Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options
GAO-05-50: Published: Dec 29, 2004. Publicly Released: Jan 28, 2005.
In 2003, U.S. dairy farmers marketed nearly 19.7 billion gallons of raw milk, one-third of which were used in fluid milk products. Farmers, cooperatives, processors, and retailers receive a portion of the retail price of milk for their part in providing milk to consumers. During 2002 and 2003, farm prices fell while retail prices did not similarly decline. This pattern raised concerns about a growing spread between farm and retail prices. Farm prices have since increased, reaching record highs in April 2004. As requested, GAO examined (1) the portion of retail milk prices received by farmers, cooperatives, processors, and retailers, how this changed over time, and the relationship between price changes at these levels; (2) how various factors influence prices and affect the transmission of price changes among levels; and (3) how federal dairy program changes and alternative policy options have affected or might affect farm income and federal costs, among other considerations.
Between October 2000 and May 2004, on average, farmers received about 46 percent, cooperatives 6 percent, wholesale processors 36 percent, and retailers over 12 percent of the retail price of a gallon of 2 percent milk (the most common type of milk purchased) in the 15 U.S. markets GAO reviewed. During this period, in 12 of the 15 markets, the spread between farm and retail prices increased. However in some markets, the price spread between these levels increased and then moderated. Price changes at one level were most closely reflected in changes at adjacent levels of the marketing chain. Farm, cooperative, wholesale, and retail milk prices are determined by the interaction of a number of factors. For example, farm prices are affected by the supply of raw milk and the demand for milk products such as fluid milk, cheese, and butter, as well as by federal and state dairy programs. At the cooperative level, prices are influenced by the cost of services that cooperatives provide, and the relative bargaining power of cooperatives and milk processors. At the wholesale and retail levels, input costs such as labor and energy, and the continued consolidation of firms influence milk prices. Recent changes in federal dairy programs have affected farm income, federal costs, and other considerations. For example, the Milk Income Loss Contract program has supported some farm incomes but has exceeded initial cost estimates because of low farm prices. A number of options have been suggested to change federal dairy policies such as amending federal milk marketing orders and raising or eliminating the support price. In general, these options would have mixed effects depending upon whether milk prices were high or low over the short or long term. For example, options that increase farm income over the short term tend to increase milk production and lower farm prices over the long term. These options also tend to be costly for the federal government during periods of low prices.
Recommendation for Executive Action
Status: Closed - Implemented
Comments: In our December 2004 report, "Dairy Industry: Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options," we analyzed, in part, the effects of recent changes in federal dairy programs, as well as alternative policy options, on various policy considerations as identified in previous GAO reports, relevant studies, legislation, and our conversations with dairy policy experts. These policy considerations included farm income, milk production, federal costs, price volatility, economic efficiency, and consumer prices. We evaluated impacts on these considerations under high- and low-price scenarios, over the short and long terms. We also noted that different stakeholders in the dairy policy arena may have alternative views on the relative importance of these policy considerations, as well as other possible considerations, which could lead to differing perspectives on these options. Nevertheless, to continue the facilitation of informed decision making by USDA and the Congress on dairy issues, we recommended that USDA build on our analysis of the potential effects of various policy options as USDA proposes future changes to current dairy laws or regulations or provides information to the Congress in response to congressional proposals. In its March 2005 Statement of Action regarding this recommendation, USDA stated it was in full agreement and would perform the best analyses possible to estimate the impacts of various policy options. The agency added that such information is critical to USDA and the Congress in their efforts to maintain a strong, viable, and efficient dairy industry. In July and August 2009, USDA provided us information on several dairy analyses that it cited as examples of its commitment to implement the recommendation. For example, in two analyses done in fiscal year 2007, USDA evaluated the potential impacts of policy changes on a number of considerations, including overall prices, product prices, Milk Income Loss Contract payments, producer revenues, numbers of cows, production quantities, and federal price support programs. In general, these considerations include four of those used in our analysis as well as several others.
Recommendation: To continue the facilitation of informed decision making by USDA and the Congress, the Secretary of Agriculture should build on GAO's analysis of the potential effects of various dairy policy options as USDA proposes future changes to current dairy laws or regulations or provides information to the Congress in response to congressional proposals.
Agency Affected: Department of Agriculture