High Retail Prices Aren’t Helping Dairy Product Sales

Generally speaking, setting new records, for such things as per capita consumption, production or exports, is a nice accomplishment.

But some other records just aren’t all that great, and in some cases they can be downright harmful to an industry’s well-being.

Such appears to be the case with retail dairy product prices in 2011. As reported on our front page last week, retail dairy product prices set quite a few records last year.

Just to cite a few: the Consumer Price Index (CPI) for dairy products averaged a record-high 212.745 (1982-84=100), breaking the previous record of 210.396, set in 2008; the CPI for cheese averaged a record-high 217.517, breaking the previous record of 214.546, also set in 2008; and the butter CPI averaged a record-high 210.795, shattering the previous record of 184.6, set in 2004, and also set a new high for a single month, at 218.347 in July.

Generally speaking, none of these new retail price records is helping to increase dairy product sales. And frankly, given where farm milk and wholesale (CME cash market) dairy product prices have been in recent months, we’d like to see some additional declines in retail dairy prices, and the sooner the better.

First, a bit of good news: dairy products remain a bargain for consumers. In December, the CPI for all items stood at 225.672, while the CPI for food at home was just under 230. The CPI for dairy and related products was 218.458 in December, so retail dairy prices haven’t climbed as much as many other foods over the past three decades.

Still, there are some pretty troubling prices in these figures from the US Bureau of Labor Statistics. For example, average retail Cheddar cheese prices were over $5.00 a pound every single month in 2011, topping out at just over $5.70 a pound in September and October.

Keep in mind that, during 2011, Cheddar blocks at the CME cash market ranged from a low of $1.3425 (in early January) to a high of $2.1550 (in July). For all of 2011, blocks averaged almost $1.81 a pound.

For the sake of comparison, we went back and looked at how retail Cheddar prices fared in 2007 and 2008, the last two years in which the CME Cheddar block price topped $2.00 a pound.

In 2007, block prices ranged from a low of $1.2875 to a high of $2.2025, and were above $2.00 a pound in all or parts of June, August, October, November and December, en route to averaging about $1.76 a pound.
In 2008, block prices ranged from a low of $1.1325 (on the last day of the year) to a record high of $2.2850 in May, and were above $2.00 a pound for all or parts of January, February, May, June and July en route to averaging almost $1.86 a pound, which is still a record.

So what happened with retail Cheddar prices in 2007 and 2008? In 2007, the retail Cheddar price topped out at $4.52 a pound, in October, and retail Cheddar prices actually dipped below $4.00 a pound twice (in May and June).

In 2008, retail Cheddar prices only dipped below $4.50 a pound once (at just under $4.40, in May) and reached a then-record high of just under $5.10 a pound in November, before dropping back under $5.00 a pound in December.

With these prices in mind, it seems that retail Cheddar prices in 2011 were quite a bit higher than the CME cash market prices would justify.

Keeping in mind that there’s a pretty big lag between CME prices and retail prices, it’s noteworthy that, in both 2007 and 2008, retail Cheddar prices have gone from a little over twice the level of CME prices to, at times last year, close to triple the level of CME prices.

That is, in 2008, when CME block prices averaged almost $1.86 a pound, retail Cheddar prices averaged around $4.73 a pound. Last year, when CME block prices averaged almost $1.81 a pound, retail Cheddar prices averaged about $5.42 a pound. That’s a pretty big jump in the plant-to-retail price spread.

Is that growing gap hurting cheese sales? According to the most recent USDA report to Congress on the dairy promotion programs (covering 2009), an “important factor influencing per capita commercial disappearance of all dairy products is the retail price of dairy products.”

So how did Cheddar sales respond to high retail prices last year? One small piece of information is commercial disappearance of American cheese, which declined in April, July, August and September last year.

We wouldn’t be at all surprised to see per capita Cheddar consumption post a rare decline for all of 2011, and high retail prices would seem to be at least partly to blame.

What about fluid milk? Retail fluid milk prices were pretty high last year, peaking at over $3.70 a gallon in both August and September and averaging above $3.30 a gallon every month of the year. For all of 2011, retail whole milk prices averaged around $3.57 a gallon, the highest average since 2008, when they averaged almost $3.80 a gallon.

And how did fluid milk sales fare last year? They declined every month (through November), with those decreases ranging from 0.1 percent in January to 2.3 percent in both April and September.

Going back a couple of years, in 2009, retail whole milk prices averaged around $3.11 a gallon, and beverage milk sales actually increased slightly over 2008. Fluid milk sales have been relatively flat for decades now, but it appears that higher-than-average retail prices aren’t exactly helping.

The good news, from a demand perspective, is that most forecasts are pointing to slightly lower milk and dairy product prices in 2012 than in 2011. The bad news: USDA is actually forecasting that retail dairy product prices will rise 2 to 3 percent this year.

Obviously, that’s not going to help sales. With the US economy still struggling, it seems like lower, or at least flat, retail dairy product prices, better reflecting wholesale and farm prices, could help boost sales. r. DG

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