Terry D. Etherton

The good versus bad milk marketing campaign has one key goal: to differentiate conventional milk from rbST-free milk. And, to do this as a strategy to sell the latter for a whole lot more at retail.

Central to this strategy has been the use of absence claims on the milk container touting that rbST-free milk does not contain rbST. As readers of Terry Etherton Blog on Biotechnology or Terry Etherton’s Blog on Hormones, Biotechnology, and Food Safety know, all cow’s milk contains bST and treatment of cows with rbST does not alter milk levels of the hormone. There is NO compositional difference between conventional and rbST-free milk within a fat category.

In the most recent American Farm Bureau Federation (AFBF) Marketbasket Survey of retail milk prices, a 1/2 gallon container of conventional milk costs $2.22. In this survey, rbST-free milk was selling for $3.01 per 1/2 gallon: a 36% increase compared to regular milk. This is equivalent to a $0.79 premium per 1/2 gallon…a lot of money!

An important question emerges. What proportion of this retail premium SHOULD be paid to producers who have been forced out of using rbST? The reality is that, presently, many dairy farmers in America are being forced by their local milk cooperative to give up use of rbST. This is because milk processors who are seeking more rbST-free milk are using the “smoke and mirrors” marketing campaign featuring the allegation that consumers want the milk. Consequently, co-ops push to manage procuring one source of milk, not two since it takes more time and money to manage two different milk pickup routes for conventional and rbST-free. As I have written previously in Terry Etherton Blog on Biotechnology, there is little evidence from well-conducted surveys indicating that consumers are interested in rbST-free milk. The ploy, of course, is not driven by what consumers want, but rather what retailers can sell the product for.

It is clear to me that the margin increase is such that irrespective of the market share for rbST-free milk, retailers profit. The extent of this profit is presented below.

So, the smoke and mirrors marketing campaign rolls on, yet dairy farmers in many instances are not being paid any premium for being forced to give up rbST. If they are receiving one, it ranges from $0.06 to $0.12 per hundredweight (CWT) of milk (milk is sold on CWT basis by farmers). Thus, an important profitability tool for the dairy farmers of America is literally being stolen! So much for the principle of “freedom to operate”.

What Should the Premium Be?

To illustrate the extent to which dairy farmers are being cheated, I did some calculations of milk price at retail on a CWT basis.

Using the most recent AFBF Survey, a 1/2 gallon container of conventional milk sold for $2.22. Converting this to a CWT basis (8.6 lbs per gal) results in a retail price of $51.63. At the time the survey was being done, Class I milk price at the farm was approaching $20 per CWT. Being conservative, I used $18/CWT as the average mailbox milk price that dairy farmers receive. Based on the mailbox price and and the price of a CWT at retail ($51.63), the producer’s share of the retail conventional milk price received is 34.9%.

In the same survey, the retail price for a 1/2 gallon of rbST-labeled milk averaged $3.01 nationwide. Converting this retail price to a CWT basis results in rbST-free milk being sold for $70.00 per CWT! Thus, based on this example, there is a $18.37 premium per CWT for rbST-free versus conventional milk at retail. For producers to get the same share of the retail premium that they get from conventional milk (i.e., 34.9%), they should be paid $6.41 per CWT more than the current mailbox price (i.e., 34.9% of $18.37 = $6.41).

These facts are important. I can imagine that milk dealers and retailers are not eager to share this much money with dairy farmers. It is clear that some milk marketers care more about profits than about the ability of dairy farmers to choose which management tools to use that enhance dairy farm profitability. So, we are back to the “hard reality” confronting America’s dairy farmers, which is the driving motive for some processors/retailers is to make more money, AND not share it fairly with dairy farmers. What a legacy for the dairy industry.