.19. (Tampa Bay wasn’t on the list of cities.)
As farmers get paid more, retail prices usually increase, too, though not necessarily right away.
“Retailers are often slow to move milk prices up or down,” Nicholson said.
How much higher will retail prices go? A little, Vitaliano predicted. So far, farmers still aren’t getting paid enough to drive significant and widespread increases in retail prices.
Milk has been a bargain for years compared to other foods, he said. It’s likely to remain that way, at least for the foreseeable future.