Dairy Industry

About one-third of the 18 billion gallons of milk produced by U.S. dairy farms each year is processed into fluid drinking milk. Fluid milk moves from the farm to the retail state through several pathways, and several entities are involved in its processing or marketing. These entities include dairy cooperative organizations, retail food chains that have their own dairy-processing operations, firms with multiple bottling plants, and firms with a single bottling plant. This report (1) provides information on the entities that handle fluid milk from the time it leaves the farm to the time it is sold to the customer, including regional variations, and (2) updates GAO's August 1991 report (GAO/RCED-91-187FS) on prices for dairy and other foods at various market levels nationally and in certain urban markets across the country.

GAO noted that: (1) the majority of milk used to produce fluid milk in the United States passes from the farm to dairy cooperatives; (2) however, most of the milk for fluid use is not processed by dairy cooperatives but is sold to retail food chains, companies that own multiple bottling plants, and independent bottlers that process it into fluid milk for sale to consumers; (3) each entity that is involved in the processing and marketing of fluid milk adds value to the product and receives a portion of the spread between the farm and retail fluid milk prices; (4) consequently, the number and types of entities that make up a particular pathway and their related market share may have a significant effect on the amount of the farm-to-retail price spread that can be attributed to any one entity or group of entities; (5) GAO found that these factors differ in each of the seven milk-producing regions of the United States; (6) GAO found that the Bureau of Labor Statistics' price indexes for all uses of milk and at all levels rose overall from September 1991 through September 1997; (7) the percent increases in the retail-level price indexes for whole milk, processed dairy products, and cheese were substantially higher than the percent increases in the farm-level price indexes for milk used for fluid and manufactured products for this period of time; (8) however, during this period of time, the farm-level price indexes were relatively more volatile than their retail-level counterparts; (9) in addition, the Agricultural Marketing Service's data show that from 1991 through the first 9 months of 1997, the average difference between the retail price and the announced cooperative price for a gallon of milk in 28 cities increased from $1.12 to $1.30, on the basis of nominal prices that have not been adjusted for inflation; (10) GAO also found that the average price spread varied significantly across the 28 cities during this period; (11) information from the Economic Research Service shows that from 1990 through 1996, all foods in the Department of Agriculture market basket, including dairy products, experienced retail price increases; and (12) while the retail price for dairy products increased by 12.3 percent during this period, the retail price increase for other products in this market basket ranged from 8.8 to 39.3 percent.