Market Watch Diary Excessive markups?

October 25, 2009 07:00 PM
Alan Levitt
There's never a shortage of finger-pointing when milk prices plunge.

Blame is assigned to imports, big co-ops, retailer margins, processor margins and pricing transparency, to name a few popular culprits.

One case where criticism might be warranted is retailer and/or processor margins. In a simple calculation of retailer markup—subtracting the retail price from the wholesale price—the average retail margins on milk in 2008–09 were up 21% compared with the average from 2000 to 2007. On a similar comparison for cheese, average retail margins were up 15%.

The Bureau of Labor Statistics (BLS) says a gallon of whole milk retailed for $3.01, on average, from 2000 to 2007. Over the same period, the Class I base price, plus a $2/cwt. differential, averaged $1.33/gal. That creates a simple markup of $1.68.

Meanwhile, in 2008–09, the retail price of a gallon of whole milk has averaged $3.46, while the Class I price plus differential has averaged only $1.43/gal. That leaves a markup of $2.03.

Likewise, BLS says natural cheddar cheese sold for an average retail price of $4.15/lb. from 2000 to 2007. The National Agricultural Statistics Service (NASS) cheese price averaged $1.40 during those eight years, leaving a markup of $2.75 per pound.
In the last two years, the retail price of cheddar has averaged $4.72 per pound, while the NASS average has been $1.57. That produces a markup of $3.15.

I'm not suggesting that price gouging or anything illegal took place when these margins were raised. In most states, retailers have the autonomy to charge what the market will bear.

But it raises some questions: How much more milk might we have sold over the last couple of years if the price was 35¢/gal. less? How much more cheese would have been sold if it was 40¢/lb. less?

To be clear, the higher volumes that might have resulted from lower price tags would not have prevented the market from crashing. That occurred due to a cascade of factors both big and small.

But every little bit helps. If lower prices had been offered to our recession-weary consumers, we might have been able to move a little more product, which would have kept excesses from piling up in storage quite so quickly. And that might have left us that much closer to bringing the market back into balance.

Bonus content:

Average retail dairy prices

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