cows in field

Why The Free Market Is No Long Functioning Properly For Dairy


by Francis Thicke
Manchester Dairy Rally
May 30, 2009

Added August 1, 2009. Milk prices paid to dairy farmers have fallen by nearly half this past year, but the price of milk on the grocery store shelf has changed little, if at all. For years dairy farmers have been repeatedly and increasingly squeezed by cycles of this same marketplace phenomenon. Economists call this “asymmetric pricing.”

Asymmetric pricing in the dairy sector occurs through the following mechanism: when prices rise for dairy farmers, prices rise in grocery stores; when prices fall for dairy farmers, prices remain the same or fall proportionally less in grocery stores. As a result of this cycle occurring repeatedly, dairy farmers are receiving an increasingly smaller portion of the dollars consumers spend on dairy products.

Why has the supply-demand relationship of the marketplace broken down in the dairy sector? Why is the free market no longer functioning properly?

During recent years, the dairy marketplace has become increasingly concentrated, to the point that monopoly power now appears to play a role in setting dairy prices. Economic literature indicates that if four (or fewer) firms control 40% of a market, that market no longer functions as a competitive market. Today, just one firm purchases 34% of the milk produced by U.S. dairy farmers. That firm, Dairy Farmers of America (DFA), also has marketing agreements with other dairy purchasers, leading industry analysts to estimate that DFA by itself indirectly controls over 40% of the commodity milk market.

Dairy processing and wholesaling has become similarly concentrated. Dean Foods has acquired more than 100 dairy manufacturing plants over the past 15 years as it led the consolidation of dairy processing and wholesaling. Dean’s products are sold under more than 50 regional brands and a wide array of private labels of grocery chains. It is not publicly known exactly what share of the processing and wholesale market Dean controls, but some industry analysts put it at 40%. Ironically, as dairy farmers reported record profits last quarter.

These two industry giants, Dean Foods and DFA, work together and have marketing agreements for purchase of raw milk from farmers (DFA) and processing and wholesaling of dairy products (Dean) all across the U.S. To add to this growing monopoly power within dairy marketing, the retail food industry has undergone major consolidation in recent years, resulting in a few large grocery chains
controlling the majority of retail sales of U.S. dairy products. What can be done? For one, the federal government needs to enforce antitrust laws. We need Teddy Roosevelt-style action to bring back competitive markets.

Also, it is time for dairy farmers to step up and take back control of their cooperatives, so cooperatives again work for the benefit of farmers. For example, why does DFA have 12 licenses to import dairy products into the U.S., including a license to import butter substitute? How is that helping DFA’s farmer members? Recent massive imports of dairy products are contributing to the havoc within dairy markets. According to recent data, the equivalent of 20,000 semi tanker trucks full of skim milk were imported into the U.S. during one month’s time in the form of milk casein and milk protein concentrates (MPC). It has been reported that much of the imported MPDC has not been subject to FDA safety testing. After the contamination we saw in Chinese dairy products, this is more than an academic concern. These massive imports drive down prices paid to U.S. dairy farmers. Why are U.S. dairy cooperatives importing milk products to the detriment of U.S. dairy farmers?

Dairy farmers are in crisis and cannot long stay in business under today’s market conditions. Small and mid-sized dairy farms, businesses buy locally and contribute greatly to the economies of rural America. America needs to keep its family dairy farms.