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    Recalculating the Milk Money

    A milk surplus spells bad news for dairy farmers, while c-stores walk a fine line to refigure pricing.

    By Renee M. Covino

    A recent blog on Consumerist.com found "Reader Anthony" very confused about milk pricing at his nearby Walmart. What should have been a split-second shopping decision turned into a frustrating five-minute dairy case analysis.

    Apparently, "Anthony" discovered a gallon of milk offered at $2.25 or two for $5.00 ($2.50 each). The half-gallon pricing was no less confusing -- $2.47, which was 22 cents more expensive than the cheapest price listed for a gallon of milk. As proof that "Anthony" wasn't making this up, he took photos of the shelf tags, which were also posted on the blog.

    While Walmart clearly needed to reassess and match up its milk pricing on that particular day in that particular store, the world's largest retailer is not entirely to blame for the situation.

    "Milk pricing is fairly complicated, especially in the last month or two," said Patrick Geoghegan, senior vice president of corporate communications for the Wisconsin Milk Marketing Board.

    The depressed economy -- both global and domestic -- resulted in a drastic surplus of U.S. milk, according to industry reports. In these troubled times, the demand for milk plunged, and with it, the prices paid to American dairy farmers.

    According to the U.S. Department of Agriculture, the price per hundred pounds of milk dropped to $10.72, down $5.02 from January, and down $8.96 from a year ago. The price at press time was the lowest it's been since 2003.

    "It's a dire situation, dairy producers are squeezed to the max," Geoghegan stated.

    "The problem is so bad, it has triggered a government program to buy surplus milk," reported Peggy Armstrong, director of communications for the International Dairy Foods Association (IDFA) in Washington. The association is currently formulating its recommendations to the USDA about exactly how to allocate/distribute the surplus milk.

    "There's a fine line between too much and too little milk," offered Bob Cropp, a dairy economist with the University of Wisconsin at Madison. "It's a perishable product. You can't store it too long."

    So from the retail perspective, setting the right milk prices now can be a great balancing act, too.

    "There's a tendency to ease prices down slowly," Cropp said.

    But c-store retailers admitted setting milk prices is currently even more ambiguous.

    "Some will adjust their pricing a little on cost [or] a little on their market," said Carl Byrne, president of Byrne Dairy, with 50 stores in Syracuse N.Y., referring to his c-store channel colleagues. "Some might wait a bit because they already have ads in place, or check the competition and be more followers than leaders on setting the price. And some may take the opportunity to really promote it more aggressively, at an even greater discount than the costs have come down. It really depends on what's happening in your own local geography, and so it's all over the place how people are dealing with it."

    That might explain the price discrepancies at "Reader Anthony's" Walmart -- with prices coming down so quickly, several approaches were in play or overlapped at one time. Or perhaps a store clerk simply failed to take down the previous week's sign.

    So which pricing approach is Byrne Dairy taking? Mark Byrne, the chain's executive vice president of retail, explained that on the first of every month, a new milk cost is set by Byrne Dairy to its separately run retail stores. As of Feb. 1, that cost was the lowest it's been "in a long time," he said. "Whatever price decrease we get, we usually pass it directly on to our customers. However, there's usually a week delay because all the milk in the store [at the time of the price drop] was purchased at the previous month's price."

    Byrne added, "we're definitely going to adjust our prices down. We want to be as competitive as we can be on this."

    Will that result in an increase in milk volume at Byrne Dairy stores? Byrne doesn't think so. "We're different than most c-stores in that we are a dairy-based company, and our customers already know us for being a dairy store. We have five doors of milk in our stores whereas some only have two or three, so we've always emphasized selling dairy," he said.

    Rutter's Farm Stores in York, Pa., which like Byrne Dairy, sells milk from its own dairy, is also starting to adjust to the new milk pricing. Robert Perkins, director of marketing, explained the chain's milk pricing scenario:

    "We've always tried to market the quality of our milk, and with that, we are price-positioned on gallons and half gallons to be at a state minimum," he said. "In the last two months, that has come down quite significantly -- anywhere from 10 to 15 percent."

    At press time, Perkins said Rutter's was just over $3 -- at $3.10 a gallon -- on homogenized vitamin D milk, while 2 percent milk was right at $3 a gallon.

    "From a marketing standpoint, we'd love to be at $2.99," he stated.

    Similar to Byrne Dairy, the company's whole position includes local farms, local dairy and better-for-you, according to Perkins. Because of state minimums, lowest price positioning is not an option for Rutter's.

    So far in the company's stores, "I've not seen [milk purchasing] frequency increase one way or another," Perkins relayed. "It's still pretty much stable, but it hasn't been long enough to see the effect on milk volumes."

    The University of Wisconsin's Cropp recognized retailers don't want to carry more inventory than needed, but he does think it's time for more of them to "meet the volume and stock up a bit," in order to help the entire market, he said.

    He also sees some special opportunities to promote milk a bit more, predicting, "we could actually see fluid milk sales volumes higher than last year," especially if retailers play their prices right and consumers respond.

    Other economists predicted milk prices will drop even lower this spring -- but if volume picks up, that might not necessarily be a bad thing for the market, according to Cropp.

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