Federal Watchdog Agency Issues Second Dairy Pricing Report: Minimal Relationship Between Farm and Retail Prices

November 09, 1998

A federal watchdog agency has completed the second installment of its twopart study of dairy prices, showing that there is little correlation between the price farmers receive for their milk and the price on store shelves.

In August 1997, Vermont Senators Patrick Leahy and Jim Jeffords requested that the U.S. General Accounting Office (GAO) update its comprehensive 1991 study of dairy pricing. In April, GAO issued the first installment, and today, Jeffords and Leahy released the second and final part.

The second GAO report (Dairy Industry: Information on Prices for Fluid Milk and the Factors That Influence Them) shows that in most parts of the country, there is virtually no correlation between changes in the price dairy farmers receive and prices at the retail level. This is in sharp contrast with the close correlation between changes in the farm and cooperative prices for milk. For example:

• Augusta, Maine:   Between January, 1996 and February, 1998, the correlation coefficient between farm and cooperative prices of fluid milk was .91. This value means that 91 percent of the time that there was a change in the farm price of fluid milk, there was a corresponding change in the cooperative price. However, the retail price of milk correlated to changes in the farm price only 11 percent of the time.
• Houston, Texas:  Changes in farmer and cooperative prices corresponded 74 percent of the time, while changes in retail prices correlated only 3 percent of the time. Ninetyseven percent of the time that there were changes in fluid milk prices at the farm level, retailers did not adjust their milk prices to reflect those changes.
  
  
• Atlanta, Georgia:  Changes in the farm price corresponded with cooperative prices 95 percent of the time, while changes in the farm price resulted in corresponding changes in retail prices only 16 percent of the time.