a

GAO

United States Government Accountability Office

Report to Congressional Requesters

December 2004 DAIRY INDUSTRY

Information on Milk 

Prices, Factors 

Affecting Prices, and 

Dairy Policy Options

GAO-05-50
www.gao.gov/cgi-bin/getrpt?GAO-05-50.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lawrence J. 

Dyckman, (202) 512-3841, 

dyckmanl@gao.gov. 

Highlights of GAO-05-50, a report to 

congressional requesters 

December 2004

DAIRY INDUSTRY

Information on Milk Prices, Factors 

Affecting Prices, and Dairy Policy 

Options 

Between October 2000 and May 2004, on average, farmers received about 46 

percent, cooperatives 6 percent, wholesale processors 36 percent, and 

retailers over 12 percent of the retail price of a gallon of 2 percent milk (the 

most common type of milk purchased) in the 15 U.S. markets GAO reviewed. 

During this period, in 12 of the 15 markets, the spread between farm and 

retail prices increased. However in some markets, the price spread between 

these levels increased and then moderated. Price changes at one level were 

most closely reflected in changes at adjacent levels of the marketing chain. 

Farm, cooperative, wholesale, and retail milk prices are determined by the 

interaction of a number of factors. For example, farm prices are affected by 

the supply of raw milk and the demand for milk products such as fluid milk, 

cheese, and butter, as well as by federal and state dairy programs. At the 

cooperative level, prices are influenced by the cost of services that 

cooperatives provide, and the relative bargaining power of cooperatives and 

milk processors. At the wholesale and retail levels, input costs such as labor 

and energy, and the continued consolidation of firms influence milk prices. 

Recent changes in federal dairy programs have affected farm income, federal 

costs, and other considerations. For example, the Milk Income Loss 

Contract program has supported some farm incomes but has exceeded 

initial cost estimates because of low farm prices. A number of options have 

been suggested to change federal dairy policies such as amending federal 

milk marketing orders and raising or eliminating the support price. In 

general, these options would have mixed effects depending upon whether 

milk prices were high or low over the short or long term. For example, 

options that increase farm income over the short term tend to increase milk 

production and lower farm prices over the long term. These options also 

tend to be costly for the federal government during periods of low prices. 

Farm and Retail 2 Percent Milk Prices, October 2000 to May 2004 

In 2003, U.S. dairy farmers 

marketed nearly 19.7 billion gallons 

of raw milk, one-third of which 

were used in fluid milk products. 

Farmers, cooperatives, processors, 

and retailers receive a portion of 

the retail price of milk for their part 

in providing milk to consumers. 

During 2002 and 2003, farm prices 

fell while retail prices did not 

similarly decline. This pattern 

raised concerns about a growing 

spread between farm and retail 

prices. Farm prices have since 

increased, reaching record highs in 

April 2004. As requested, GAO 

examined (1) the portion of retail 

milk prices received by farmers, 

cooperatives, processors, and 

retailers, how this changed over 

time, and the relationship between 

price changes at these levels; (2) 

how various factors influence 

prices and affect the transmission 

of price changes among levels; and 

(3) how federal dairy program 

changes and alternative policy 

options have affected or might 

affect farm income and federal 

costs, among other considerations. 

To continue informed decisionmaking, the Secretary of 

Agriculture should build on GAO’s 

analysis of the potential effects of 

various policy options as USDA 

proposes future changes or 

provides information to the 

Congress. USDA expressed 

concern about the practicality of 

some of the dairy policy options 

discussed. USDA did not comment 

on the report’s recommendation. 
Page i GAO-05-50 Dairy Industry

Contents

Letter 1

Conclusions 8

Recommendations for Executive Action 9

Agency Comments and Our Evaluation 9

Appendixes

Appendix I: Objectives, Scope, and Methodology 14

Appendix II: Analysis of Prices at Four Marketing Levels for 2 Percent 

Milk in Selected Markets 24

Portion Received by Farmers, Cooperatives, Wholesale Milk 

Processors and Retailers 24

Changes in Farm and Retail Prices and the Price Spread 26

Correlation between Price Changes at the Four Marketing

Levels 27

Comparison of Average Annual and Monthly Prices for 2 Percent 

Milk 30

Appendix III: Retail Prices for Four Kinds of Milk in Selected Markets 49

Appendix IV: Average Monthly and Annual Farm, Cooperative, Wholesale 

and Retail Milk Prices in Selected Markets 64

Appendix V: Factors That Influence the Price of Milk as It Moves from the 

Farm to the Consumer 94

Market Forces, in Addition to Federal and State Policies, Influence 

Milk Prices at the Farm Level 94

Services Provided by Cooperatives, Market Structure, and Collective 

Action Can Influence the Price of Milk at the Cooperative

Level 108

Input Costs, Service Levels, Innovations, and Market Structure 

Influence Wholesale Fluid Milk Prices 113

Retailing Costs, Consumer Demand, and Market Structure Changes 

Affect Retail Prices for Fluid Milk 120

Appendix VI: Economic Studies of Price Transmission in the U.S. Fluid 

Milk Market 131

Summary of Recent Economic Studies of Price Transmission in the 

U.S. Fluid Milk Market 135

Results on the Extent of Farm-to-Retail Price Transmission and 

Price Transmission Asymmetry 150

Results on Farm-to-Retail Speed of Adjustment and Price 

Transmission Asymmetry 153
Contents

Page ii GAO-05-50 Dairy Industry

Results for Retail-to-Farm Price Transmission and Price 

Transmission Asymmetry 154

Possible Causes of Asymmetry in the Extent and Speed of Price 

Transmission 154

Appendix VII: Effects of Recent Federal Dairy Program Changes and 

Alternative Policy Options 159

Recent Changes in Federal Dairy Programs Vary in Their Effects on 

Policy Considerations We Identified 159

Effects of Alternative Dairy Policies Differ under Various 

Scenarios 176

Appendix VIII: Comments from the U.S. Department of Agriculture 237

GAO Comments 242

Appendix IX: GAO Contacts and Staff Acknowledgments 246

Contacts 246

Acknowledgments 246

Related GAO Products 247

Tables Table 1: Portion of the Retail Price of a Gallon of 2 Percent Milk 

Received by Farmers, Cooperatives, Wholesale 

Processors, and Retailers for 15 Markets, October 2000 

through May 2004 25

Table 2: Changes in the Farm-to-Retail Price Spread for a Gallon of 

2 Percent Milk for 15 Markets, October 2000 through May 

2004 26

Table 3: Correlation between Farm Price Changes and Changes in 

Cooperative, Wholesale, and Retail Prices for a Gallon of 2 

Percent Milk for 15 Markets, October 2000 through May 

2004 28

Table 4: Correlation between Cooperative Price Changes and 

Changes in Wholesale and Retail Prices for a Gallon of 2 

Percent Milk for 15 Markets, October 2000 through May 

2004 29

Table 5: Correlation between Wholesale and Retail Price Changes 

for a Gallon of 2 Percent Milk for 15 Markets, October 2000 

through May 2004 30

Table 6: Average Annual Farm, Cooperative, Wholesale, and Retail 

Prices for a Gallon of 2 Percent Milk in Selected Markets, 

2000 31
Contents

Page iii GAO-05-50 Dairy Industry

Table 7: Average Annual Farm, Cooperative, Wholesale, and Retail 

Prices for a Gallon of 2 Percent Milk in Selected Markets, 

2001 31

Table 8: Average Annual Farm, Cooperative, Wholesale, and Retail 

Prices for a Gallon of 2 Percent Milk in Selected Markets, 

2002 32

Table 9: Average Annual Farm, Cooperative, Wholesale, and Retail 

Prices for a Gallon of 2 Percent Milk in Selected Markets, 

2003 33

Table 10: Average Annual Farm, Cooperative, Wholesale, and Retail 

Prices for a Gallon of 2 Percent Milk in Selected Markets, 

2004 33

Table 11: Prices for a Gallon of Milk in Atlanta, Georgia, October 

2000 through May 2004 64

Table 12: Prices for a Gallon of Milk in Boston, Massachusetts, 

October 2000 through May 2004 66

Table 13: Prices for a Gallon of Milk in Charlotte, North Carolina, 

October 2000 through May 2004 68

Table 14: Prices for a Gallon of Milk in Cincinnati, Ohio, October 

2000 through May 2004 70

Table 15: Prices for a Gallon of Milk in Dallas, Texas, October 2000 

through May 2004 72

Table 16: Prices for a Gallon of Milk in Denver, Colorado, October 

2000 through May 2004 74

Table 17: Prices for a Gallon of Milk in Miami, Florida, October 2000 

through May 2004 76

Table 18: Prices for a Gallon of Milk in Milwaukee, Wisconsin, 

October 2000 through May 2004 78

Table 19: Prices for a Gallon of Milk in Minneapolis, Minnesota, 

October 2000 through May 2004 80

Table 20: Prices for a Gallon of Milk in New Orleans, Louisiana, 

October 2000 through May 2004 82

Table 21: Prices for a Gallon of Milk in Phoenix, Arizona, October 

2000 through May 2004 84

Table 22: Prices for a Gallon of Milk in Salt Lake City, Utah, October 

2000 through May 2004 86

Table 23: Prices for a Gallon of Milk in San Diego, California, 

October 2000 through May 2004 88

Table 24: Prices for a Gallon of Milk in Seattle, Washington, October 

2000 through May 2004 90

Table 25: Prices for a Gallon of Milk in Washington, D.C., October 

2000 through May 2004 92
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Page iv GAO-05-50 Dairy Industry

Table 26: Average Ownership and Operating Costs by Region and 

Herd Size, 2000 96

Table 27: USDA’s Milk Classes Used for Setting Milk Prices 102

Table 28: Change in Costs for Fluid Milk Processing Plants in Maine, 

1993 through 2000 115

Table 29: Supermarket Operating Costs as a Percentage of Sales and 

Gross Margin, 2003 121

Table 30: Growth of Supermarket Sales and Expenses during the 

Last Decade, 1993 through 2003 122

Table 31: Market Share of the Top Four Food Retailers in Selected 

Markets, 2003 127

Table 32: Overview of Fluid Milk Price Transmission Studies and 

Results on Price Transmission Asymmetry/Symmetry 132

Table 33: Recent Price Transmission Studies of the Fluid Milk 

Market 136

Figures Figure 1: Selected Milk Markets, Corresponding Defense 

Commissaries Used for Our Analysis, and Federal Milk 

Marketing Order Areas Prior to April 2004 19

Figure 2: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Atlanta, Georgia, October 

2000 through May 2004 34

Figure 3: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Boston, Massachusetts, 

October 2000 through May 2004 35

Figure 4: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Charlotte, North Carolina, 

October 2000 through May 2004 36

Figure 5: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Cincinnati, Ohio, October 

2000 through May 2004 37

Figure 6: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Dallas, Texas, October 2000 

through May 2004 38

Figure 7: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Denver, Colorado, October 

2000 through May 2004 39

Figure 8: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Miami, Florida, October 2000 

through May 2004 40
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Page v GAO-05-50 Dairy Industry

Figure 9: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Milwaukee, Wisconsin, 

October 2000 through May 2004 41

Figure 10: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Minneapolis, Minnesota, 

October 2000 through May 2004 42

Figure 11: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for New Orleans, Louisiana, 

October 2000 through May 2004 43

Figure 12: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Phoenix, Arizona, October 

2000 through May 2004 44

Figure 13: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Salt Lake City, Utah, October 

2000 through May 2004 45

Figure 14: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for San Diego, California, 

October 2000 through May 2004 46

Figure 15: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Seattle, Washington, October 

2000 through May 2004 47

Figure 16: Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk for Washington, D.C., October 

2000 through May 2004 48

Figure 17: Retail Prices in Atlanta, Georgia, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 49

Figure 18: Retail Prices in Boston, Massachusetts, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 50

Figure 19: Retail Prices in Charlotte, North Carolina, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 51

Figure 20: Retail Prices in Cincinnati, Ohio, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 52

Figure 21: Retail Prices in Dallas, Texas, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 53

Figure 22: Retail Prices in Denver, Colorado, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 54
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Page vi GAO-05-50 Dairy Industry

Figure 23: Retail Prices in Miami, Florida, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 55

Figure 24: Retail Prices in Milwaukee, Wisconsin, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 56

Figure 25: Retail Prices in Minneapolis, Minnesota, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 57

Figure 26: Retail Prices in New Orleans, Louisiana, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 58

Figure 27: Retail Prices in Phoenix, Arizona, for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 59

Figure 28: Retail Prices in Salt Lake City, Utah, for Whole, 2 Percent, 

1 Percent, and Skim Milk, October 2000 through May 

2004 60

Figure 29: Retail Prices in San Diego, California, for Whole, 2 

Percent, 1 Percent, and Skim Milk, October 2000 through 

May 2004 61

Figure 30: Retail Prices in Seattle, Washington, for Whole, 2 Percent, 

1 Percent, and Skim Milk, October 2000 through May 

2004 62

Figure 31: Retail Prices in Washington, D.C., for Whole, 2 Percent, 1 

Percent, and Skim Milk, October 2000 through May 

2004 63

Figure 32: Map of Federal Milk Marketing Orders 101

Figure 33: Number of Fluid Milk Processing Plants and Volume of 

Milk Processed per Plant, 1980 through 2002 119

Figure 34: Percentage of Retail Food Sales by Market Segment, 1993 

and 2003 129

Figure 35: Marketing Chain and Price Transmission for the U.S. 

Fluid Milk Industry 134

Figure 36: Potential Effects of Options to Change FMMOs on 

Various Policy Considerations 178

Figure 37: Potential Effects of Options to Change the Price Support 

Program on Various Policy Considerations 194

Figure 38: Potential Effects of Options to Extend MILC on Various 

Policy Considerations 204

Figure 39: Potential Effects of Adopting the NDEA on Various Policy 

Considerations 211
Contents

Page vii GAO-05-50 Dairy Industry

Figure 40: Potential Effects of Changing Trade Restrictions and 

Export Incentives on Various Policy Considerations 217

Figure 41: Potential Effects of Options to Facilitate Risk 

Management on Various Policy Considerations 228

Figure 42: Potential Effects of Options to Manage Raw Milk Supplies 

on Various Policy Considerations 233

Abbreviations

AMS Agricultural Marketing Service

CCC Commodity Credit Corporation

DEIP Dairy Export Incentive Program

FMMO federal milk marketing order

FSA Farm Service Agency

MILC Milk Income Loss Contract

NDEA National Dairy Equity Act

NEDC Northeast Interstate Dairy Compact

NYC New York City

UNY Upstate New York

USDA U.S. Department of Agriculture

WTO World Trade Organization

This is a work of the U.S. government and is not subject to copyright protection in the 

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permission from GAO. However, because this work may contain copyrighted images or 

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Page 1 GAO-05-50 Dairy Industry

United States Government Accountability Office

Washington, D.C. 20548

A

December 29, 2004 Letr

Congressional Requesters:

In 2003, U.S. dairy farmers marketed nearly 19.7 billion gallons of raw milk 

for which they received approximately $21.2 billion. Roughly one-third of 

these 19.7 billion gallons were ultimately sold to consumers as fluid milk 

(milk) products. The milk marketing chain that moves milk from the dairy 

farm to the consumer is composed of farmers, dairy cooperatives,1

wholesale milk processors,2 and retailers, and entities at each level receive 

a portion of the retail price of a gallon of milk for the functions they 

perform. These functions include producing, processing, distributing, and 

selling milk. During 2002 and 2003, farm prices were the lowest since 1979, 

while retail milk prices generally did not experience a similar decline.3

 This 

disparity raised concerns about a growing price spread between farm and 

retail milk prices. However, in 2004, farm price trends have reversed, with 

farm prices reaching record highs.

Since the 1930s, the U.S. Department of Agriculture (USDA) and some 

states have operated programs designed to support dairy farmers by 

ensuring that farm prices do not fall below minimum levels. These 

programs include, among others, federal milk marketing orders (FMMOs), 

which use formulas to establish minimum farm prices in different 

marketing areas of the country; a price support program to sustain farm 

prices through a standing offer to purchase certain milk products at set 

prices; and trade restrictions or export subsidies to protect the U.S. milk 

industry from competition from foreign milk products or reduce supplies.

Low farm prices have generated interest in new federal policies to provide 

assistance to dairy farmers; however, the cost of these programs during 

periods of low prices has raised concerns. For example, in the Farm 

1

Dairy cooperatives are member-owned organizations that assist producers in marketing 

their milk. Cooperatives provide a variety of services for their members such as ensuring 

adequate raw milk supplies to meet processors’ needs, transporting milk, quality assurance, 

and standardizing milk composition.

2

Wholesale milk processors include bottlers and major retail food chains with bottling 

plants, and cooperatives that process, package, and distribute fluid milk for sale to retailers. 

Our review did not include other entities that market milk at the wholesale level.

3

In this report, farm prices are the prices paid for raw milk supplies. After the milk has been 

processed into a fluid milk beverage, references to “milk prices” are retail milk prices.
Page 2 GAO-05-50 Dairy Industry

Security and Rural Investment Act of 2002 (the 2002 Farm Bill), Congress 

authorized USDA to establish the Milk Income Loss Contract (MILC) 

program, which provides supplemental payments to farmers during periods 

of low prices.4

 Depressed farm prices triggered $1.8 billion in MILC 

payments to dairy farmers in fiscal year 2003. Additionally, USDA spent 

over $1.5 billion in fiscal years 2001 through 2003 attempting to maintain 

minimum farm prices at a legislatively set level through the price support 

program.

Recent changes in milk prices have illustrated the volatility of milk price 

cycles. For example, as of April 2004, farm prices reached record highs as 

USDA announced a minimum price for raw milk used in manufacturing 

cheese that was approximately 36 percent higher, at $19.66 per 

hundredweight, than the March price of $14.49 per hundredweight, an 

increase of nearly $0.45 per gallon of milk.5

 This increase reflected a 

number of changed market conditions that decreased the amount of raw 

milk production, while also increasing the demand for some manufactured 

dairy products.6

 However, high farm prices create incentives for farmers to 

produce more milk, which then tends to depress milk prices over the long 

term, thereby increasing concerns about farm viability in the future.

At your request, this report examines (1) what portion of the retail price of 

fluid milk is received by dairy farmers, dairy cooperatives, wholesale milk 

processors, and retailers in selected markets throughout the United States, 

how this distribution has changed over the period of our review (October 

2000 through May 2004), and the relationships among price changes at 

these levels; (2) how various factors, such as costs, influence the price of 

milk as it moves from the farm to the consumer, as well as how these and 

other factors affect the extent to which changes in price are transmitted 

among levels as milk moves from the farm to the consumer; and (3) how 

changes in dairy policies and alternative policy options have affected or 

4

Pub. L. No. 107-171, 116 Stat. 134 (2002).

5

A hundredweight is a unit of measure equal to 100 pounds of, in this case, raw milk. 

Approximately 11.6 gallons of fluid milk can be made from 100 pounds of raw milk.

6

Recent evidence suggests that retail milk prices have also begun rising with the recovering 

farm prices.
Page 3 GAO-05-50 Dairy Industry

might affect farm income, federal costs, economic efficiency,7 and 

consumer prices, among other policy considerations. It also updates other 

information on milk prices included in our June 2001 report.8

To update our information on the pricing distribution among the various 

levels of the milk marketing chain, we analyzed milk prices in 15 selected 

markets nationwide, ensuring that (1) these markets provided national 

geographic coverage; (2) at least one market was located in each of the 

federal milk marketing order areas, as they existed during the majority of 

the period from October 2000 through May 2004; (3) the selected markets 

included both state and federally regulated markets; and (4) these areas 

represented similar marketing areas for which we reported information in 

our June 2001 report.9

 For these 15 markets, we obtained data from USDA, 

the cognizant state milk control agency, the Department of Defense’s 

Commissary Agency, and a private data collection company on the prices 

received by farmers, cooperatives, wholesale milk processors, and 

retailers.10 We limited our data collection efforts to whole, skim, 2 percent, 

and 1 percent milk as sales of these milk types constitute over 93 percent of 

fluid milk sales annually. We also confined our analysis to the prices of 

these milk types sold in gallon containers as milk sold in gallon containers 

7

There can be different kinds of economic efficiency effects. Government policies may be 

more or less economically efficient depending upon the extent to which they prevent the 

transmission of market price signals and lead to a misallocation of resources into excess 

production. Policies may also be more or less efficient depending upon the extent to which 

they affect the distribution of production between farmers with high or low costs of 

production.

8

GAO, Dairy Industry: Information on Milk Prices and Changing Market Structure, GAO01-561 (Washington, D.C.: June 15, 2001).

9

The beginning of our period of analysis corresponds to the end of the data presented in our 

previous report, GAO-01-561. The end point represents the most recent month for which 

data were available from all of our sources.

10We were unable to obtain actual data on the prices received by wholesale milk processors 

because these data are considered proprietary. As a proxy for these data we used data 

obtained from the Defense Commissary Agency on the prices at which it sold milk. 

Commissary prices reflect a 5 percent markup above the prices at which the commissaries 

purchase milk from wholesale suppliers. We obtained data from 39 different commissary 

locations near the 15 markets in our analysis.
Page 4 GAO-05-50 Dairy Industry

accounts for about 65 percent of fluid milk products sold under FMMOs.11

We focused our detailed data analysis on 2 percent milk sold in gallon 

containers, the largest volume of reduced-fat milk sold nationwide. As a 

result, our analysis may not reflect pricing trends for all types of milk and 

package sizes.

To update our information on factors influencing milk prices, explore price 

transmission within the milk marketing chain, and examine the effects of 

federal dairy policy changes and alternative policy options, we contacted a 

number of national dairy experts in academia or representing federal and 

state agencies, cooperatives, processors, retailers, or industry groups. We 

also reviewed relevant legislation, studies, and other publications. We 

qualitatively analyzed the effects of recent changes in federal dairy 

programs, as well as alternative policy options, on various policy 

considerations as identified in previous GAO reports, relevant studies, and 

legislation, as well as through our conversations with dairy policy experts. 

These policy considerations included farm income, milk production, 

federal costs, price volatility, economic efficiency, and consumer prices. 

Different stakeholders in the dairy policy arena may have alternative views 

on the relative importance of these policy considerations, as well as other 

considerations that we did not include, which could lead to differing 

perspectives on these options. We conducted our review from September 

2003 through October 2004 in accordance with generally accepted 

government auditing standards. We did not independently verify the data 

we received from various sources. However, we discussed with these 

sources the measures they take to ensure the accuracy of data, and these 

measures seemed reasonable. Appendix I provides additional information 

on the scope and methodology of our review.

In summary, we found the following:

• Between October 2000 and May 2004, on average, farmers received 45.9 

percent, cooperatives 6.1 percent, wholesale milk processors 35.6 

percent, and retailers 12.5 percent of the retail price of a gallon of 2 

percent milk in the 15 markets we reviewed. However, these 

percentages varied widely depending on the specific market. For 

example, the farmers’ portion ranged from 36.0 percent to about 58.6 

percent.

11This estimate is based on USDA data for the month of November for selected years 

between 1991 and 2001, which were the most recent data we could obtain.
Page 5 GAO-05-50 Dairy Industry

• Furthermore, during this time period, the price spread between farm 

and retail prices increased in 12 of the 15 markets we examined. 

However, in some of the 12 markets, the spread between farm and retail 

milk prices increased dramatically, and then moderated. In 9 of the 15 

markets, retail prices showed a statistically significant increase. In 4 of 

the remaining markets, retail prices decreased over time, while in the 

other 2 markets, retail prices showed no statistically significant change. 

At the same time, farm prices decreased in 12 of the 15 markets and 

increased in the remaining 3 markets during the 44-month period. 

However, declines in farm prices, in most cases, began to reverse during 

the latter months of our period of analysis. Price changes generally 

correlated across levels in the marketing chain, with the strongest 

correlations occurring between adjacent levels. For example, in most of 

the markets we analyzed, changes in cooperative prices correlated 

strongly with changes in wholesale prices. However, changes in 

cooperative prices correlated less strongly with changes in retail prices.

• Prices at all levels of the milk marketing chain are determined by the 

interaction of a number of factors. For example, farm prices are 

determined primarily by factors affecting the supply of raw milk, such as 

costs of production; the demand for milk products, such as fluid milk, 

cheese and butter; and the effects of federal and state dairy programs. 

At the cooperative level, the difference between what cooperatives pay 

farmers for raw milk and the prices at which they sell raw milk to 

wholesale fluid milk processors is influenced by the types of services 

the cooperatives provide, the relative bargaining power of cooperatives 

and milk processors, as well as collective action taken by dairy 

cooperatives. Factors that affect the difference between what 

processors pay for this raw milk and the prices at which they sell fluid 

milk products to retailers include input costs, such as labor, energy, 

transportation and packaging; the level of services they provide to 

retailers; innovations in processing technology; and changes in the 

structure of the fluid milk processing industry, such as increases in the 

consolidation and market share of some firms. At the retail level, costs 

such as labor and energy, along with other factors such as consumer 

demand and the structure of the market, help determine the difference 

between what retailers pay for fluid milk products and the prices they 

charge consumers for those products.

• While price changes at one level of the milk marketing chain are 

generally reflected in price changes at other levels, several factors can 

influence the extent or speed at which these changes are reflected and 
Page 6 GAO-05-50 Dairy Industry

whether price increases and decreases are reflected differently. For 

example, increasing concentration, resulting in greater market power at 

successive levels of the milk marketing chain, may provide entities an 

opportunity to influence how changes in prices are transmitted among 

the different levels. In addition, other factors, such as federal and state 

dairy policies, can affect prices in ways that can cause market 

participants to alter the way they transmit price changes between 

marketing levels. Some recent economic studies of the U.S. fluid milk 

market have found that these and other factors may cause retail milk 

prices to react more completely and quickly to farm price increases than 

to decreases.

• Recent changes in the FMMO program, adjustments to the prices of 

products purchased under the price support program, and the 

establishment of the MILC program have had various impacts on policy 

considerations such as dairy farm income, federal costs, and price 

volatility. Reforms to the FMMO system had mixed effects on farm 

income depending on the geographic location of the farmer, while the 

overall effects on all farmers are less clear. Further, recent adjustments 

to the prices of products purchased under the price support program 

have generally decreased federal costs but also decreased farm income 

during periods of low prices. Finally, government payments introduced 

through the MILC program have kept some small dairy farms in 

business, but the program has exceeded initial federal cost estimates 

because farm prices during 2002 and 2003 were lower than anticipated.

• A number of options that would modify existing policies or introduce 

alternative policies have been proposed or discussed. While we 

examined the potential impacts of these options on a range of policy 

considerations related to the dairy sector, we did not assess their overall 

economic or budgetary impacts or their consistency with U.S. 

international trade commitments or positions in ongoing negotiations. 

As a result, the purpose of this analysis is not to take a position for or 

against any of these options, but simply to discuss their likely effects on 

the policy considerations we identified. Various policy options could 

affect dairy policy considerations in different ways under different 

scenarios, such as periods of high or low prices. Also, short-term effects 

may differ from long-term effects. In general, options that increase farm 

income over the short term also tend to increase milk production and 

thus the potential for oversupply and lower average farm prices over the 

long term. For example, the dairy support price could be raised, which 

would limit the fall of farm prices and increase farm income in the short 
Page 7 GAO-05-50 Dairy Industry

term. However, it would spur additional production and therefore 

reduce average farm prices over the long term. Such options also tend to 

be costly for the federal government during periods of low prices. Thus, 

extending the MILC program, which is scheduled to expire at the end of 

September 2005, would allow the federal government to continue to 

support farm income but could also increase federal costs if farm prices 

trend downward in the future. In some cases, options that increase the 

economic efficiency of federal dairy programs also increase price 

volatility because they allow clearer transmission of market price 

signals. For example, eliminating the price support program would 

increase volatility by removing the price floor on manufactured dairy 

products, but it would also increase economic efficiency by reducing 

incentives to allocate resources to surplus production. Also, to the 

extent that price changes at the wholesale level are passed through to 

the retail level, a number of options would likely have mixed effects on 

consumer prices depending upon the particular product under 

consideration (e.g., butter, cheese, or fluid milk).

As a result of recent farm bills, such as those in 1996 and 2002, USDA has 

studied different aspects of dairy policy, either to implement program 

changes mandated by the Congress or to provide information to the 

Congress on the effects of various dairy programs. For example, the 2002 

farm bill required USDA to conduct studies of dairy policy issues, including 

an economic evaluation of the effects of various elements of the national 

dairy policy and of terminating federal dairy programs relating to milk price 

support and supply management. One study required by this legislation, 

which addressed the subject of changing standards for fluid milk, was 

issued in August 2003.12 A second study, which included both an evaluation 

of the effects of various elements of the national dairy policy and the 

termination of federal milk price support and supply management 

programs, was provided to the Congress in September 2004.13

12USDA/Agricultural Marketing Service, Raising the Minimum Nonfat Solids Standard to 

the National Average in Raw Milk: A Study of Fluid Milk Identity Standards (Washington, 

D.C.: August 2003).

13USDA, Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk 

Pricing, (Washington, D.C.: July 2004). This study combined the results of work by more 

than 20 researchers from 10 universities, as well as information provided by researchers at 

USDA.
Page 8 GAO-05-50 Dairy Industry

This report is divided into nine appendixes. Appendix I describes in detail 

our objectives, scope, and methodology. Appendix II provides information 

on average milk prices at the farm, cooperative, wholesale, and retail 

levels; changes in farm and retail milk prices and how they affect the farmto-retail price spread; and the extent to which price changes at one level of 

the milk marketing chain correlate with price changes at other levels. 

Appendix III compares retail prices of whole, 2 percent, 1 percent, and 

skim milk. Appendix IV provides the average monthly prices and annual 

prices of the four types of milk at each level of the milk marketing chain. 

Appendix V describes the factors that influence prices as milk moves from 

the farmer to the consumer. Appendix VI provides a technical review of 

recent research examining price transmission within the milk marketing 

chain. Appendix VII provides a qualitative analysis of the effects of recent 

changes in federal dairy programs and alternative dairy policy options that 

have been proposed or discussed. Appendix VIII presents USDA’s 

comments and our evaluation of them. Appendix IX lists GAO contacts and 

contributors to this report.

Conclusions The difference in price between what farmers receive for their raw milk 

and what consumers pay for fluid milk products has increased in recent 

years. This growing spread between farm and retail prices may be 

attributable to a number of factors at each level of the milk marketing 

chain, including supply and demand forces, changes in input costs to 

processing and retailing, and the continued concentration of cooperatives, 

wholesale milk processors, and retailers. A variety of federal policies exist 

to influence the prices that farmers receive. However, the effects of these 

policies may not be uniform; they can affect different sizes of farms or 

regions of the country in different ways. Moreover, policies that benefit 

farm income may adversely affect other policy considerations such as 

economic efficiency and federal costs. Given the complexity of federal 

dairy policy, the decision to change existing policies or introduce new 

policies requires consideration of a variety of these potential effects. 

Examining the effects of policy alternatives on a variety of different policy 

considerations will help the Congress formulate federal dairy policy based 

on comprehensive analyses that consider these alternatives in relation to 

their effects on different considerations, farm sizes, and regions of the 

country. In addition, although recent USDA studies have examined some 

policy options, there are other potential policy options to consider, as 

discussed in this report.
Page 9 GAO-05-50 Dairy Industry

Recommendations for 

Executive Action

To continue the facilitation of informed decision making by USDA and the 

Congress, we recommend that the Secretary of Agriculture build on GAO’s 

analysis of the potential effects of various dairy policy options as USDA 

proposes future changes to current dairy laws or regulations or provides 

information to the Congress in response to congressional proposals.

Agency Comments and 

Our Evaluation

We provided a draft of this report to USDA and DOD for their review and 

comment. We received written comments from USDA’s Under Secretary for 

Farm and Foreign Agricultural Services and Under Secretary for Marketing 

and Regulatory Programs, which are presented in appendix VIII. USDA also 

provided suggested technical corrections, which we have incorporated into 

this report, as appropriate. These technical corrections were offered by 

several USDA agencies, including the Agricultural Marketing Service, 

Economic Research Service, Farm Service Agency, and Office of the Chief 

Economist. DOD had no comments on the draft report.

In its written comments, USDA said the information provided in the report 

on milk prices at the farm, cooperative, and retail levels is valid. However, 

USDA said it has reservations regarding our use of prices paid for fluid milk 

at commissaries as an indicator of the wholesale price of fluid milk and that 

we should make clear the weaknesses of using commissary price data. 

USDA acknowledged, however, that there seems to be no viable 

alternative. During the course of our work, we were unable to obtain 

wholesale price data because these data are considered proprietary by 

industry officials. After consulting with USDA officials and other dairy 

experts, we determined that commissary price data were the best surrogate 

because commissaries generally sell milk at a standard 5 percent markup 

from cost. Based on USDA’s comments, we expanded the discussion in the 

report of the potential limitations of using commissary data.

USDA said it largely agrees with the report’s discussion of the factors that 

influence the price of milk as it moves from the farm to the consumer and 

the report’s characterization of economic studies of price transmission in 

the U.S. fluid milk market. However, USDA expressed some concerns 

regarding the report’s discussion of recent federal dairy program changes 

and alternative policy options. First, USDA said that this discussion 

appears to be a compilation of policy recommendations that are examined 

independently and qualitatively within the existing program structure. Our 

discussion of dairy policy options are not policy recommendations. As 

stated in the report, to identify these policy options and their potential 
Page 10 GAO-05-50 Dairy Industry

impacts we relied heavily on a synthesis of the views of leading dairy 

experts and the results of an extensive literature search, including our 

review of more than 50 studies and other publications. Time and resource 

constraints for completing our work precluded us from developing or 

contracting for the use of an economic model that would have provided 

quantitative estimates of these potential impacts. In addition, some of the 

policy options would have been difficult to model and quantify, such as the 

potential impacts of accelerating USDA’s hearing and rulemaking process 

for amending FMMOs. The report also notes that we compared the policy 

options identified against a baseline scenario of policies in place as of 

August 2004. This baseline scenario existed at the start of our work and 

was needed to provide a consistent context for our analysis.

Second, USDA suggested that we make clear the caveats of this type of 

analysis. As noted in the report, we examined the impact of federal dairy 

program changes and policy options on six policy considerations: farm 

income, milk production, federal costs, price volatility, economic 

efficiency, and consumer prices. We acknowledge that other stakeholders 

may have different views on the importance of these policy considerations, 

or other considerations that we did not include in our analysis. The report 

also states that the potential effects of policy options on these 

considerations could vary depending upon economic conditions and other 

policy decisions. In this regard, we did not assess the options’ overall 

economic or budgetary impacts, or their consistency with U.S. 

international trade commitments or positions in ongoing negotiations. In 

addition, the report does not identify a preferred option or combination of 

options. As indicated in the report, each option has varying potential 

impacts on the policy considerations used in our analysis. Despite these 

caveats, we believe this analysis is informative and helpful to congressional 

decision makers who must weigh competing interests in determining dairy 

policy.

USDA also said that in some cases the report mischaracterizes the 

operation of current programs and the effects that changes to current 

programs or the introduction of new programs would have on program 

outlays, producers, and consumers. For example, USDA noted that the 

report offers several options for improving the operation of the Dairy 

Export Incentive Program (DEIP), including expanding the use of this 

program. However, USDA indicated that expanding the use of DEIP is not a 

legitimate option because, under World Trade Organization (WTO) rules, 

DEIP is bound by quantitative and monetary caps and product-specific 

restrictions that limit its use to the current range of eligible dairy 
Page 11 GAO-05-50 Dairy Industry

commodities. We do not agree that we mischaracterized the operation of 

this program. The report clearly states that USDA has announced and 

awarded subsidies under DEIP to the limits allowed by WTO rules for 

nonfat dry milk and various cheeses. Regarding expansion, the report 

discusses options suggested by dairy experts for the additional use of this 

program as an effective marketing tool, and does not call for expanding its 

use to exceed relevant WTO caps or restrictions. However, we have 

adjusted the language in the report to make this distinction clearer.

USDA also offered several comments regarding the FMMO program. 

Among these, USDA said that the report is incorrect in stating that the 

objective of this program is “to ensure an adequate level of milk 

production.” According to USDA, this objective is associated with the Dairy 

Price Support Program. We have revised the report to reflect this 

clarification and added language suggested by USDA to better describe the 

FMMO program’s objectives.

In addition, USDA raised concerns about the practicality of implementing 

some of the options discussed in the report, particularly (1) adopting a 

competitive pay price to establish class prices under the FMMO program 

and (2) combining Class III and Class IV into a single manufacturing class.14

Regarding the first, USDA said that it and a committee of academicians 

spent considerable time several years ago trying to devise a competitive 

price series that could be used to establish minimum class prices. However, 

this effort was unsuccessful. USDA said that our report does not identify or 

indicate how to create such a price series. Similarly, regarding combining 

Class III and Class IV, USDA notes that no specifics are offered in the report 

as to how milk in such a class would be priced. We acknowledge that the 

report does not explain how a competitive price series could be created or 

how milk would be priced if the classes were merged. However, these 

options were identified by stakeholders during the course of our work. 

Other options discussed in the report also may present challenging 

implementation issues and in many cases the report discusses those issues.

14Under the FMMO program, a classified pricing plan provides different classes and 

minimum prices for milk depending on how it is used. Milk used in fluid products is placed 

in Class I. Milk used for various manufactured products is placed in Classes II through IV. 

Class II includes soft products, such as cottage cheese, ice cream, and yogurt. Class III 

includes spreadable and hard cheeses. Class IV includes butter and dried milk products, 

such as nonfat dry milk.
Page 12 GAO-05-50 Dairy Industry

Finally, USDA said that it does not believe the hearing and rulemaking 

process it uses to modify FMMOs inhibits its ability to respond to changing 

market conditions or the marketing of new dairy products. However, as 

discussed in the report, some stakeholders cited the slowness of this 

process as a concern. In addition, the report discusses USDA’s efforts to 

improve this process to more quickly respond to problems or needed 

changes while ensuring the promulgation of economically sound 

regulation.

USDA did not comment on the report’s recommendation.

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

date of this letter. We will then send copies of the report to the Senate 

Committee on Agriculture, Nutrition, and Forestry; the House Committee 

on Agriculture; other appropriate congressional committees; interested 

Members of Congress; the Secretary of Agriculture; the Secretary of 

Defense; the Director of the Office of Management and Budget; and other 

interested parties. Copies will also be made available to others upon 

request. In addition, the report will be available at no charge on GAO’s Web 

site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841. Key contributors to this report are listed in appendix IX.

Lawrence J. Dyckman

Director, Natural Resources

and Environment
Page 13 GAO-05-50 Dairy Industry

List of Requesters

The Honorable Olympia J. Snowe

Chair

Committee on Small Business & Entrepreneurship

United States Senate

The Honorable Hillary Rodham Clinton

United States Senate

The Honorable Susan Collins

United States Senate

The Honorable Christopher J. Dodd

United States Senate

The Honorable James M. Jeffords

United States Senate

The Honorable Edward M. Kennedy

United States Senate

The Honorable John F. Kerry

United States Senate

The Honorable Patrick Leahy

United States Senate

The Honorable Barbara A. Mikulski

United States Senate

The Honorable John D. Rockefeller IV

United States Senate

The Honorable Paul S. Sarbanes

United States Senate

The Honorable Charles E. Schumer

United States Senate

The Honorable Arlen Specter

United States Senate
Page 14 GAO-05-50 Dairy Industry

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

In March 2003, Senator Snowe, Chair, Committee on Small Business and 

Entrepreneurship, joined by Senators Clinton, Collins, Dodd, Jeffords, 

Kennedy, Kerry, Leahy, Mikulski, Rockefeller IV, Sarbanes, Schumer, and 

Specter requested that GAO examine a number of issues concerning the 

pricing and marketing of milk in the United States. Specifically, they asked 

us to update the information contained in our 2001 report, entitled Dairy 

Industry: Information on Milk Prices and Changing Market Structure

(GAO-01-561, June 15, 2001), and to address other issues. This report 

examines (1) what portion of the retail price of fluid milk is received by 

dairy farmers, dairy cooperatives, wholesale milk processors, and retailers 

in selected markets throughout the United States, how this distribution has 

changed over the period of our review, and the relationships among price 

changes at these levels; (2) how various factors, such as costs, influence 

the price of milk as it moves from the farm to the consumer, as well as how 

these and other factors affect the extent to which changes in price are 

transmitted among levels as milk moves from the farm to the consumer; 

and (3) how changes in dairy policies and alternative policy options have 

affected or might affect farm income, federal costs, economic efficiency, 

and consumer prices, among other policy considerations.1

 It also updates 

other information on milk prices included in our June 2001 report.

To update our information on the price distribution among the various 

levels of the milk marketing chain, we analyzed milk prices in 15 selected 

markets nationwide: Atlanta, Georgia; Boston, Massachusetts; Charlotte, 

North Carolina; Cincinnati, Ohio; Dallas, Texas; Denver, Colorado; Miami, 

Florida; Milwaukee, Wisconsin; Minneapolis, Minnesota; New Orleans, 

Louisiana; Phoenix, Arizona; Salt Lake City, Utah; San Diego, California; 

Seattle, Washington; and Washington, D.C.2

 In selecting these markets, we 

ensured that (1) they provided national geographic coverage; (2) at least 

one market was located in each of the federal milk marketing orders 

(FMMOs) as they existed during most of the period from October 2000 

through May 2004; (3) the selected markets included both state and 

federally regulated markets; and (4) these areas represented similar 

marketing areas for which we reported information in our June 2001 

report. For the 15 markets, we collected data on the prices received by 

1

This report does not specifically address consolidation and concentration trends in the 

dairy industry and what is known about the impact of concentration on milk prices, as the 

2001 report did. However, the report discusses market concentration as one of the factors 

that influence the price of milk as it moves from the farm to the consumer. (See app. V.)

2

Portions of some of these market areas lie in adjacent states.
Appendix I

Objectives, Scope, and Methodology

Page 15 GAO-05-50 Dairy Industry

farmers, cooperatives, wholesale milk processors, and retailers for October 

2000 through May 2004. We limited our data collection efforts to the prices 

of whole, 2 percent, 1 percent, and skim milk because sales of these milk 

types constitute over 93 percent of fluid milk sales annually. We also 

confined our analysis to the prices of these milk types sold in gallon 

containers because milk sold in gallon containers accounts for about 65 

percent of fluid milk products sold under FMMOs.3

There is no precise method for calculating the price that farmers receive 

for raw milk that is ultimately processed and sold in fluid milk products 

because dairy farmers receive a blend price for their milk, which is the 

average price for milk used for fluid and manufactured products. 

Therefore, any calculation of the value received by farmers for raw milk 

that is to be used for fluid milk products is necessarily only approximate. 

To estimate a farm price for raw milk used in fluid milk products, we used 

data provided by the U.S. Department of Agriculture’s (USDA) Agricultural 

Marketing Service (AMS). AMS developed an adjustment, which accounts 

for various charges such as hauling and marketing fees, that we subtracted 

from the announced cooperative Class I price to obtain the estimated farm 

price for raw milk used in fluid milk products for each of the selected 

markets in our review except San Diego, which is not part of the FMMO 

system.4

 AMS’s adjustment accounts for farm-to-plant hauling costs, 

cooperative dues and capital assessment, mandatory advertising and 

promotion costs, competitive and receiving credits, and a representative 

estimate of the value of reimbursements to cooperatives for the services 

performed for handlers and for transportation costs not covered by the 

order minimum price.5

 Most of the items that make up the adjustment are 

not available for the specific fluid milk market that we selected, but rather 

are based on information collected for milk used over wider geographical 

areas. Therefore, an order-wide value used for any of these items provides 

an estimate rather than the actual value for this item. Also, the values for 

3

This estimate is based on USDA data for the month of November for selected years 

between 1991 and 2001. It was the most recent data we could obtain.

4

Under the federal milk marketing orders, a classified pricing plan provides different classes 

and minimum prices for milk depending on how the milk is used. Milk used in fluid products 

is placed in Class I, which is the highest-priced class. Milk used for various manufactured 

products is placed in lower-priced classes.

5

Handler is the federal order term for cooperatives, processors, or dealers of milk who 

commonly purchase raw milk and sell pasteurized milk and milk products. See 7 C.F.R. 

§1000.9 for a more complete definition.
Appendix I

Objectives, Scope, and Methodology

Page 16 GAO-05-50 Dairy Industry

two of the adjustment items—reimbursements to cooperatives for services 

performed for handlers and for transportation costs not covered by the 

order minimum price—were not readily available so they were estimated 

indirectly based on other reported data and, in some cases, on anecdotal 

information provided by industry members. However, despite these 

limitations, AMS believes that the estimated farm price is a good 

representation of the price that dairy farmers receive for raw milk used in 

fluid milk products. For the farm price for San Diego—a state-regulated 

market—we used mailbox price data collected by the California 

Department of Food and Agriculture. The mailbox price is the weighted 

average of the prices received by dairy farmers in the market for all of their 

raw milk sold and therefore is computed as the total net dollars received 

for milk divided by the total pounds of milk marketed.6

 This price is likely 

to be lower than the price received for milk used for fluid purposes because 

the prices for milk used for manufacturing purposes are generally lower. 

However, it is the best measure we could obtain.

To determine cooperative prices, we used AMS data on announced 

cooperative prices to represent prices that wholesale milk processors paid 

to cooperatives. Wholesale milk processors in federally regulated markets 

generally purchase milk from cooperatives and pay the federal minimum 

price for milk plus premiums that are negotiated between cooperatives and 

wholesale milk processors. The announced cooperative price is the Class I 

milk price announced by the major cooperative in each of the markets. This 

price does not apply to all Class I sales in federally regulated markets and is 

not necessarily the price actually received for all of the milk sold by the 

major cooperative; the announced cooperative prices have not been 

verified by USDA as actually having been paid by processors. For San 

Diego, we used the minimum fluid prices established by the state of 

California. Data on the premiums paid in excess of these minimums were 

not available for this market. (See app. V for a detailed discussion of overorder premiums.)

To determine wholesale prices, we used the prices paid at Department of 

Defense Commissary Agency locations. The Defense Commissary Agency 

purchases milk under competitive and noncompetitive contracts with 

6

The mailbox price information collected by the California Department of Food and 

Agriculture does not account for all of the various factors that influence farm prices. As a 

result, it does not provide as good a measure of the price that farmers receive based on the 

value of their milk as the AMS adjustment does for the FMMO markets where it is available.
Appendix I

Objectives, Scope, and Methodology

Page 17 GAO-05-50 Dairy Industry

wholesalers. We used commissary prices as surrogates for privately 

established wholesale prices because (1) defense commissaries sell 

groceries at a standard 5 percent markup from cost to active and retired 

military personnel and (2) wholesale price data are considered proprietary 

by industry officials and were not available to us. The commissary network 

of stores ranks twelfth in the United States in sales volume for supermarket 

chains. We selected 39 different commissary locations near the 15 markets 

we reviewed, and the Defense Commissary Agency provided us with 

weekly prices paid by consumers at these locations for gallons of whole, 2 

percent, 1 percent, and skim milk.7

 We averaged these weekly prices to 

obtain monthly prices. We then adjusted these monthly prices to account 

for the 5 percent markup. Where we had multiple commissary locations for 

a market, we averaged the adjusted monthly prices to obtain a wholesale 

price for the market. We recognize that these locations may not provide an 

ideal match with other price data analyzed for a given location; for 

example, in some markets the available commissary locations were not in 

close proximity to the selected marketing areas. Also, wholesale 

processors may provide these commissary locations with different levels of 

service than they do for retailers in these markets.8

 In such cases, the 

prices paid by these commissaries for fluid milk may have been different 

than the prices that retailers in the selected markets paid to their wholesale 

suppliers. However, these were the best wholesale data that we could 

obtain. In those locations where commissaries sold more than one brand of 

milk, we used the price for the brand that had the highest sales volume for 

a particular period.

For retail prices, we contracted with Information Resources, Inc., a private 

data collection and analysis company, to obtain average weekly retail 

prices for whole, 2 percent, 1 percent, and skim milk sold in gallon 

containers. These data represented a weighted average of prices at 

supermarkets with yearly sales exceeding $2 million for the markets 

included in our analysis. We then averaged these weekly prices to obtain 

monthly prices. We were unable to obtain data from some types of 

nonsupermarket retailers such as mass merchandisers, thus the retail 

7

The 39 commissary locations were selected either because they were within the marketing 

area for one of our 15 selected markets (as defined by our source for retail pricing data, 

Information Resources, Inc.), or because they were the closest location available.

8

In addition to shipping the products to stores, some wholesalers provide in-store services, 

including unloading the milk on the store dock, restocking the dairy case, and removing 

outdated or leaking containers.
Appendix I

Objectives, Scope, and Methodology

Page 18 GAO-05-50 Dairy Industry

pricing data that we present may not be representative of fluid milk prices 

at those locations. Figure 1 shows the locations of the 15 selected markets, 

the corresponding commissaries, and the federal milk marketing order 

areas.
Appendix I

Objectives, Scope, and Methodology

Page 19 GAO-05-50 Dairy Industry

Figure 1: Selected Milk Markets, Corresponding Defense Commissaries Used for Our Analysis, and Federal Milk Marketing 

Order Areas Prior to April 2004

Pacific

Northwest

Upper

Midwest

Appalachian

Southeast

Central

Southwest

Western

Florida

Arizona/Las Vegas

Mideast

Minneapolis

Denver

Dallas

Charlotte

Atlanta

San Diego

Salt 

Lake

City 

Seattle

Northeast

Fort McCoy

Milwaukee

Naval Station Great Lakes

Wright-Patterson Air Force Base

Hanscom Air Force Base

Boston

Washington, D.C. 

Cincinnati

Fort Bragg, North Post Store

Naval Air Station, Key West

Source: GAO, based on USDA and Defense Commissary Agency information.

Naval Support Activities, New Orleans 

New Orleans

Naval Base, San Diego 

Luke Air Force Base

Phoenix

Miami

Hill Air Force Base

Fluid milk market Federal milk marketing order areas

Bolling Air Force Base

Clear Creek Commissary, Fort Hood

Warrior Way Commissary, Fort Hood

Naval Station Everett,

Smokey Point Support Center

Fort Lewis

McChord Air Force Base

Davis-Monthan Air Force Base

Marine Corps Base, Camp Pendleton 

Naval Outlying Landing Field,

Imperial Beach 

Marine Corps Air Station, Miramar 

Naval Air Station, North Island

1

10

2

3

1

2 3

4

30

32

33

34

28

29

35

5

6

7

8

9

San Onofre Commissary, Camp Pendleton

Fort Gillem

Naval Construction Battalion Center,

Gulfport 

Keesler Air Force Base

Fort McPherson Andrews Air Force Base

Fort Carson

Peterson Air Force Base

Buckley Air Force Base

U.S. Air Force Academy

Walter Reed Army Medical Center

Fort Myer

Fort Belvoir

Marine Corps Base, Quantico 

Aberdeen Proving Ground

Naval Station, Annapolis 

Fort Meade

Fort Detrick

11

31

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

23

5

4

22

21

14 15

16

17

18

28,

29 31

34 33 25, 26, 27

30, 32

20

13

10

7 6

11

12

9

8

Department of Defense commissary Not federally regulated

38 35

37

36

24

19

36

37

38
Appendix I

Objectives, Scope, and Methodology

Page 20 GAO-05-50 Dairy Industry

Note: The Western Order was terminated as of April 1, 2004. However, because the order existed 

during the majority of our period of analysis we chose to include the data in this report. Farm and 

cooperative level prices for this order for April and May 2004 were provided by USDA based on what 

they would have been had the order still existed.

To determine (1) the portion of the retail price of a gallon of milk received 

by farmers, cooperatives, wholesale milk processors, and retailers; (2) how 

changes in retail and farm prices affect the farm-to-retail price spread; and 

(3) how price changes at any level of the marketing chain correlate to 

changes in prices at other levels, we limited our analysis to 2 percent milk, 

which currently represents the largest volume of reduced-fat milk sold 

nationwide. Therefore, our analysis of 2 percent prices may not necessarily 

reflect pricing patterns and trends for the other three kinds of milk. 

Appendix II includes graphs that show the relationships among the farm, 

cooperative, wholesale, and retail prices for a gallon of 2 percent milk for 

each of the 15 markets. Because farm and cooperative prices reflect a 

higher milkfat content than that in 2 percent milk, we adjusted these prices 

to reflect the value of removing milkfat and replacing it with skim milk.9

This adjustment allowed us to use farm and cooperative prices that were 

comparable to the wholesale and retail prices for our analysis.

To determine the degree that farm and retail prices had changed and the 

effect these changes had on the farm-to-retail price spread from October 

2000 through May 2004 for each of the 15 markets, we used a statistical 

procedure to estimate farm-level and retail prices at the beginning and end 

of the period.10 We relied on estimated rather than actual prices to reduce 

the influence of the starting and ending months and years selected for our 

analysis in markets in which milk prices varied from month to month. We

9

For San Diego, we used prices that were adjusted for 2 percent milkfat and 10 percent 

nonfat milk solids so that they were comparable with the prices of retail milk sold in 

California.

10We used a regression procedure for each market to determine whether the price could be 

reliably predicted as a function of time for both farm-level and retail prices. This procedure 

allowed us to estimate initial and final prices for farm-level and retail prices that take into 

account the variability in these price series during the 44-month period. This regression 

procedure was done on time and time-squared because we observed that prices generally 

fell for part of the period and then rose. Including the time-squared variable in the 

regression provided a better fit for the data. A statistically significant relationship indicates 

that we found a consistent association, either up or down, between price and time. For 

statistically significant relationships, we calculated a final price estimate (computed for the 

last month of our data series) and compared to an estimated price calculated for the first 

month. In the absence of a statistically significant relationship–when no consistent 

association was found–we treated initial and final estimates of price the same, even if actual 

beginning and final prices differ.
Appendix I

Objectives, Scope, and Methodology

Page 21 GAO-05-50 Dairy Industry

used the differences between the estimated initial and final prices to 

represent the changes during the period. When our statistical procedure 

did not find a consistent association between prices and time, we treated 

the difference in the estimated initial and final prices as zero. We calculated 

the change in the farm-to-retail price spread as the estimated retail price 

difference minus the estimated farm price difference.

To describe the relationship between price changes at any given level in the 

milk marketing chain and price changes at the other levels, we tested for 

correlations between price changes at the various levels for each of the 15 

markets included in our analysis. Specifically, we calculated coefficients 

describing the degree of correlation between changes in farm prices and 

price changes at the cooperative, wholesale, and retail levels; price changes 

at the cooperative level and price changes at the wholesale and retail 

levels; and price changes at the wholesale and retail levels. In appendix II, 

we report those correlation coefficients and indicate which are statistically 

different from zero at the 95 percent confidence level.

To update information provided in our June 2001 report on the retail prices 

for four kinds of milk, we analyzed the retail price data that we obtained 

from Information Resources, Inc. We array these data in appendix III for 

each of the selected 15 markets for October 2000 through May 2004.

To update information provided in our June 2001 report on average 

monthly and annual farm and cooperative prices, and wholesale and retail 

prices for different kinds of milk, we analyzed data obtained from USDA, 

the California Department of Food and Agriculture, the Department of 

Defense Commissary Agency, and Information Resources, Inc. We report 

these data in appendix IV for each of the selected 15 markets for October 

2000 through May 2004.

To update our information on the major factors influencing milk prices and 

explore price transmission within the milk marketing chain, we conducted 

more than 50 interviews with national dairy experts working with the 
Appendix I

Objectives, Scope, and Methodology

Page 22 GAO-05-50 Dairy Industry

federal and state governments,11 cooperatives,12 processors,13 retailers,14 or 

industry groups,15 or in academia.16 We also reviewed a number of relevant 

studies and publications from USDA and other sources. Where possible, we 

obtained data on production costs, services provided by cooperatives, as 

well as inputs to processing and retailing. We also obtained information on 

concentration and market power at each level of the milk marketing chain. 

We present information on the factors influencing the price of milk in 

appendix V.

To compare the results and methodologies of various studies looking at the 

issue of price transmission in fluid milk marketing from the farm to the 

retail level, we performed a technical review of 14 academic studies 

conducted over the past 10 years, looking at model descriptions, 

assumptions, and results. We also spoke with the economists involved in 

these studies concerning their model results and the causes of differences 

in fluid milk price transmission across markets. The scope of these studies 

encompassed national, regional, and city-level models of fluid milk price 

transmission. Appendix VI provides a summary of our review of price 

transmission and the various price transmission studies.

To identify and examine the effects of federal dairy program changes and 

alternative policy options, we contacted many of the same dairy experts 

previously mentioned. We also conducted an extensive literature search 

and reviewed more than 50 relevant studies and other publications we 

identified. We qualitatively analyzed the effects of federal dairy program 

11Federal government sources included officials from USDA’s AMS, Economic Research 

Service, and Farm Service Agency.

12Cooperatives we contacted included Dairy Farmers of America; California Dairies, Inc.; 

Agri-Mark; Land O’Lakes, Inc.; and Prairie Farms.

13Fluid milk processors and processors of manufactured dairy products that we contacted 

included HP Hood LLC and Leprino Foods, as well as cooperatives and retailers that 

process and manufacture these products.

14Retailers that we contacted included Wal-Mart, Albertsons, the H. E. Butt Grocery 

Company, and Demoulas Super Markets, Inc.

15Industry groups that we contacted included the National Milk Producers Federation, the 

International Dairy Foods Association, and the Food Marketing Institute.

16Academic dairy experts that we contacted included professors from Cornell University, 

North Carolina State University, Ohio State University, Texas A&M University, University of 

Connecticut, University of Wisconsin–Madison, and the University of California–Davis.
Appendix I

Objectives, Scope, and Methodology

Page 23 GAO-05-50 Dairy Industry

changes and policy options we identified on six main policy considerations: 

farm income, milk production, federal costs, price volatility, economic 

efficiency, and consumer prices. We evaluated impacts on these policy 

considerations under both high- and low-price scenarios, over the short 

and long terms. We identified these policy considerations by reviewing 

previous GAO reports, relevant studies, and legislation, as well as through 

our conversations with dairy policy experts. Different stakeholders in the 

dairy policy arena may have alternative views on the relative importance of 

these policy considerations, as well as other considerations that we did not 

include, which could lead to differing perspectives on these options. In 

addition, the potential effects of policy options on these considerations 

could vary depending upon economic conditions and other policy 

decisions. We compared the dairy policy options we identified against a 

baseline scenario of the policies in place as of August 2004: FMMO 

regulations, a Milk Income Loss Contract (MILC) program that is scheduled 

to expire at the end of fiscal year 2005, a price support program at $9.90 per 

hundredweight, a Dairy Export Incentive Program (DEIP), trade 

restrictions, and milk regulatory policies in some states. We include a 

discussion of the effects of recent federal dairy program changes and 

alternative policy options in appendix VII.

We conducted our review from September 2003 through October 2004 in 

accordance with generally accepted government auditing standards. We 

did not independently verify the data we received from various sources. 

However, we discussed with these sources the measures they take to 

ensure the accuracy of the data, and these measures seemed reasonable. 

Additionally, we consulted with the following dairy experts concerning the 

results of our analysis of price transmission within the milk marketing 

chain and the effects of changes in federal dairy programs and alternative 

policy options:

• Ed Jesse, Ph.D., Professor, Department of Agricultural and Applied 

Economics, University of Wisconsin–Madison;

• Daniel Lass, Ph.D., Professor, College of Natural Resources and the 

Environment, University of Massachusetts, Amherst;

• Richard Sexton, Ph.D., Professor, Department of Agricultural and 

Resource Economics, University of California–Davis; and

• Mark Stephenson, Ph.D., Senior Extension Associate, Department of 

Applied Economics and Management, Cornell University.
Page 24 GAO-05-50 Dairy Industry

Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets ApendxiI

This appendix reports on our analysis of prices at four marketing levels for 

a gallon of 2 percent milk in 15 selected markets for October 2000 through 

May 2004. Our analysis includes information on (1) the portion of the retail 

price of a gallon of milk received by farmers, cooperatives, wholesale milk 

processors, and retailers; (2) how changes in farm and retail milk prices 

affect the farm-to-retail milk price spread; and (3) how price changes at any 

level of the marketing chain correlate with changes in prices at other levels.

We limited our analysis to gallons of 2 percent milk because sales of milk 

with reduced fat content account for nearly 52 percent of all sales of fluid 

milk and sales of 2 percent milk account for about 62 percent of these 

reduced-fat sales. The farm and cooperative prices used in our analysis and 

presented in this appendix have been adjusted to reflect 2 percent milkfat. 

This analysis may not reflect pricing patterns and trends for other kinds of 

milk. We present complete data for prices for all four types of milk—whole, 

2 percent, 1 percent, and skim—in appendix III.

Portion Received by 

Farmers, Cooperatives, 

Wholesale Milk 

Processors and 

Retailers

Between October 2000 and May 2004, on average, our data suggest that 

farmers received 45.9 percent, cooperatives 6.1 percent, wholesale 

processors 35.6 percent, and retailers 12.5 percent of the retail price of a 

gallon of 2 percent milk in the 15 markets we reviewed.1

 However, these 

percentages varied depending on the specific market. For example, the 

farmers’ portion ranged from 36.0 percent to 58.6 percent, while retailers in 

12 markets received anywhere from 3.5 percent to 44.1 percent.2

 In 

comparison, the average percentages we reported in 2001 for the period 

March 1998 through September 2000 were 43 percent, 5 percent, 33 

percent, and 19 percent, respectively, for farmers, cooperatives, wholesale 

processors, and retailers. Table 1 summarizes the price breakdown for each 

market.

1

These figures represent unweighted averages of the percentages for each market.

2

See explanatory note (a) to table 1. In some places (3 out of 15 markets), retailers 

experienced negative returns.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 25 GAO-05-50 Dairy Industry

Table 1: Portion of the Retail Price of a Gallon of 2 Percent Milk Received by Farmers, Cooperatives, Wholesale Processors, and 

Retailers for 15 Markets, October 2000 through May 2004

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Note: Percentages may not total 100 due to rounding.

a

Our analysis found that retailers in the Dallas, Miami, and Minneapolis markets received a negative 

return on a gallon of 2 percent milk for the 44-month period. Officials with one major retailer in the 

Dallas market indicated that a price war was occurring in Dallas during this time period. We were 

unable to obtain explanations for the negative returns in Miami and Minneapolis. These negative 

returns may be the result of problems with comparability between commissary and supermarket data.

b

Figures for the San Diego market may understate the percent received by cooperatives and overstate 

the percent received by wholesale processors because the cooperative price data for this market did 

not include estimates of over-order premiums paid to cooperatives. On the other hand, figures for this 

market may overstate the percent received by cooperatives and understate the percent received by 

farmers because unlike the farm price data for other markets, the farm price data for San Diego 

represent a weighted average of milk sold for all uses. See appendix I.

Selected market

Percent received 

by farmers

Percent received 

by cooperatives

Percent received 

by wholesale 

processors

Percent received 

by retailers

Subtotal received 

by wholesale 

processors and 

retailers

Atlanta, Ga. 42.7 7.4 34.8 15.1 49.9

Boston, Mass. 51.2 4.5 24.0 20.4 44.4

Charlotte, N.C. 41.1 7.5 46.6 4.8 51.4

Cincinnati, Ohio 45.8 7.6 39.0 7.7 46.7

Dallas, Tex. 55.9 5.3 49.5 (10.7)a 38.8

Denver, Colo. 39.4 4.5 25.7 30.3 56.0

Miami, Fla. 50.8 9.5 45.0 (5.3)a 39.7

Milwaukee, Wisc. 52.1 7.9 36.5 3.5 40.0

Minneapolis, Minn. 58.6 7.8 64.1 (30.5)a 33.6

New Orleans, La. 36.8 9.5 36.6 17.1 53.7

Phoenix, Ariz. 42.5 3.3 34.8 19.4 54.2

Salt Lake City, Utah 44.8 3.6 43.0 8.6 51.6

San Diego, Calif.

b 36.0 6.8 28.1 29.1 57.2

Seattle, Wash. 36.7 3.2 16.0 44.1 60.1

Washington, D.C. 53.4 3.3 10.2 33.1 43.3

Average for the 15 

markets 45.9 6.1 35.6 12.5 48.0 
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 26 GAO-05-50 Dairy Industry

Changes in Farm and 

Retail Prices and the 

Price Spread

From October 2000 through May 2004, the spread between farm and retail 

milk prices increased in 12 of the 15 markets.3

 However, in some of the 12 

markets, the spread between farm and retail milk prices increased 

dramatically and then moderated. In 9 of the 15 markets, retail prices 

showed a statistically significant increase. In 4 of the remaining markets, 

retail prices decreased over time; in the other 2 markets, retail prices 

showed no statistically significant change. At the same time, farm prices 

decreased in 12 of the 15 markets and increased in the remaining 3 markets 

over the 44-month period. However, these declining farm prices began to 

moderate, or, in most cases, began to rise during the latter months of our 

period of analysis. Table 2 provides these data for selected markets.4

Table 2: Changes in the Farm-to-Retail Price Spread for a Gallon of 2 Percent Milk for 

15 Markets, October 2000 through May 2004

3

The price spread of a commodity represents differences in prices between two levels of the 

marketing chain. These differences reflect the costs incurred and profits received through 

adding value by processing, transporting, and distributing a commodity.

4

The values used to calculate the changes in farm and retail prices in table 2 are based on 

statistical estimates of initial and final prices for these two levels, not the actual prices 

recorded in the first and last month of the period for which we have data. The method for 

calculating these estimates is described in appendix I. The changes in the farm-to-retail 

price spread are the differences between the changes in retail and farm prices from October 

2000 to May 2004 and consequently are determined from the statistically estimated initial 

and final prices for the retail and farm levels.

Selected market

Change in farm 

prices

Change in retail 

prices

Change in the farm-to-retail 

price spread

Atlanta, Ga. $0.03 ($0.21) ($0.24)

Boston, Mass. (0.06) 0.12 0.18

Charlotte, N.C. (0.05) 0.20 0.25

Cincinnati, Ohio (0.07) (0.12) (0.05)

Dallas, Tex. 0.02 0.24 0.22

Denver, Colo. (0.06) 0.16 0.22

Miami, Fla. (0.01) 0.25 0.26

Milwaukee, Wisc. (0.03) 0.05 0.08

Minneapolis, Minn. (0.02) a 0.02

New Orleans, La. (0.10) 0.16 0.27

Phoenix, Ariz. (0.07) (0.01) 0.06
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 27 GAO-05-50 Dairy Industry

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Note: Differences between changes in farm and retail prices may not add to the change in the farm-toretail price spread due to rounding.

a

No statistically significant change was observed in the price spread over the 44-month period.

Correlation between 

Price Changes at the 

Four Marketing Levels

We found that price changes generally correlated across levels in the 

marketing chain, with the strongest correlations occurring between 

adjacent levels. The values of correlation coefficients presented are 

estimates of the degree that price changes at one level in the milk 

marketing chain are associated with price changes at other levels. The 

higher the coefficient, the closer the association between changes in prices 

at different levels. Changes in cooperative prices, in general, were strongly 

correlated with changes in wholesale prices.5

 However, changes in 

cooperative prices correlated less strongly with changes in retail prices. As 

discussed in appendix V, many factors other than farm or wholesale prices 

influence the retail price of fluid milk.

Correlation coefficients between prices at different marketing levels varied 

across markets. For example, correlations between cooperative and 

wholesale prices in individual markets range from a high of 0.982 to a low 

of –0.031. We ranked the 15 markets by the extent of correlation between 

cooperative and wholesale prices. The correlation coefficient for the 

Salt Lake City, Utah (0.04) a 0.04

San Diego, Calif. 0.03 (0.16) (0.19)

Seattle, Wash. (0.08) 0.10 0.18

Washington, D.C. (0.03) 0.28 0.32

(Continued From Previous Page)

Selected market

Change in farm 

prices

Change in retail 

prices

Change in the farm-to-retail 

price spread

5

As discussed in appendix I, farm prices were estimated by subtracting out certain cost 

factors, provided by USDA, from the announced cooperative Class I prices. To the extent 

that these factors do not change much over time, it would be expected that price changes at 

the farm level would closely correlate with price changes at the cooperative level, except for 

San Diego. As discussed in appendix I, we estimated the farm and cooperative prices 

differently in San Diego because California is not part of the federal milk marketing order 

system. The approach that we used for San Diego would not be expected to generate a 

similarly close correlation between farm and cooperative prices. Because farm prices for 

raw milk used for fluid purposes are not directly observed but are derived from cooperative 

prices, correlations of wholesale and retail prices with cooperative prices provide a better 

picture of the price relationship across levels in the milk marketing chain.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 28 GAO-05-50 Dairy Industry

market that fell in the middle of this ranking was 0.788. In comparison, the 

market in the middle of a similar ranking for the time period analyzed in 

our 2001 report had a lower correlation coefficient between these prices, 

0.716. Similarly, correlations between cooperative and retail prices in 

individual markets range from a high of 0.879 to a low of 0.214. We did a 

comparable ranking of the 15 markets by the extent of correlation between 

cooperative and retail prices. The correlation coefficient for the market 

that fell in the middle of this ranking was 0.588. In comparison, the market 

in the middle of a similar ranking for the time period presented in our 2001 

report again had a lower correlation coefficient between these prices, 

0.483. Tables 3 through 5 present data from our correlation analysis of price 

changes across marketing levels.

Table 3: Correlation between Farm Price Changes and Changes in Cooperative, 

Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for 15 Markets, October 

2000 through May 2004

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Note: In calculating the correlation coefficients for each market, we omitted the months for which data 

were missing.

Selected market

Correlation 

coefficients for 

cooperative prices

Correlation 

coefficients for 

wholesale prices

Correlation 

coefficients for 

retail prices

Atlanta, Ga. 0.999* 0.525* 0.537*

Boston, Mass. 1.000* 0.691* 0.780*

Charlotte, N.C. 0.995* 0.693* 0.778*

Cincinnati, Ohio 1.000* 0.983* 0.589*

Dallas, Tex. 0.998* 0.813* 0.713*

Denver, Colo. 0.999* 0.932* 0.428*

Miami, Fla. 0.999* (0.024) 0.826*

Milwaukee, Wisc. 0.999* 0.683* 0.881*

Minneapolis, Minn. 0.999* 0.220 0.503*

New Orleans, La. 0.993* 0.784* 0.863*

Phoenix, Ariz. 1.000* 0.542* 0.217

Salt Lake City, 

Utah 1.000* 0.829* 0.360*

San Diego, Calif. 0.407* 0.432* 0.341*

Seattle, Wash. 1.000* 0.939* 0.249

Washington, D.C. 1.000* 0.962* 0.810*
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 29 GAO-05-50 Dairy Industry

*Indicates that the correlation coefficient estimated for this time period is statistically significant at the 5 

percent level (i.e., the probability that the two price series are uncorrelated is less than 5 percent).

Table 4: Correlation between Cooperative Price Changes and Changes in Wholesale 

and Retail Prices for a Gallon of 2 Percent Milk for 15 Markets, October 2000 through 

May 2004

Source: GAO’s analysis of cooperative price data provided by USDA (for the San Diego market, the Southern California Class I price 

data were provided by the California Department of Food and Agriculture), wholesale price data provided by the Defense Commissary 

Agency, and retail price data provided by Information Resources, Inc.

Note: In calculating the correlation coefficients for each market, we omitted the months for which data 

were missing.

*Indicates that the correlation coefficient estimated for this time period is statistically significant at the 5 

percent level (i.e., the probability that the two price series are uncorrelated is less than 5 percent).

Selected market

Correlation coefficients for 

wholesale prices

Correlation coefficients for 

retail prices

Atlanta, Ga. 0.546* 0.543*

Boston, Mass. 0.694* 0.775*

Charlotte, N.C. 0.697* 0.778*

Cincinnati, Ohio 0.982* 0.588*

Dallas, Tex. 0.818* 0.725*

Denver, Colo. 0.939* 0.436*

Miami, Fla. (0.031) 0.823*

Milwaukee, Wisc. 0.682* 0.879*

Minneapolis, Minn. 0.228 0.499*

New Orleans, La. 0.788* 0.861*

Phoenix, Ariz. 0.540* 0.214

Salt Lake City, Utah 0.830* 0.360*

San Diego, Calif. 0.969* 0.480*

Seattle, Wash. 0.939* 0.250

Washington, D.C. 0.962* 0.809*
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 30 GAO-05-50 Dairy Industry

Table 5: Correlation between Wholesale and Retail Price Changes for a Gallon of 2 

Percent Milk for 15 Markets, October 2000 through May 2004

Source: GAO’s analysis of wholesale price data provided by the Defense Commissary Agency and retail price data provided by 

Information Resources, Inc.

Note: In calculating the correlation coefficients for each market, we omitted the months for which data 

were missing.

*Indicates that the correlation coefficient estimated for this time period is statistically significant at the 5 

percent level (i.e., the probability that the two price series are uncorrelated is less than 5 percent).

Comparison of Average 

Annual and Monthly 

Prices for 2 Percent 

Milk

Tables 6 through 10 show the average annual price for a gallon of 2 percent 

milk in the 15 markets for each of the four marketing levels during part of 

2000, all of 2001, 2002, and 2003, and part of 2004. Figures 2 through 16 

present average monthly data for the period October 2000 through May 

2004 on farm, cooperative, wholesale, and retail prices for gallons of 2 

percent milk in each of the 15 markets. Gaps in any of the lines shown in 

the figures indicate that data were unavailable for those months.

Selected market Correlation coefficients for retail prices

Atlanta, Ga. 0.319*

Boston, Mass. 0.348*

Charlotte, N.C. 0.746*

Cincinnati, Ohio 0.544*

Dallas, Tex. 0.802*

Denver, Colo. 0.429*

Miami, Fla. (0.003)

Milwaukee, Wisc. 0.744*

Minneapolis, Minn. 0.205

New Orleans, La. 0.734*

Phoenix, Ariz. 0.419*

Salt Lake City, Utah 0.270

San Diego, Calif. 0.497*

Seattle, Wash. 0.183

Washington, D.C. 0.778*
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 31 GAO-05-50 Dairy Industry

Table 6: Average Annual Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk in Selected Markets, 2000

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Note: Averages for 2000 were calculated using data from October through December, the portion of 

2000 included in our analysis.

a

We were unable to obtain data from the Defense Commissary Agency to represent wholesale prices 

for 2 percent milk in the Cincinnati market during 2000.

Table 7: Average Annual Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk in Selected Markets, 2001

Selected market Farm price Cooperative price Wholesale price Retail price

Atlanta, Ga. $1.05 $1.25 $2.04 $2.67

Boston, Mass. 1.25 1.35 1.96 2.23

Charlotte, N.C. 1.09 1.25 2.06 2.58

Cincinnati, Ohio 1.03 1.21 a 2.24

Dallas, Tex. 1.08 1.20 2.05 1.74

Denver, Colo. 0.99 1.11 1.73 2.45

Miami, Fla. 1.22 1.44 2.50 2.33

Milwaukee, Wisc. 1.05 1.18 1.79 1.94

Minneapolis, Minn. 1.01 1.12 2.05 1.77

New Orleans, La. 1.02 1.22 2.25 2.61

Phoenix, Ariz. 1.01 1.09 1.83 2.09

Salt Lake City, Utah 0.98 1.06 1.97 2.25

San Diego, Calif. 0.92 1.16 1.90 2.54

Seattle, Wash. 1.02 1.10 1.47 2.56

Washington, D.C. 1.21 1.28 1.51 2.11

Selected market Farm price

Cooperative 

price

Wholesale 

price

Retail 

price

Atlanta, Ga. $1.14 $1.34 $2.50 $2.68

Boston, Mass. 1.29 1.39 1.95 2.32

Charlotte, N.C. 1.18 1.34 2.32 2.62

Cincinnati, Ohio 1.15 1.32 2.24 2.28

Dallas, Tex. 1.17 1.28 2.15 1.98

Denver, Colo. 1.12 1.23 1.93 2.54

Miami, Fla. 1.31 1.53 2.56 2.40
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 32 GAO-05-50 Dairy Industry

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Table 8: Average Annual Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk in Selected Markets, 2002

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Milwaukee, Wisc. 1.17 1.32 2.17 2.07

Minneapolis, Minn. 1.14 1.27 2.21 1.73

New Orleans, La. 1.11 1.31 2.32 2.68

Phoenix, Ariz. 1.14 1.21 1.91 2.42

Salt Lake City, Utah 1.10 1.18 2.11 2.24

San Diego, Calif. 1.05 1.25 2.04 2.84

Seattle, Wash. 1.11 1.20 1.66 2.73

Washington, D.C. 1.34 1.42 1.71 2.30

Selected market Farm price Cooperative price Wholesale price Retail price

Atlanta, Ga. $1.04 $1.22 $2.01 $2.47

Boston, Mass. 1.11 1.21 1.77 2.33

Charlotte, N.C. 1.01 1.22 2.55 2.59

Cincinnati, Ohio 0.95 1.11 1.98 2.34

Dallas, Tex. 1.08 1.17 2.19 2.03

Denver, Colo. 0.93 1.05 1.66 2.56

Miami, Fla. 1.17 1.41 2.56 2.36

Milwaukee, Wisc. 0.98 1.14 1.81 2.01

Minneapolis, Minn. 0.95 1.10 2.38 1.95

New Orleans, La. 0.92 1.19 2.22 2.70

Phoenix, Ariz. 0.94 1.02 1.88 2.59

Salt Lake City, Utah 0.91 0.99 1.92 2.29

San Diego, Calif. 0.88 1.06 1.84 2.66

Seattle, Wash. 0.93 1.01 1.39 2.74

Washington, D.C. 1.16 1.23 1.44 2.28

(Continued From Previous Page)

Selected market Farm price

Cooperative 

price

Wholesale 

price

Retail 

price
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 33 GAO-05-50 Dairy Industry

Table 9: Average Annual Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk in Selected Markets, 2003

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Table 10: Average Annual Farm, Cooperative, Wholesale, and Retail Prices for a 

Gallon of 2 Percent Milk in Selected Markets, 2004

Selected market Farm price Cooperative price Wholesale price Retail price

Atlanta, Ga. $1.07 $1.25 $2.02 $2.49

Boston, Mass. 1.14 1.25 1.79 2.33

Charlotte, N.C. 1.05 1.27 2.65 2.63

Cincinnati, Ohio 0.98 1.16 2.00 2.34

Dallas, Tex. 1.09 1.19 2.26 2.02

Denver, Colo. 0.97 1.08 1.68 2.55

Miami, Fla. 1.20 1.43 2.56 2.47

Milwaukee, Wisc. 1.01 1.19 1.87 2.00

Minneapolis, Minn. 0.99 1.13 2.36 1.62

New Orleans, La. 0.94 1.24 2.22 2.68

Phoenix, Ariz. 0.97 1.05 1.97 2.45

Salt Lake City, Utah 0.95 1.03 1.99 2.14

San Diego, Calif. 0.93 1.12 1.84 2.69

Seattle, Wash. 0.95 1.04 1.46 2.88

Washington, D.C. 1.19 1.27 1.46 2.33

Selected market Farm price Cooperative price Wholesale price Retail price

Atlanta, Ga. $1.18 $1.35 $2.21 $2.54

Boston, Mass. 1.27 1.38 1.90 2.43

Charlotte, N.C. 1.13 1.35 2.84 2.87

Cincinnati, Ohio 1.09 1.27 2.21 1.95

Dallas, Tex. 1.20 1.30 2.47 2.13

Denver, Colo. 1.06 1.20 2.04 2.72

Miami, Fla. 1.30 1.52 2.56 2.63

Milwaukee, Wisc. 1.15 1.31 2.13 2.13

Minneapolis, Minn. 1.14 1.29 2.43 1.93

New Orleans, La. 1.03 1.33 2.15 2.87

Phoenix, Ariz. 1.08 1.17 2.17 2.25
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 34 GAO-05-50 Dairy Industry

Source: GAO’s analysis of farm and cooperative price data provided by USDA (for the San Diego market, the mailbox and Southern 

California Class I price data were provided by the California Department of Food and Agriculture), wholesale price data provided by the 

Defense Commissary Agency, and retail price data provided by Information Resources, Inc.

Note: The 2004 averages were calculated using data from January through May of that year, the 

portion of 2004 included in our analysis.

Figure 2: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Atlanta, Georgia, October 2000 

through May 2004

Note: For Atlanta, Georgia, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Atlanta 

adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid by the 

commissaries at Fort Gillem and Fort McPherson, adjusted for a 5 percent markup; and the retail price 

is the price collected by Information Resources, Inc., for the Atlanta market.

Salt Lake City, Utah 1.07 1.14 2.16 2.19

San Diego, Calif. 1.12 1.22 1.92 2.50

Seattle, Wash. 1.06 1.15 1.74 2.59

Washington, D.C. 1.31 1.39 1.66 2.56

(Continued From Previous Page)

Selected market Farm price Cooperative price Wholesale price Retail price

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

2000 2001 2002 2003 2004

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 35 GAO-05-50 Dairy Industry

Figure 3: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Boston, Massachusetts, October 

2000 through May 2004

Note: For Boston, Massachusetts, the farm price is the USDA estimated farm Class I price adjusted to 

2 percent milkfat content; the cooperative price is the effective cooperative Class I price for Boston 

adjusted to 2 percent milkfat content during the period that the Northeast Interstate Dairy Compact 

was effective (July 1997 through September 2001); the cooperative price after September 2001 is the 

announced cooperative Class I price for Boston adjusted to 2 percent milkfat content; the wholesale 

price is the price paid by the commissary at Hanscom Air Force Base, adjusted for a 5 percent markup; 

and the retail price is the price collected by Information Resources, Inc., for the Boston market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

2000 2002 2003 2004 2001

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 36 GAO-05-50 Dairy Industry

Figure 4: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Charlotte, North Carolina, October 

2000 through May 2004

Note: For Charlotte, North Carolina, the farm price is the USDA estimated farm Class I price adjusted 

to 2 percent milkfat content; the cooperative price is the announced cooperative Class I price for 

Charlotte adjusted to 2 percent milkfat content; the wholesale price is the price paid by the Fort Bragg 

North Post Store, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Charlotte market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 37 GAO-05-50 Dairy Industry

Figure 5: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Cincinnati, Ohio, October 2000 

through May 2004

Note: For Cincinnati, Ohio, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Cincinnati 

adjusted to 2 percent milkfat content; the wholesale price is the price paid by the commissary at 

Wright-Patterson Air Force Base, adjusted for a 5 percent markup; and the retail price is the price 

collected by Information Resources, Inc., for the Cincinnati market. We were unable to obtain data from 

the Defense Commissary Agency to represent wholesale prices for 2 percent milk in the Cincinnati 

market during 2000 and for January and February 2001.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 38 GAO-05-50 Dairy Industry

Figure 6: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Dallas, Texas, October 2000 through 

May 2004

Note: For Dallas, Texas, the farm price is the USDA estimated farm Class I price adjusted to 2 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Dallas adjusted to 

2 percent milkfat content; the wholesale price is the average of the prices paid by the two 

commissaries at Fort Hood, adjusted for a 5 percent markup; and the retail price is the price collected 

by Information Resources, Inc., for the Dallas market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

0.00

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 39 GAO-05-50 Dairy Industry

Figure 7: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Denver, Colorado, October 2000 

through May 2004

Note: For Denver, Colorado, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Denver 

adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid by the 

commissaries at Fort Carson, Peterson Air Force Base, Buckley Air Force Base, and the U.S. Air Force 

Academy, adjusted for a 5 percent markup; and the retail price is the price collected by Information 

Resources, Inc., for the Denver market.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

0.00

Dollars per gallon

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 40 GAO-05-50 Dairy Industry

Figure 8: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Miami, Florida, October 2000 through 

May 2004

Note: For Miami, Florida, the farm price is the USDA estimated farm Class I price adjusted to 2 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Miami adjusted to 

2 percent milkfat content; the wholesale price is the price paid by the commissary at the Naval Air 

Station, Key West, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Miami market.

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug.

Sept.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

Dollars per gallon

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 41 GAO-05-50 Dairy Industry

Figure 9: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Milwaukee, Wisconsin, October 2000 

through May 2004

Note: For Milwaukee, Wisconsin, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Milwaukee 

adjusted to 2 percent milkfat content; the wholesale price is the price paid by the commissary at the 

Naval Station Great Lakes, adjusted for a 5 percent markup; and the retail price is the price collected 

by Information Resources, Inc., for the Milwaukee market.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

0.00

Dollars per gallon

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 42 GAO-05-50 Dairy Industry

Figure 10: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Minneapolis, Minnesota, October 

2000 through May 2004

Note: For Minneapolis, Minnesota, the farm price is the USDA estimated farm Class I price adjusted to 

2 percent milkfat content; the cooperative price is the announced cooperative Class I price for 

Minneapolis adjusted to 2 percent milkfat content; the wholesale price is the price paid by the 

commissary at Fort McCoy, adjusted for a 5 percent markup; and the retail price is the price collected 

by Information Resources, Inc., for the Minneapolis market.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

Dollars per gallon

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 43 GAO-05-50 Dairy Industry

Figure 11: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for New Orleans, Louisiana, October 

2000 through May 2004

Note: For New Orleans, Louisiana, the farm price is the USDA estimated farm Class I price adjusted to 

2 percent milkfat content; the cooperative price is the announced cooperative Class I price for New 

Orleans adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid by 

the Naval Support Activities, New Orleans; the Naval Construction Battalion Center, Gulfport; and 

Keesler Air Force Base commissaries, adjusted for a 5 percent markup; and the retail price is the price 

collected by Information Resources, Inc., for the New Orleans market.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Aug

Sept.

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

0.00

Dollars per gallon

2000 2001 2002 2003 2004

Retail price

Farm price

Cooperative price

Wholesale price

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 44 GAO-05-50 Dairy Industry

Figure 12: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Phoenix, Arizona, October 2000 

through May 2004

Note: For Phoenix, Arizona, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Phoenix 

adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid by the 

commissaries at Luke Air Force Base and Davis-Monthan Air Force Base, adjusted for a 5 percent 

markup; and the retail price is the price collected by Information Resources, Inc., for the Phoenix 

market.

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

Dollars per gallon

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 45 GAO-05-50 Dairy Industry

Figure 13: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Salt Lake City, Utah, October 2000 

through May 2004

Note: For Salt Lake City, Utah, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Salt Lake 

City adjusted to 2 percent milkfat content; the wholesale price is the price paid by the commissary at 

Hill Air Force Base, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Salt Lake City market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 46 GAO-05-50 Dairy Industry

Figure 14: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for San Diego, California, October 2000 

through May 2004

Note: For San Diego, California, the farm price is the California Department of Food and Agriculture 

mailbox price adjusted to 2 percent milkfat content; the cooperative price is the Southern California 

Class I price adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid 

by the commissaries at the Naval Base, San Diego; Marine Corps Base, Camp Pendleton; Naval 

Outlying Landing Field, Imperial Beach; Marine Corps Air Station, Miramar; Naval Air Station, North 

Island; and by the San Onofre Commissary, Camp Pendleton, adjusted for a 5 percent markup; and 

the retail price is the price collected by Information Resources, Inc., for the San Diego market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25 Retail

Wholesale

Cooperative

Farm

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Source: GAO analysis of data provided by the California Department of Food and Agriculture, the Defense Commissary Agency,

and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 47 GAO-05-50 Dairy Industry

Figure 15: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Seattle, Washington, October 2000 

through May 2004

Note: For Seattle, Washington, the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Seattle 

adjusted to 2 percent milkfat content; the wholesale price is the average of the prices paid by the 

commissaries at the Naval Station Everett, Smokey Point Support Center; Fort Lewis; and McChord 

Air Force Base, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Seattle market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

2000 2001 2002 2003 2004
Appendix II

Analysis of Prices at Four Marketing Levels 

for 2 Percent Milk in Selected Markets

Page 48 GAO-05-50 Dairy Industry

Figure 16: Farm, Cooperative, Wholesale, and Retail Prices for a Gallon of 2 Percent Milk for Washington, D.C., October 2000 

through May 2004

Note: For Washington, D.C., the farm price is the USDA estimated farm Class I price adjusted to 2 

percent milkfat content; the cooperative price is the announced cooperative Class I price for 

Washington, D.C., adjusted to 2 percent milkfat content; the wholesale price is the average of the 

prices paid by the commissaries at Bolling Air Force Base; Walter Reed Army Medical Center; Fort 

Myer; Fort Belvoir; the Marine Corps Base, Quantico; Andrews Air Force Base; Aberdeen Proving 

Ground; the Naval Station, Annapolis; Fort Meade; and Fort Detrick, adjusted for a 5 percent markup; 

and the retail price is the price collected by Information Resources, Inc., for the Washington, D.C., 

market.

Dollars per gallon

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Retail

Wholesale

Cooperative

Farm

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

0.00

Retail price

Farm price

Cooperative price

Wholesale price

2000 2001 2002 2003 2004
Page 49 GAO-05-50 Dairy Industry

Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets ApendxiI

This appendix updates information provided in our June 2001 report on the 

average retail prices for whole, 2 percent, 1 percent, and skim milk in 15 

selected markets for October 2000 through May 2004. We found that retail 

pricing patterns varied significantly across markets. For example, in the 

Boston market from October 2000 through May 2004, the average price for 

2 percent milk was generally the same as the average price for 1 percent 

milk; however, whole and skim milk prices were generally lower. On the 

other hand, for this period in the San Diego market, the average price of 2 

percent milk was generally lower than the prices of whole and 1 percent 

milk, but higher than skim milk prices. Figures 17 through 31 provide 

information on the average retail price for the four kinds of milk in the 15 

selected markets for October 2000 through May 2004.

Figure 17: Retail Prices in Atlanta, Georgia, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Atlanta market.

Dollars per gallon

1-Percent milk

2-Percent milk

Skim milk

Whole milk

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

2 percent milk

1 percent milk

Skim milk

2000 2001 2002 2003 2004
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 50 GAO-05-50 Dairy Industry

Figure 18: Retail Prices in Boston, Massachusetts, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 

2004

Note: The retail price is the price collected by Information Resources, Inc., for the Boston market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

0.00

Source: GAO analysis of data provided by Information Resources, Inc.

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 51 GAO-05-50 Dairy Industry

Figure 19: Retail Prices in Charlotte, North Carolina, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 

2004

Note: The retail price is the price collected by Information Resources, Inc., for the Charlotte market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

Source: GAO analysis of data provided by Information Resources, Inc.

Whole milk

Skim milk

2000 2001 2002 2003 2004

Dollars per gallon

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 52 GAO-05-50 Dairy Industry

Figure 20: Retail Prices in Cincinnati, Ohio, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Cincinnati market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

0.00

Source: GAO analysis of data provided by Information Resources, Inc.

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 53 GAO-05-50 Dairy Industry

Figure 21: Retail Prices in Dallas, Texas, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Dallas market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

Feb.

Mar.

Apr.

May

June

Oct.

Nov.

Dec.

Jan.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

0.00

Source: GAO analysis of data provided by Information Resources, Inc.

Whole milk

Skim milk

2000 2001 2002 2003 2004

Dollars per gallon

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 54 GAO-05-50 Dairy Industry

Figure 22: Retail Prices in Denver, Colorado, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Denver market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

Dollars per gallon

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 55 GAO-05-50 Dairy Industry

Figure 23: Retail Prices in Miami, Florida, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Miami market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Aug

Sept.

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.Mar.

Apr.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

Dollars per gallon

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 56 GAO-05-50 Dairy Industry

Figure 24: Retail Prices in Milwaukee, Wisconsin, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 

2004

Note: The retail price is the price collected by Information Resources, Inc., for the Milwaukee market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

Dollars per gallon

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 57 GAO-05-50 Dairy Industry

Figure 25: Retail Prices in Minneapolis, Minnesota, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 

2004

Note: The retail price is the price collected by Information Resources, Inc., for the Minneapolis market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Aug

Sept.

Oct.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 58 GAO-05-50 Dairy Industry

Figure 26: Retail Prices in New Orleans, Louisiana, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 

2004

Note: The retail price is the price collected by Information Resources, Inc., for the New Orleans market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Aug

Sept.

Oct.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 59 GAO-05-50 Dairy Industry

Figure 27: Retail Prices in Phoenix, Arizona, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Phoenix market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

July

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 60 GAO-05-50 Dairy Industry

Figure 28: Retail Prices in Salt Lake City, Utah, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Salt Lake City 

market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

Nov

Dec.

Jan.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Dollars per gallon

Source: GAO analysis of data provided by Information Resources, Inc.

Whole milk

Skim milk

2000 2001 2002 2003 2004

0.00

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 61 GAO-05-50 Dairy Industry

Figure 29: Retail Prices in San Diego, California, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the San Diego market.

Dollars per gallon

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Aug

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Jul

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 62 GAO-05-50 Dairy Industry

Figure 30: Retail Prices in Seattle, Washington, for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Seattle market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Aug

Sept.

.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

June

July

.

Oct.

May

June

July

Aug.

Sept.

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Dollars per gallon

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Appendix III

Retail Prices for Four Kinds of Milk in 

Selected Markets

Page 63 GAO-05-50 Dairy Industry

Figure 31: Retail Prices in Washington, D.C., for Whole, 2 Percent, 1 Percent, and Skim Milk, October 2000 through May 2004

Note: The retail price is the price collected by Information Resources, Inc., for the Washington, D.C., 

market.

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1-Percent milk

2-Percent milk

Skim milk

Whole milk

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

May

.

Oct.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

Aug

Sept.

.

July

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Jul

Aug.

Sept.

y

May

June

Nov

Dec.

Jan.

Feb.

Mar.

Apr.

.

Oct.

Dollars per gallon

Source: GAO analysis of data provided by Information Resources, Inc.

0.00

Whole milk

Skim milk

2000 2001 2002 2003 2004

2 percent milk

1 percent milk
Page 64 GAO-05-50 Dairy Industry

Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk Prices 

in Selected Markets ApendxiIV

This appendix updates information provided in our June 2001 report on 

average monthly and annual farm and cooperative prices of raw milk and 

on the average monthly and annual wholesale and retail prices for a gallon 

of whole, 2 percent, 1 percent, and skim milk. Tables 11 through 25 provide 

these data for 15 selected markets over the period October 2000 through 

May 2004.

Table 11: Prices for a Gallon of Milk in Atlanta, Georgia, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.20 $1.41 $2.16 $2.04 $2.01 $1.99 $2.64 $2.77 $2.87 $2.75

Nov. 1.20 1.40 2.16 2.04 2.01 1.99 2.48 2.53 2.59 2.51

Dec. 1.21 1.41 2.16 2.04 2.01 1.99 2.63 2.71 2.76 2.69

Avg. 1.20 1.41 2.16 2.04 2.01 1.99 2.58 2.67 2.74 2.65

2001 Jan. 1.37 1.57 2.21 2.42 N/A 2.04 2.66 2.77 2.86 2.74

Feb. 1.21 1.41 2.17 2.45 N/A 2.07 2.23 2.33 2.37 2.32

Mar. 1.25 1.45 2.17 2.45 N/A 2.07 2.65 2.73 2.81 2.71

Apr. 1.32 1.52 2.17 2.45 N/A 2.07 2.53 2.69 2.71 2.65

May 1.37 1.58 2.17 2.45 2.05 2.07 2.58 2.75 2.76 2.69

June 1.41 1.61 2.20 2.47 2.05 2.10 2.50 2.62 2.64 2.57

July 1.45 1.66 2.22 2.52 2.05 2.13 2.55 2.67 2.71 2.64

Aug. 1.46 1.66 2.22 2.54 2.05 2.13 2.55 2.68 2.68 2.63

Sept. 1.47 1.68 2.22 2.56 2.05 2.13 2.54 2.70 2.70 2.65

Oct. 1.50 1.71 2.22 2.56 2.05 2.13 2.64 2.77 2.81 2.71

Nov. 1.49 1.69 2.22 2.56 2.08 2.13 2.60 2.73 2.74 2.68

Dec. 1.20 1.41 2.22 2.56 2.08 2.13 2.57 2.68 2.72 2.66

Avg. 1.38 1.58 2.20 2.50 2.06 2.10 2.55 2.68 2.71 2.64

2002 Jan. 1.22 1.40 2.22 2.25 2.08 2.13 2.54 2.64 2.68 2.62

Feb. 1.22 1.40 2.22 2.18 2.08 2.13 2.48 2.62 2.63 2.60

Mar. 1.22 1.40 2.13 2.06 1.99 1.99 2.51 2.67 2.72 2.64

Apr. 1.22 1.40 2.04 1.95 1.89 1.84 2.38 2.55 2.55 2.51

May 1.22 1.40 2.04 1.95 1.89 1.84 2.32 2.51 2.54 2.49

June 1.20 1.38 2.04 1.95 1.89 1.84 2.30 2.43 2.46 2.42

July 1.17 1.35 2.04 1.95 1.89 1.84 2.12 2.26 2.22 2.23

Aug. 1.16 1.34 2.04 1.95 1.89 1.84 2.29 2.51 2.50 2.47

Sept. 1.15 1.34 2.04 1.95 1.89 1.84 2.21 2.40 2.35 2.37

Oct. 1.15 1.32 2.04 1.95 1.89 1.84 2.08 2.25 2.21 2.22
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 65 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Atlanta market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Atlanta for 3.5 

percent milkfat content; the wholesale price is the average of the prices paid by the commissaries at 

Fort Gillem and Fort McPherson, adjusted for a 5 percent markup; and the retail price is the price 

collected by Information Resources, Inc., for the Atlanta market. Prices may not average due to 

rounding. “N/A” indicates data not available.

Nov. 1.17 1.35 2.06 1.97 1.92 1.86 2.13 2.30 2.27 2.26

Dec. 1.16 1.34 2.08 1.99 1.94 1.88 2.32 2.49 2.51 2.48

Avg. 1.19 1.37 2.08 2.01 1.94 1.91 2.31 2.47 2.47 2.44

2003 Jan. 1.16 1.34 2.08 1.99 1.94 1.88 2.21 2.38 2.38 2.35

Feb. 1.16 1.34 2.08 1.99 1.94 1.88 2.31 2.47 2.50 2.45

Mar. 1.13 1.31 2.08 1.99 1.94 1.88 2.28 2.47 2.45 2.43

Apr. 1.11 1.29 2.08 1.99 1.94 1.88 2.23 2.41 2.43 2.38

May 1.12 1.30 2.08 1.99 1.94 1.88 2.23 2.40 2.38 2.37

June 1.12 1.30 2.08 1.99 1.94 1.88 2.28 2.47 2.47 2.44

July 1.12 1.30 2.08 1.99 1.94 1.88 2.23 2.45 2.44 2.40

Aug. 1.19 1.38 2.08 1.99 1.94 1.88 2.28 2.44 2.42 2.40

Sept. 1.39 1.57 2.08 1.99 1.94 1.88 2.44 2.67 2.68 2.62

Oct. 1.41 1.60 2.21 2.11 2.06 2.02 2.44 2.62 2.66 2.60

Nov. 1.41 1.60 2.21 2.12 2.07 2.02 2.46 2.66 2.67 2.62

Dec. 1.40 1.58 2.21 2.12 2.07 2.02 2.27 2.49 2.51 2.46

Avg. 1.23 1.41 2.11 2.02 1.97 1.92 2.31 2.49 2.50 2.46

2004 Jan. 1.25 1.43 2.21 2.12 2.07 2.02 2.24 2.42 2.38 2.36

Feb. 1.25 1.43 2.21 2.12 2.07 2.02 2.25 2.39 2.37 2.34

Mar. 1.26 1.43 2.21 2.12 2.07 2.02 2.28 2.45 2.43 2.40

Apr. 1.40 1.57 2.22 2.12 2.07 2.03 2.29 2.49 2.38 2.35

May 1.87 2.05 2.64 2.55 2.50 2.45 2.69 2.93 2.85 2.78

Avg. 1.41 1.58 2.30 2.21 2.16 2.11 2.35 2.54 2.48 2.45

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 66 GAO-05-50 Dairy Industry

Table 12: Prices for a Gallon of Milk in Boston, Massachusetts, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.41 $1.50 $2.00 $1.96 $1.91 $1.90 $2.19 $2.21 $2.23 $2.02

Nov. 1.41 1.50 2.00 1.96 1.91 1.90 2.20 2.22 2.24 2.03

Dec. 1.41 1.50 2.00 1.96 1.91 1.90 2.23 2.26 2.27 2.05

Avg. 1.41 1.50 2.00 1.96 1.91 1.90 2.21 2.23 2.25 2.03

2001 Jan. 1.43 1.53 2.00 1.96 1.91 1.90 2.23 2.25 2.25 2.05

Feb. 1.41 1.50 2.00 1.96 1.91 1.90 2.25 2.29 2.29 2.08

Mar. 1.41 1.50 2.00 1.96 1.91 1.90 2.26 2.31 2.32 2.12

Apr. 1.41 1.50 2.00 1.96 1.91 1.90 2.26 2.30 2.31 2.12

May 1.45 1.55 2.00 1.96 1.91 1.90 2.26 2.31 2.32 2.13

June 1.55 1.65 2.00 1.96 1.91 1.90 2.26 2.31 2.32 2.14

July 1.59 1.68 2.00 1.96 1.91 1.90 2.27 2.32 2.33 2.14

Aug. 1.65 1.75 2.00 1.96 1.91 1.90 2.27 2.32 2.33 2.15

Sept. 1.66 1.76 2.00 1.96 1.91 1.90 2.28 2.34 2.36 2.18

Oct. 1.69 1.79 2.00 1.96 1.91 1.90 2.30 2.35 2.37 2.19

Nov. 1.68 1.78 2.00 1.96 1.93 1.90 2.32 2.38 2.40 2.21

Dec. 1.36 1.45 2.07 1.85 1.71 1.71 2.27 2.36 2.38 2.20

Avg. 1.52 1.62 2.01 1.95 1.90 1.88 2.27 2.32 2.33 2.14

2002 Jan. 1.35 1.45 2.07 1.85 1.71 1.71 2.27 2.33 2.35 2.17

Feb. 1.35 1.45 2.07 1.85 1.71 1.71 2.28 2.36 2.38 2.20

Mar. 1.32 1.42 2.04 1.82 1.68 1.68 2.28 2.37 2.38 2.21

Apr. 1.30 1.41 2.03 1.81 1.67 1.67 2.27 2.34 2.35 2.18

May 1.29 1.39 2.01 1.81 1.67 1.67 2.27 2.34 2.36 2.19

June 1.27 1.37 2.00 1.78 1.63 1.63 2.26 2.32 2.34 2.17

July 1.23 1.33 1.96 1.74 1.60 1.60 2.26 2.31 2.33 2.16

Aug. 1.20 1.30 1.95 1.73 1.59 1.59 2.24 2.28 2.31 2.14

Sept. 1.20 1.30 1.95 1.73 1.59 1.59 2.26 2.32 2.33 2.17

Oct. 1.17 1.28 1.92 1.70 1.56 1.56 2.25 2.32 2.33 2.18

Nov. 1.21 1.31 1.96 1.74 1.60 1.60 2.26 2.32 2.33 2.18

Dec. 1.20 1.31 1.95 1.73 1.59 1.59 2.24 2.30 2.29 2.15

Avg. 1.26 1.36 1.99 1.77 1.63 1.63 2.26 2.33 2.34 2.18

2003 Jan. 1.20 1.31 1.95 1.73 1.59 1.59 2.27 2.33 2.31 2.16

Feb. 1.17 1.28 1.90 1.70 1.56 1.55 2.28 2.33 2.33 2.19

Mar. 1.14 1.25 1.87 1.66 1.52 1.52 2.27 2.33 2.33 2.17

Apr. 1.12 1.23 1.86 1.65 1.51 1.51 2.25 2.29 2.28 2.15
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 67 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Boston market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the effective cooperative Class I price for Boston for 3.5 

percent milkfat content during the period that the Northeast Interstate Dairy Compact was effective 

(July 1997 through September 2001); the cooperative price after September 2001 is the announced 

cooperative Class I price for Boston for 3.5 percent milkfat content; the wholesale price is the price 

paid by the commissary at Hanscom Air Force Base, adjusted for a 5 percent markup; and the retail 

price is the price collected by Information Resources, Inc., for the Boston market. Prices may not 

average due to rounding.

May 1.13 1.24 1.87 1.66 1.52 1.52 2.26 2.31 2.31 2.16

June 1.13 1.24 1.87 1.66 1.52 1.52 2.26 2.29 2.30 2.15

July 1.16 1.27 1.88 1.67 1.53 1.53 2.25 2.29 2.29 2.13

Aug. 1.26 1.37 1.98 1.76 1.62 1.62 2.25 2.29 2.30 2.14

Sept. 1.50 1.61 2.15 1.94 1.79 1.79 2.31 2.35 2.37 2.21

Oct. 1.54 1.66 2.25 2.04 1.89 1.89 2.33 2.38 2.40 2.24

Nov. 1.55 1.67 2.26 2.05 1.90 1.90 2.33 2.39 2.40 2.24

Dec. 1.51 1.62 2.21 2.00 1.85 1.85 2.34 2.40 2.42 2.26

Avg. 1.28 1.40 2.00 1.79 1.65 1.65 2.28 2.33 2.34 2.18

2004 Jan. 1.34 1.45 2.08 1.87 1.72 1.72 2.35 2.40 2.42 2.26

Feb. 1.31 1.43 2.03 1.81 1.67 1.67 2.34 2.37 2.39 2.24

Mar. 1.34 1.46 2.03 1.81 1.67 1.67 2.32 2.37 2.38 2.22

Apr. 1.49 1.60 2.20 1.98 1.83 1.83 2.32 2.37 2.38 2.26

May 2.01 2.12 2.26 2.05 1.90 1.90 2.58 2.63 2.66 2.51

Avg. 1.50 1.61 2.12 1.90 1.76 1.76 2.38 2.43 2.45 2.30

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 68 GAO-05-50 Dairy Industry

Table 13: Prices for a Gallon of Milk in Charlotte, North Carolina, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.25 $1.41 $2.09 $2.05 $2.03 $2.00 $2.59 $2.59 $2.64 $2.55

Nov. 1.24 1.40 2.08 2.06 2.03 2.00 2.56 2.56 2.59 2.52

Dec. 1.25 1.41 2.11 2.08 2.03 2.00 2.57 2.59 2.62 2.55

Avg. 1.25 1.41 2.09 2.06 2.03 2.00 2.57 2.58 2.62 2.54

2001 Jan. 1.40 1.57 2.25 2.18 2.08 2.00 2.61 2.62 2.64 2.58

Feb. 1.25 1.41 2.10 2.07 2.03 1.98 2.56 2.57 2.60 2.53

Mar. 1.29 1.45 2.14 2.11 2.08 2.03 2.61 2.63 2.65 2.57

Apr. 1.36 1.52 2.21 2.19 2.15 2.10 2.58 2.61 2.63 2.56

May 1.41 1.58 2.28 2.25 2.21 2.17 2.59 2.62 2.64 2.57

June 1.44 1.61 2.35 2.32 2.28 2.23 2.58 2.61 2.63 2.57

July 1.49 1.66 2.38 2.35 2.31 2.26 2.59 2.62 2.64 2.57

Aug. 1.49 1.66 2.52 2.42 2.36 2.30 2.58 2.61 2.63 2.56

Sept. 1.51 1.68 2.57 2.45 2.38 2.32 2.57 2.60 2.62 2.55

Oct. 1.54 1.71 2.57 2.46 2.39 2.33 2.58 2.60 2.63 2.55

Nov. 1.53 1.69 2.60 2.50 2.46 2.42 2.62 2.64 2.68 2.62

Dec. 1.24 1.41 2.60 2.55 2.54 2.52 2.62 2.65 2.68 2.63

Avg. 1.41 1.58 2.38 2.32 2.27 2.22 2.59 2.62 2.64 2.57

2002 Jan. 1.18 1.40 2.60 2.55 2.54 2.52 2.63 2.65 2.67 2.60

Feb. 1.18 1.40 2.60 2.55 2.54 2.52 2.59 2.60 2.65 2.58

Mar. 1.18 1.40 2.60 2.55 2.54 2.52 2.59 2.61 2.65 2.59

Apr. 1.18 1.40 2.60 2.55 2.54 2.52 2.58 2.60 2.63 2.56

May 1.19 1.40 2.60 2.55 2.54 2.52 2.57 2.59 2.63 2.57

June 1.17 1.38 2.60 2.55 2.54 2.52 2.57 2.59 2.60 2.56

July 1.14 1.35 2.60 2.55 2.54 2.52 2.54 2.56 2.61 2.55

Aug. 1.12 1.34 2.60 2.55 2.54 2.52 2.56 2.58 2.62 2.56

Sept. 1.12 1.34 2.60 2.55 2.54 2.52 2.51 2.55 2.59 2.53

Oct. 1.10 1.31 2.60 2.55 2.54 2.52 2.51 2.53 2.59 2.52

Nov. 1.14 1.35 2.63 2.57 2.56 2.54 2.59 2.60 2.65 2.58

Dec. 1.12 1.34 2.65 2.58 2.57 2.56 2.58 2.58 2.63 2.56

Avg. 1.15 1.37 2.61 2.55 2.54 2.53 2.57 2.59 2.63 2.56

2003 Jan. 1.13 1.34 2.65 2.58 2.57 2.56 2.52 2.52 2.58 2.50

Feb. 1.13 1.34 2.64 2.57 2.56 2.54 2.59 2.58 2.64 2.56

Mar. 1.10 1.31 2.62 2.56 2.55 2.52 2.59 2.59 2.64 2.56

Apr. 1.08 1.29 2.62 2.56 2.55 2.52 2.58 2.57 2.62 2.54
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 69 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Charlotte market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Charlotte for 3.5 

percent milkfat content; the wholesale price is the price paid by the Fort Bragg North Post Store, 

adjusted for a 5 percent markup; and the retail price is the price collected by Information Resources, 

Inc., for the Charlotte market. Prices may not average due to rounding.

May 1.09 1.30 2.62 2.56 2.55 2.52 2.56 2.56 2.61 2.53

June 1.09 1.30 2.62 2.56 2.55 2.52 2.59 2.58 2.62 2.55

July 1.09 1.30 2.62 2.56 2.55 2.52 2.56 2.56 2.63 2.53

Aug. 1.16 1.38 2.62 2.56 2.55 2.52 2.59 2.61 2.68 2.58

Sept. 1.35 1.57 2.77 2.70 2.69 2.66 2.62 2.64 2.71 2.65

Oct. 1.38 1.60 2.95 2.85 2.87 2.85 2.75 2.76 2.83 2.73

Nov. 1.38 1.60 2.98 2.85 2.92 2.91 2.78 2.80 2.88 2.80

Dec. 1.37 1.58 2.98 2.85 2.92 2.91 2.80 2.82 2.90 2.81

Avg. 1.20 1.41 2.72 2.65 2.65 2.63 2.63 2.63 2.70 2.61

2004 Jan. 1.21 1.43 2.98 2.90 2.92 2.90 2.78 2.79 2.87 2.78

Feb. 1.21 1.43 2.88 2.82 2.81 2.80 2.76 2.77 2.84 2.77

Mar. 1.21 1.43 2.78 2.75 2.69 2.66 2.74 2.75 2.83 2.73

Apr. 1.35 1.57 2.70 2.69 2.57 2.52 2.83 2.83 2.92 2.81

May 1.83 2.05 3.10 3.05 2.85 2.84 3.19 3.21 3.24 3.21

Avg. 1.36 1.58 2.89 2.84 2.77 2.74 2.86 2.87 2.94 2.86

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 70 GAO-05-50 Dairy Industry

Table 14: Prices for a Gallon of Milk in Cincinnati, Ohio, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.20 $1.38 N/A N/A $1.96 $1.80 $1.88 $2.28 $2.32 $2.25

Nov. 1.19 1.37 N/A N/A 1.96 1.80 1.94 2.18 2.25 2.19

Dec. 1.22 1.40 N/A N/A 1.96 1.80 1.93 2.27 2.31 2.25

Avg. 1.20 1.38 N/A N/A 1.96 1.80 1.92 2.24 2.29 2.23

2001 Jan. 1.38 1.55 N/A N/A 1.96 1.80 2.09 2.37 2.46 2.37

Feb. 1.20 1.37 N/A N/A 1.96 1.80 1.86 2.20 2.27 2.22

Mar. 1.26 1.43 2.29 2.12 1.96 1.80 1.91 2.06 2.08 2.04

Apr. 1.33 1.50 2.34 2.15 1.99 1.81 1.88 2.21 2.28 2.21

May 1.39 1.56 2.43 2.22 2.03 1.84 1.80 2.07 1.93 1.88

June 1.46 1.63 2.49 2.26 2.05 1.84 1.98 2.27 2.31 2.26

July 1.50 1.67 2.53 2.29 2.07 1.85 1.98 2.28 2.32 2.25

Aug. 1.51 1.67 2.53 2.29 2.07 1.85 1.94 2.38 2.47 2.41

Sept. 1.52 1.69 2.54 2.30 2.08 1.86 2.00 2.42 2.46 2.40

Oct. 1.55 1.72 2.56 2.30 2.06 1.82 1.95 2.23 2.29 2.15

Nov. 1.52 1.70 2.39 2.36 2.15 1.96 2.02 2.56 2.67 2.55

Dec. 1.21 1.37 2.28 2.09 2.19 2.00 1.87 2.29 2.36 2.27

Avg. 1.40 1.57 2.44 2.24 2.05 1.85 1.94 2.28 2.33 2.25

2002 Jan. 1.19 1.36 2.26 2.06 2.19 2.00 1.96 2.38 2.44 2.34

Feb. 1.19 1.36 2.26 2.06 2.19 2.00 1.91 2.37 2.46 2.38

Mar. 1.17 1.33 2.23 2.03 2.19 2.00 1.93 2.36 2.50 2.36

Apr. 1.15 1.32 2.23 2.03 N/A N/A 1.95 2.28 2.29 2.22

May 1.13 1.30 2.20 2.00 N/A N/A 1.88 2.44 2.48 2.38

June 1.11 1.28 2.19 1.99 N/A N/A 1.81 2.21 2.27 2.18

July 1.08 1.24 2.16 1.96 N/A N/A 1.81 2.30 2.33 2.24

Aug. 1.07 1.23 2.14 1.94 N/A N/A 1.82 2.33 2.36 2.27

Sept. 1.07 1.23 2.14 1.94 N/A N/A 1.81 2.34 2.38 2.28

Oct. 1.03 1.20 2.11 1.91 N/A N/A 1.79 2.28 2.32 2.23

Nov. 1.07 1.24 2.15 1.95 N/A N/A 1.83 2.43 2.48 2.37

Dec. 1.07 1.23 2.14 1.94 1.75 1.56 1.85 2.37 2.40 2.32

Avg. 1.11 1.28 2.18 1.98 2.08 1.89 1.86 2.34 2.39 2.30

2003 Jan. 1.07 1.24 2.14 1.94 1.75 1.56 1.72 2.35 2.39 2.30

Feb. 1.06 1.24 2.11 1.90 1.75 1.56 1.82 2.29 2.33 2.24

Mar. 1.02 1.20 2.07 1.86 1.71 1.52 1.84 2.30 2.34 2.24

Apr. 1.01 1.19 2.06 1.85 1.71 1.52 1.74 2.21 2.24 2.17
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 71 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Cincinnati market, the farm price is the USDA-estimated farm Class I price for 3.5 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Cincinnati 

for 3.5 percent milkfat content; the wholesale price is the price paid by the commissary at WrightPatterson Air Force Base, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Cincinnati market. Prices may not average due to rounding. “N/A” 

indicates data not available.

May 1.02 1.19 2.07 1.86 1.68 1.49 1.84 2.38 2.42 2.32

June 1.02 1.20 2.07 1.86 1.68 1.49 1.80 2.47 2.54 2.42

July 1.02 1.20 2.08 1.87 1.69 1.50 1.82 2.30 2.33 2.25

Aug. 1.09 1.27 2.17 1.97 1.78 1.59 1.86 2.43 2.48 2.37

Sept. 1.33 1.51 2.39 2.19 2.01 1.81 1.83 2.38 2.42 2.32

Oct. 1.38 1.56 2.44 2.24 2.06 1.86 1.86 2.36 2.42 2.31

Nov. 1.38 1.56 2.45 2.25 2.07 1.87 1.88 2.40 2.46 2.34

Dec. 1.34 1.52 2.39 2.20 2.06 1.86 1.87 2.15 2.18 2.08

Avg. 1.15 1.32 2.20 2.00 1.83 1.64 1.82 2.34 2.38 2.28

2004 Jan. 1.18 1.36 2.27 2.07 1.89 1.70 1.71 2.08 2.07 2.00

Feb. 1.15 1.33 2.22 2.02 1.83 1.64 1.63 1.89 1.88 1.82

Mar. 1.18 1.36 2.25 2.05 1.86 1.67 1.63 1.87 1.85 1.80

Apr. 1.33 1.51 2.41 2.21 2.03 1.83 1.46 1.70 1.60 1.56

May 1.85 2.03 2.88 2.68 2.50 2.31 1.87 2.19 2.14 2.05

Avg. 1.34 1.52 2.41 2.21 2.02 1.83 1.66 1.95 1.91 1.85

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 72 GAO-05-50 Dairy Industry

Table 15: Prices for a Gallon of Milk in Dallas, Texas, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.24 $1.35 $2.06 $2.06 $2.02 $1.95 $1.79 $1.64 $1.75 $1.67

Nov. 1.23 1.35 2.06 2.06 2.02 1.95 1.87 1.77 2.01 1.80

Dec. 1.24 1.35 2.06 2.03 2.02 1.95 2.00 1.82 2.02 1.81

Avg. 1.24 1.35 2.06 2.05 2.02 1.95 1.89 1.74 1.93 1.76

2001 Jan. 1.35 1.46 2.06 2.03 2.02 1.95 2.01 1.89 2.12 1.87

Feb. 1.25 1.36 2.15 2.12 2.11 2.04 2.02 1.91 2.07 1.91

Mar. 1.29 1.40 2.16 2.13 2.12 2.04 1.96 1.85 2.03 1.84

Apr. 1.35 1.46 2.16 2.13 2.12 2.04 2.00 1.92 2.06 1.92

May 1.40 1.51 2.16 2.13 2.12 2.04 2.05 1.94 2.07 1.94

June 1.43 1.55 2.16 2.13 2.12 2.04 2.07 2.00 2.05 1.98

July 1.50 1.61 2.16 2.13 2.12 2.04 2.08 2.00 2.09 1.96

Aug. 1.50 1.62 2.21 2.18 2.15 2.10 2.08 2.06 2.18 2.05

Sept. 1.50 1.61 2.21 2.19 2.18 2.10 2.06 2.02 2.09 1.99

Oct. 1.54 1.64 2.21 2.19 2.18 2.10 2.10 2.04 2.12 2.05

Nov. 1.53 1.63 2.21 2.19 2.18 2.10 2.08 2.05 2.19 2.06

Dec. 1.25 1.36 2.21 2.19 2.18 2.10 2.16 2.10 2.14 2.10

Avg. 1.41 1.52 2.17 2.15 2.13 2.06 2.06 1.98 2.10 1.97

2002 Jan. 1.25 1.36 2.21 2.19 2.18 2.10 2.03 2.03 2.20 2.01

Feb. 1.26 1.36 2.21 2.19 2.18 2.10 2.09 2.03 2.15 2.02

Mar. 1.27 1.37 2.21 2.19 2.18 2.10 2.02 2.00 2.11 1.97

Apr. 1.27 1.37 2.21 2.19 2.18 2.10 2.05 2.01 2.14 2.00

May 1.27 1.37 2.21 2.19 2.18 2.10 2.08 2.02 2.17 2.00

June 1.27 1.37 2.21 2.19 2.18 2.10 2.10 2.06 2.21 2.07

July 1.20 1.29 2.21 2.19 2.18 2.10 2.07 2.06 2.23 2.06

Aug. 1.18 1.28 2.21 2.19 2.18 2.10 2.08 2.06 2.23 2.06

Sept. 1.18 1.28 2.21 2.19 2.18 2.10 2.07 2.05 2.18 2.05

Oct. 1.15 1.25 2.21 2.19 2.18 2.10 2.06 2.06 2.18 2.06

Nov. 1.20 1.28 2.21 2.19 2.18 2.10 2.05 1.99 2.08 1.99

Dec. 1.18 1.28 2.21 2.19 2.18 2.10 2.02 1.97 2.05 1.97

Avg. 1.22 1.32 2.21 2.19 2.18 2.10 2.06 2.03 2.16 2.02

2003 Jan. 1.19 1.29 2.21 2.19 2.18 2.10 2.02 1.98 2.07 1.96

Feb. 1.16 1.26 2.21 2.19 2.18 2.10 2.01 1.95 2.03 1.93

Mar. 1.12 1.22 2.21 2.19 2.18 2.10 2.05 1.97 2.04 1.96

Apr. 1.11 1.21 2.21 2.19 2.18 2.10 2.07 2.00 2.07 2.00
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 73 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Dallas market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Dallas for 3.5 

percent milkfat content; the wholesale price is the average of the prices paid by the two commissaries 

at Fort Hood, adjusted for a 5 percent markup; and the retail price is the price collected by Information 

Resources, Inc., for the Dallas market. Prices may not average due to rounding.

May 1.11 1.22 2.21 2.19 2.18 2.10 2.06 1.96 2.05 1.96

June 1.11 1.22 2.21 2.19 2.18 2.10 2.07 2.01 2.08 1.99

July 1.11 1.22 2.21 2.19 2.18 2.10 2.06 1.98 2.07 1.96

Aug. 1.19 1.30 2.21 2.19 2.18 2.10 2.14 2.01 2.12 1.99

Sept. 1.41 1.52 2.39 2.37 2.26 2.27 2.18 2.05 2.14 2.02

Oct. 1.43 1.54 2.39 2.37 2.43 2.27 2.27 2.17 2.27 2.16

Nov. 1.43 1.54 2.39 2.37 2.45 2.27 2.24 2.11 2.21 2.10

Dec. 1.42 1.53 2.49 2.46 2.44 2.37 2.19 2.05 2.06 2.02

Avg. 1.23 1.34 2.28 2.26 2.25 2.17 2.11 2.02 2.10 2.00

2004 Jan. 1.27 1.38 2.41 2.38 2.37 2.28 2.16 2.01 2.01 1.95

Feb. 1.27 1.38 2.39 2.37 2.35 2.26 2.15 1.96 1.98 1.92

Mar. 1.28 1.38 2.39 2.37 2.35 2.26 2.14 1.97 1.96 1.94

Apr. 1.42 1.52 2.43 2.40 2.38 2.29 2.24 2.03 2.03 1.95

May 1.89 2.00 2.87 2.84 2.82 2.74 2.79 2.67 2.77 2.52

Avg. 1.43 1.53 2.50 2.47 2.45 2.37 2.30 2.13 2.15 2.06

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 74 GAO-05-50 Dairy Industry

Table 16: Prices for a Gallon of Milk in Denver, Colorado, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.18 $1.31 $1.94 $1.71 $1.62 $1.52 $2.55 $2.43 $2.45 $2.23

Nov. 1.19 1.30 1.94 1.72 1.63 1.53 2.55 2.44 2.46 2.25

Dec. 1.21 1.33 1.97 1.75 1.65 1.56 2.58 2.49 2.45 2.27

Avg. 1.19 1.31 1.95 1.73 1.63 1.54 2.56 2.45 2.45 2.25

2001 Jan. 1.38 1.49 2.10 1.88 1.79 1.70 2.62 2.50 2.56 2.28

Feb. 1.21 1.31 1.97 1.75 1.54 1.57 2.57 2.48 2.54 2.27

Mar. 1.27 1.37 1.99 1.77 1.55 1.59 2.49 2.45 2.48 2.15

Apr. 1.33 1.44 2.07 1.85 1.63 1.67 2.59 2.50 2.50 2.30

May 1.40 1.51 2.14 1.93 1.70 1.74 2.59 2.51 2.61 2.28

June 1.46 1.57 2.20 2.00 1.76 1.81 2.65 2.56 2.58 2.34

July 1.49 1.60 2.23 2.02 1.79 1.83 2.65 2.55 2.48 2.31

Aug. 1.49 1.61 2.24 2.03 1.80 1.84 2.65 2.55 2.52 2.31

Sept. 1.51 1.62 2.25 2.04 1.81 1.85 2.60 2.53 2.49 2.31

Oct. 1.55 1.65 2.28 2.07 1.82 1.88 2.64 2.60 2.62 2.35

Nov. 1.53 1.64 2.27 2.06 1.83 1.87 2.65 2.63 2.72 2.39

Dec. 1.22 1.33 1.96 1.74 1.64 1.56 2.64 2.65 2.64 2.40

Avg. 1.40 1.51 2.14 1.93 1.72 1.74 2.61 2.54 2.56 2.31

2002 Jan. 1.21 1.32 1.96 1.74 1.64 1.56 2.67 2.65 2.73 2.39

Feb. 1.21 1.32 1.95 1.74 1.64 1.56 2.66 2.64 2.72 2.39

Mar. 1.18 1.29 1.92 1.71 1.62 1.53 2.64 2.63 2.72 2.34

Apr. 1.17 1.28 1.91 1.70 1.61 1.52 2.69 2.71 2.73 2.39

May 1.15 1.26 1.89 1.68 1.59 1.50 2.60 2.61 2.71 2.40

June 1.13 1.24 1.87 1.66 1.57 1.48 2.59 2.54 2.71 2.34

July 1.09 1.21 1.83 1.62 1.53 1.44 2.50 2.43 2.64 2.30

Aug. 1.08 1.20 1.82 1.62 1.52 1.43 2.50 2.43 2.63 2.33

Sept. 1.08 1.19 1.82 1.62 1.52 1.43 2.52 2.51 2.70 2.30

Oct. 1.05 1.17 1.80 1.59 1.49 1.41 2.55 2.52 2.70 2.34

Nov. 1.09 1.21 1.83 1.62 1.53 1.44 2.43 2.50 2.68 2.32

Dec. 1.09 1.20 1.82 1.62 1.52 1.43 2.49 2.49 2.64 2.30

Avg. 1.13 1.24 1.87 1.66 1.57 1.48 2.57 2.56 2.69 2.35

2003 Jan. 1.09 1.20 1.82 1.61 1.52 1.43 2.57 2.52 2.71 2.32

Feb. 1.06 1.17 1.79 1.58 1.49 1.40 2.61 2.56 2.70 2.35

Mar. 1.03 1.14 1.77 1.55 1.46 1.38 2.56 2.50 2.65 2.34

Apr. 1.01 1.12 1.75 1.54 1.44 1.36 2.51 2.44 2.61 2.31
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 75 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Denver market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Denver for 3.5 

percent milkfat content; the wholesale price is the average of the prices paid by the commissaries at 

Fort Carson, Peterson Air Force Base, Buckley Air Force Base, and the U.S. Air Force Academy, 

adjusted for a 5 percent markup; and the retail price is the price collected by Information Resources, 

Inc., for the Denver market. Prices may not average due to rounding.

May 1.02 1.13 1.76 1.55 1.45 1.37 2.55 2.47 2.66 2.34

June 1.02 1.13 1.76 1.55 1.45 1.37 2.54 2.45 2.64 2.31

July 1.02 1.14 1.77 1.56 1.46 1.38 2.56 2.47 2.68 2.35

Aug. 1.12 1.24 1.85 1.64 1.55 1.46 2.58 2.50 2.71 2.35

Sept. 1.36 1.47 2.03 1.81 1.72 1.63 2.80 2.69 2.97 2.53

Oct. 1.41 1.52 2.13 1.92 1.82 1.73 2.87 2.73 2.99 2.55

Nov. 1.42 1.53 2.15 1.94 1.84 1.75 2.81 2.70 2.93 2.45

Dec. 1.37 1.49 2.14 1.96 1.82 1.72 2.73 2.62 2.72 2.36

Avg. 1.16 1.27 1.89 1.68 1.59 1.50 2.64 2.55 2.75 2.38

2004 Jan. 1.17 1.31 2.10 1.91 1.78 1.68 2.72 2.65 2.70 2.34

Feb. 1.15 1.29 2.07 1.89 1.75 1.65 2.69 2.55 2.58 2.20

Mar. 1.18 1.32 2.07 1.89 1.75 1.64 2.80 2.69 2.56 2.42

Apr. 1.33 1.47 2.21 2.04 1.89 1.78 2.88 2.79 2.59 2.49

May 1.85 1.99 2.66 2.48 2.34 2.23 3.00 2.90 2.87 2.64

Avg. 1.34 1.48 2.22 2.04 1.90 1.80 2.82 2.72 2.66 2.42

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 76 GAO-05-50 Dairy Industry

Table 17: Prices for a Gallon of Milk in Miami, Florida, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.40 $1.62 $2.46 $2.46 N/A $2.46 $2.47 $2.36 $2.38 $2.25

Nov. 1.39 1.62 2.47 2.47 N/A 2.47 2.47 2.31 2.34 2.25

Dec. 1.40 1.62 2.56 2.56 N/A 2.56 2.47 2.33 2.35 2.24

Avg. 1.40 1.62 2.50 2.50 N/A 2.50 2.47 2.33 2.36 2.25

2001 Jan. 1.56 1.78 2.56 2.56 N/A 2.56 2.48 2.34 2.35 2.24

Feb. 1.40 1.63 2.56 2.56 N/A 2.56 2.47 2.32 2.32 2.25

Mar. 1.43 1.66 2.56 2.56 N/A 2.56 2.49 2.34 2.35 2.26

Apr. 1.51 1.74 2.56 2.56 N/A 2.56 2.49 2.37 2.36 2.27

May 1.57 1.79 2.56 2.56 N/A 2.56 2.48 2.37 2.39 2.28

June 1.60 1.83 2.56 2.56 N/A 2.56 2.57 2.45 2.47 2.34

July 1.65 1.87 2.56 2.56 N/A 2.56 2.56 2.44 2.45 2.32

Aug. 1.65 1.88 2.56 2.56 N/A 2.56 2.58 2.45 2.47 2.34

Sept. 1.67 1.89 2.56 2.56 N/A 2.56 2.58 2.45 2.47 2.35

Oct. 1.70 1.92 2.56 2.56 N/A 2.56 2.56 2.44 2.45 2.33

Nov. 1.68 1.91 2.56 2.56 N/A 2.56 2.56 2.44 2.45 2.34

Dec. 1.40 1.62 2.56 2.56 N/A 2.56 2.56 2.43 2.44 2.33

Avg. 1.57 1.79 2.56 2.56 N/A 2.56 2.53 2.40 2.41 2.30

2002 Jan. 1.38 1.62 2.56 2.56 N/A 2.56 2.53 2.40 2.40 2.31

Feb. 1.38 1.62 2.56 2.56 N/A 2.56 2.49 2.38 2.38 2.30

Mar. 1.38 1.62 2.56 2.56 N/A 2.56 2.49 2.38 2.39 2.30

Apr. 1.39 1.62 2.56 2.56 N/A 2.56 2.52 2.39 2.40 2.30

May 1.39 1.62 2.56 2.56 N/A 2.56 2.47 2.36 2.36 2.27

June 1.37 1.60 2.56 2.56 N/A 2.56 2.48 2.36 2.39 2.28

July 1.33 1.57 2.56 2.56 N/A 2.56 2.46 2.37 2.35 2.27

Aug. 1.32 1.55 2.56 2.56 N/A 2.56 2.34 2.33 2.31 2.24

Sept. 1.32 1.55 2.56 2.56 N/A 2.56 2.37 2.29 2.27 2.22

Oct. 1.29 1.52 2.56 2.56 1.86 2.56 2.38 2.28 2.26 2.19

Nov. 1.32 1.56 2.56 2.56 1.88 2.56 2.45 2.35 2.36 2.28

Dec. 1.31 1.55 2.56 2.56 1.88 2.56 2.49 2.38 2.39 2.30

Avg. 1.35 1.58 2.56 2.56 1.87 2.56 2.46 2.36 2.36 2.27

2003 Jan. 1.31 1.55 2.56 2.56 1.90 2.56 2.50 2.38 2.39 2.30

Feb. 1.29 1.52 2.56 2.56 1.90 2.56 2.50 2.36 2.37 2.28

Mar. 1.26 1.49 2.56 2.56 1.90 2.56 2.51 2.38 2.39 2.29

Apr. 1.25 1.48 2.56 2.56 1.90 2.56 2.49 2.38 2.40 2.30
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 77 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Miami market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Miami for 3.5 

percent milkfat content; the wholesale price is the price paid by the commissary at the Naval Air 

Station, Key West, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Miami market. Prices may not average due to rounding. “N/A” 

indicates data not available.

May 1.26 1.49 2.56 2.56 1.90 2.56 2.54 2.42 2.43 2.32

June 1.26 1.49 2.56 2.56 1.90 2.56 2.54 2.42 2.43 2.32

July 1.25 1.49 2.56 2.56 1.91 2.56 2.51 2.40 2.41 2.31

Aug. 1.34 1.57 2.56 2.56 2.08 2.56 2.58 2.48 2.50 2.39

Sept. 1.53 1.77 2.56 2.56 2.27 2.56 2.69 2.59 2.62 2.50

Oct. 1.56 1.79 2.56 2.56 2.27 2.56 2.71 2.61 2.62 2.51

Nov. 1.56 1.79 2.56 2.56 2.27 2.56 2.69 2.59 2.57 2.49

Dec. 1.55 1.78 2.56 2.56 2.27 2.56 2.71 2.61 2.56 2.51

Avg. 1.37 1.60 2.56 2.56 2.04 2.56 2.58 2.47 2.47 2.38

2004 Jan. 1.41 1.63 2.56 2.56 2.18 2.56 2.67 2.54 2.50 2.44

Feb. 1.41 1.63 2.56 2.56 2.08 2.56 2.63 2.49 2.46 2.41

Mar. 1.41 1.63 2.56 2.56 2.08 2.56 2.64 2.51 2.47 2.42

Apr. 1.55 1.77 2.56 2.56 2.09 2.56 2.74 2.62 2.58 2.53

May 2.02 2.25 2.56 2.56 2.66 2.56 3.07 2.97 2.92 2.86

Avg. 1.56 1.78 2.56 2.56 2.22 2.56 2.75 2.63 2.59 2.53

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 78 GAO-05-50 Dairy Industry

Table 18: Prices for a Gallon of Milk in Milwaukee, Wisconsin, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.20 $1.34 $1.87 $1.79 $1.76 $1.72 $1.97 $1.93 $2.01 $1.87

Nov. 1.20 1.33 1.87 1.79 1.76 1.72 1.98 1.95 2.03 1.89

Dec. 1.21 1.34 1.87 1.79 1.76 1.72 1.99 1.95 2.00 1.89

Avg. 1.20 1.34 1.87 1.79 1.76 1.72 1.98 1.94 2.01 1.88

2001 Jan. 1.39 1.54 2.24 2.15 2.10 2.04 2.12 2.09 2.15 1.99

Feb. 1.17 1.32 2.09 2.06 2.05 2.04 2.05 2.03 2.07 1.94

Mar. 1.24 1.39 2.07 2.05 2.05 2.04 2.08 2.03 2.10 1.96

Apr. 1.31 1.46 2.14 2.09 2.07 2.04 2.10 2.05 2.10 1.96

May 1.38 1.53 2.23 2.15 2.12 2.07 2.11 2.07 2.12 1.96

June 1.46 1.61 2.29 2.19 2.15 2.09 2.10 2.06 2.08 1.94

July 1.49 1.64 2.32 2.21 2.16 2.09 2.14 2.07 2.12 1.96

Aug. 1.50 1.65 2.34 2.23 2.17 2.11 2.15 2.09 2.13 1.97

Sept. 1.53 1.67 2.42 2.31 2.25 2.18 2.16 2.09 2.13 1.97

Oct. 1.55 1.70 2.44 2.30 2.23 2.15 2.18 2.12 2.16 1.99

Nov. 1.55 1.69 2.40 2.30 2.26 2.21 2.20 2.13 2.18 2.01

Dec. 1.22 1.36 2.19 2.05 2.00 1.98 2.11 2.04 2.08 1.94

Avg. 1.40 1.55 2.26 2.17 2.13 2.09 2.13 2.07 2.12 1.97

2002 Jan. 1.20 1.36 1.97 1.86 1.84 1.84 2.07 2.04 2.04 1.91

Feb. 1.18 1.35 1.92 1.81 1.81 1.81 2.08 2.03 2.03 1.90

Mar. 1.16 1.32 1.92 1.81 1.81 1.81 2.08 2.02 2.02 1.90

Apr. 1.16 1.32 1.92 1.81 1.81 1.81 2.08 2.05 2.06 1.92

May 1.13 1.30 1.92 1.81 1.81 1.81 2.06 2.00 2.03 1.89

June 1.13 1.29 1.92 1.81 1.81 1.81 2.08 2.02 2.05 1.92

July 1.09 1.25 1.92 1.81 1.81 1.81 2.08 2.00 2.04 1.90

Aug. 1.08 1.25 1.92 1.81 1.81 1.81 2.05 2.00 2.02 1.89

Sept. 1.08 1.25 1.92 1.81 1.81 1.81 2.05 1.99 2.03 1.89

Oct. 1.05 1.22 1.92 1.81 1.81 1.81 2.04 1.98 2.02 1.88

Nov. 1.09 1.26 1.92 1.81 1.81 1.81 2.06 1.99 2.03 1.88

Dec. 1.08 1.25 1.92 1.81 1.81 1.81 2.06 1.99 2.02 1.88

Avg. 1.12 1.29 1.92 1.81 1.81 1.81 2.07 2.01 2.03 1.90

2003 Jan. 1.09 1.27 1.92 1.81 1.81 1.81 2.06 1.98 2.01 1.87

Feb. 1.05 1.22 1.92 1.81 1.81 1.81 2.06 1.98 1.99 1.86

Mar. 1.01 1.18 1.92 1.81 1.81 1.81 2.06 1.98 2.01 1.87

Apr. 1.00 1.18 1.92 1.81 1.81 1.81 2.06 1.98 2.00 1.87
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 79 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Milwaukee market, the farm price is the USDA-estimated farm Class I price for 3.5 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Milwaukee 

for 3.5 percent milkfat content; the wholesale price is the price paid by the commissary at the Naval 

Station Great Lakes, adjusted for a 5 percent markup; and the retail price is the price collected by 

Information Resources, Inc., for the Milwaukee market. Prices may not average due to rounding.

May 1.01 1.18 1.92 1.81 1.81 1.81 2.05 1.95 1.97 1.85

June 1.01 1.18 1.92 1.81 1.81 1.81 2.03 1.93 1.96 1.83

July 1.01 1.18 1.92 1.81 1.81 1.81 2.04 1.94 1.98 1.84

Aug. 1.13 1.31 1.92 1.81 1.81 1.81 2.06 2.01 2.03 1.90

Sept. 1.37 1.54 1.92 1.81 1.81 1.81 2.14 2.06 2.09 1.94

Oct. 1.39 1.57 2.16 2.05 2.04 2.04 2.15 2.07 2.11 1.96

Nov. 1.40 1.58 2.17 2.06 2.05 2.05 2.16 2.10 2.12 1.98

Dec. 1.36 1.53 2.17 2.06 2.05 2.05 2.17 2.05 2.11 1.92

Avg. 1.15 1.33 1.98 1.87 1.87 1.87 2.09 2.00 2.03 1.89

2004 Jan. 1.18 1.33 2.17 2.06 2.05 2.05 2.16 2.07 2.04 1.91

Feb. 1.16 1.32 2.17 2.06 2.05 2.05 2.14 2.06 2.01 1.89

Mar. 1.18 1.34 2.17 2.06 2.05 2.05 2.12 2.01 1.99 1.85

Apr. 1.37 1.52 2.17 2.06 2.05 2.05 2.17 2.08 2.03 1.88

May 2.01 2.17 2.53 2.42 2.28 2.19 2.52 2.45 2.41 2.18

Avg. 1.38 1.54 2.24 2.13 2.10 2.08 2.22 2.13 2.10 1.94

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 80 GAO-05-50 Dairy Industry

Table 19: Prices for a Gallon of Milk in Minneapolis, Minnesota, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.16 $1.27 $2.07 $2.05 $2.03 $2.01 $1.84 $1.74 $1.86 $1.68

Nov. 1.15 1.26 2.07 2.05 2.03 2.01 1.82 1.79 1.89 1.71

Dec. 1.16 1.27 2.07 2.05 2.03 2.01 1.79 1.79 1.92 1.74

Avg. 1.16 1.27 2.07 2.05 2.03 2.01 1.82 1.77 1.89 1.71

2001 Jan. 1.35 1.47 2.24 2.16 2.10 2.04 1.78 1.73 1.85 1.68

Feb. 1.14 1.27 2.08 2.06 2.06 2.04 1.68 1.67 1.80 1.64

Mar. 1.21 1.33 2.07 2.05 2.05 2.04 1.66 1.69 1.85 1.70

Apr. 1.28 1.41 2.14 2.09 2.07 2.04 1.67 1.72 1.86 1.76

May 1.35 1.48 2.23 2.15 2.12 2.07 1.65 1.70 1.88 1.75

June 1.43 1.56 2.29 2.19 2.15 2.09 1.68 1.71 1.91 1.78

July 1.46 1.58 2.32 2.21 2.16 2.09 1.68 1.73 1.94 1.80

Aug. 1.47 1.59 2.34 2.23 2.18 2.11 1.69 1.75 1.96 1.82

Sept. 1.50 1.62 2.42 2.30 2.25 2.18 1.69 1.76 1.99 1.83

Oct. 1.53 1.64 2.44 2.30 2.23 2.15 1.69 1.74 1.99 1.82

Nov. 1.51 1.64 2.43 2.37 2.34 2.30 1.74 1.80 2.05 1.88

Dec. 1.19 1.31 2.40 2.37 2.34 2.29 1.66 1.76 2.00 1.83

Avg. 1.37 1.49 2.28 2.21 2.17 2.12 1.69 1.73 1.92 1.77

2002 Jan. 1.17 1.32 2.40 2.37 2.34 2.29 1.68 1.74 1.99 1.81

Feb. 1.16 1.31 2.40 2.37 2.34 2.29 1.76 1.87 2.10 1.86

Mar. 1.13 1.28 2.40 2.38 2.35 2.30 1.86 2.01 2.20 1.95

Apr. 1.13 1.28 2.40 2.38 2.35 2.30 1.85 2.00 2.19 1.94

May 1.11 1.26 2.40 2.38 2.35 2.30 1.84 1.97 2.23 1.92

June 1.09 1.24 2.40 2.38 2.35 2.30 2.04 2.09 2.33 2.02

July 1.05 1.20 2.40 2.38 2.35 2.30 2.06 2.10 2.33 2.02

Aug. 1.04 1.19 2.40 2.38 2.35 2.30 2.04 2.05 2.31 1.97

Sept. 1.04 1.19 2.40 2.38 2.35 2.30 1.97 1.98 2.27 1.92

Oct. 1.02 1.16 2.40 2.38 2.35 2.30 1.78 1.85 2.14 1.83

Nov. 1.05 1.20 2.40 2.38 2.35 2.30 1.72 1.76 2.00 1.78

Dec. 1.05 1.19 2.40 2.38 2.35 2.30 1.83 1.95 2.17 1.90

Avg. 1.09 1.24 2.40 2.38 2.35 2.30 1.87 1.95 2.19 1.91

2003 Jan. 1.07 1.21 2.40 2.38 2.35 2.30 1.87 1.96 2.18 1.92

Feb. 1.02 1.16 2.40 2.38 2.35 2.30 1.75 1.79 2.00 1.78

Mar. 0.98 1.13 2.38 2.35 2.32 2.27 1.57 1.59 2.24 1.54

Apr. 0.97 1.12 2.35 2.32 2.29 2.24 1.52 1.53 2.50 1.46
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 81 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Minneapolis market, the farm price is the USDA-estimated farm Class I price for 3.5 

percent milkfat content; the cooperative price is the announced cooperative Class I price for 

Minneapolis for 3.5 percent milkfat content; the wholesale price is the price paid by the commissary at 

Fort McCoy, adjusted for a 5 percent markup; and the retail price is the price collected by Information 

Resources, Inc., for the Minneapolis market. Prices may not average due to rounding.

May 0.98 1.12 2.35 2.32 2.29 2.24 1.44 1.44 2.75 1.34

June 0.98 1.13 2.35 2.32 2.29 2.24 1.43 1.45 2.82 1.31

July 0.98 1.13 2.35 2.32 2.29 2.24 1.45 1.43 2.72 1.32

Aug. 1.10 1.25 2.35 2.32 2.29 2.24 1.52 1.46 2.84 1.35

Sept. 1.34 1.49 2.35 2.32 2.29 2.24 1.51 1.49 2.98 1.39

Oct. 1.37 1.51 2.41 2.37 2.34 2.27 1.53 1.55 2.81 1.48

Nov. 1.38 1.53 2.49 2.43 2.38 2.31 1.66 1.88 2.55 1.86

Dec. 1.33 1.48 2.49 2.43 2.38 2.31 1.57 1.88 2.57 1.91

Avg. 1.13 1.27 2.39 2.36 2.32 2.27 1.57 1.62 2.58 1.56

2004 Jan. 1.15 1.30 2.49 2.43 2.38 2.31 1.65 1.94 2.57 1.94

Feb. 1.14 1.29 2.49 2.43 2.38 2.31 1.64 1.91 2.55 1.93

Mar. 1.16 1.31 2.49 2.43 2.38 2.31 1.60 1.80 2.54 1.81

Apr. 1.35 1.49 2.49 2.43 2.38 2.31 1.52 1.78 2.52 1.63

May 1.99 2.14 2.49 2.43 2.38 2.31 2.09 2.21 2.56 2.06

Avg. 1.36 1.51 2.49 2.43 2.38 2.31 1.70 1.93 2.55 1.87

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 82 GAO-05-50 Dairy Industry

Table 20: Prices for a Gallon of Milk in New Orleans, Louisiana, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.22 $1.42 $2.36 $2.25 $2.25 $2.25 $2.64 $2.62 $2.62 $2.60

Nov. 1.22 1.41 2.32 2.25 2.25 2.25 2.59 2.60 2.54 2.56

Dec. 1.22 1.42 2.32 2.25 2.25 2.19 2.63 2.60 2.56 2.56

Avg. 1.22 1.42 2.33 2.25 2.25 2.23 2.62 2.61 2.57 2.57

2001 Jan. 1.38 1.58 2.40 2.32 2.32 2.25 2.68 2.67 2.63 2.62

Feb. 1.23 1.42 2.34 2.29 2.29 2.19 2.59 2.58 2.56 2.58

Mar. 1.27 1.46 2.34 2.29 2.29 2.19 2.57 2.59 2.60 2.60

Apr. 1.34 1.53 2.38 2.32 2.32 2.19 2.59 2.63 2.61 2.62

May 1.38 1.58 2.42 2.35 2.35 2.25 2.57 2.62 2.58 2.58

June 1.41 1.62 2.38 2.32 2.32 2.19 2.64 2.68 2.65 2.64

July 1.46 1.67 2.41 2.35 2.35 2.22 2.67 2.71 2.70 2.67

Aug. 1.47 1.67 2.44 2.38 2.38 2.25 2.70 2.74 2.70 2.68

Sept. 1.48 1.69 2.38 2.32 2.32 2.19 2.68 2.72 2.71 2.69

Oct. 1.51 1.72 2.38 2.32 2.32 2.19 2.70 2.73 2.74 2.71

Nov. 1.50 1.71 2.38 2.31 2.31 2.19 2.75 2.78 2.79 2.74

Dec. 1.21 1.42 2.29 2.23 2.23 2.19 2.73 2.75 2.80 2.74

Avg. 1.39 1.59 2.38 2.32 2.32 2.21 2.66 2.68 2.67 2.66

2002 Jan. 1.15 1.41 2.29 2.23 2.23 2.18 2.73 2.74 2.79 2.73

Feb. 1.15 1.41 2.27 2.21 2.21 2.15 2.74 2.74 2.77 2.71

Mar. 1.14 1.41 2.27 2.21 2.21 2.15 2.73 2.76 2.76 2.71

Apr. 1.15 1.41 2.27 2.21 2.21 2.15 2.72 2.74 2.74 2.71

May 1.15 1.42 2.25 2.21 2.21 2.17 2.71 2.72 2.73 2.69

June 1.13 1.40 2.30 2.23 2.23 2.19 2.70 2.71 2.72 2.68

July 1.09 1.36 2.31 2.23 2.24 2.19 2.70 2.71 2.72 2.69

Aug. 1.08 1.35 2.31 2.23 2.24 2.19 2.71 2.70 2.73 2.69

Sept. 1.08 1.35 2.31 2.23 2.24 2.19 2.64 2.64 2.67 2.64

Oct. 1.07 1.34 2.30 2.23 2.24 2.18 2.63 2.65 2.64 2.63

Nov. 1.10 1.36 2.27 2.19 2.22 2.16 2.61 2.65 2.60 2.62

Dec. 1.09 1.35 2.27 2.19 2.22 2.16 2.61 2.63 2.63 2.64

Avg. 1.12 1.38 2.29 2.22 2.23 2.17 2.69 2.70 2.71 2.68

2003 Jan. 1.06 1.36 2.27 2.19 2.22 2.16 2.60 2.62 2.61 2.60

Feb. 1.06 1.36 2.27 2.19 2.22 2.16 2.56 2.60 2.61 2.60

Mar. 1.02 1.32 2.27 2.19 2.22 2.16 2.56 2.58 2.60 2.60

Apr. 1.01 1.31 2.27 2.19 2.22 2.16 2.56 2.59 2.62 2.60
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 83 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the New Orleans market, the farm price is the USDA-estimated farm Class I price for 3.5 

percent milkfat content; the cooperative price is the announced cooperative Class I price for New 

Orleans for 3.5 percent milkfat content; the wholesale price is the average of the prices paid by the 

Naval Support Activities, New Orleans; the Naval Construction Battalion Center, Gulfport; and Keesler 

Air Force Base commissaries, adjusted for a 5 percent markup; and the retail price is the price 

collected by Information Resources, Inc., for the New Orleans market. Prices may not average due to 

rounding.

May 1.01 1.31 2.27 2.19 2.22 2.16 2.57 2.61 2.64 2.61

June 1.02 1.31 2.27 2.19 2.22 2.16 2.64 2.67 2.70 2.64

July 1.01 1.32 2.28 2.19 2.22 2.16 2.58 2.62 2.66 2.62

Aug. 1.09 1.39 2.32 2.25 2.24 2.19 2.62 2.68 2.74 2.67

Sept. 1.28 1.59 2.38 2.32 2.31 2.22 2.72 2.80 2.89 2.80

Oct. 1.31 1.61 2.44 2.38 2.37 2.25 2.75 2.81 2.86 2.80

Nov. 1.31 1.61 2.34 2.25 2.24 2.10 2.74 2.79 2.83 2.79

Dec. 1.29 1.60 2.25 2.16 2.14 1.97 2.76 2.81 2.82 2.78

Avg. 1.12 1.42 2.30 2.22 2.24 2.15 2.64 2.68 2.72 2.68

2004 Jan. 1.15 1.45 2.20 2.13 2.11 1.91 2.75 2.78 2.79 2.75

Feb. 1.15 1.45 2.14 2.08 2.05 1.85 2.71 2.74 2.74 2.70

Mar. 1.15 1.45 2.14 2.08 2.05 1.85 2.70 2.74 2.75 2.70

Apr. 1.31 1.60 2.18 2.11 2.07 1.86 2.80 2.85 2.88 2.80

May 1.78 2.08 2.44 2.33 2.27 2.04 3.18 3.25 3.28 3.18

Avg. 1.31 1.61 2.22 2.15 2.11 1.90 2.83 2.87 2.89 2.83

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 84 GAO-05-50 Dairy Industry

Table 21: Prices for a Gallon of Milk in Phoenix, Arizona, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.17 $1.24 $1.97 $1.83 $1.73 $1.63 $2.25 $2.27 $2.44 $2.16

Nov. 1.16 1.23 1.98 1.83 1.74 1.63 2.20 2.17 2.39 2.10

Dec. 1.19 1.26 1.98 1.83 1.74 1.63 2.16 1.82 2.29 1.91

Avg. 1.17 1.24 1.98 1.83 1.74 1.63 2.20 2.09 2.37 2.06

2001 Jan. 1.35 1.42 1.99 1.84 1.74 1.62 2.60 2.58 2.60 2.49

Feb. 1.17 1.24 2.04 1.89 1.76 1.64 2.70 2.59 2.59 2.50

Mar. 1.23 1.31 2.15 1.97 1.81 1.66 2.48 2.44 2.47 2.37

Apr. 1.30 1.37 2.18 1.99 1.81 1.66 2.62 2.56 2.57 2.46

May 1.37 1.44 2.08 1.96 1.80 1.64 2.46 2.38 2.43 2.27

June 1.43 1.51 2.04 1.85 1.72 1.60 2.28 2.35 2.46 2.26

July 1.46 1.54 2.04 1.85 1.72 1.60 2.38 2.44 2.49 2.34

Aug. 1.47 1.54 2.05 1.86 1.72 1.60 2.20 2.23 2.31 2.20

Sept. 1.48 1.56 2.07 1.89 1.74 1.62 2.27 2.31 2.38 2.27

Oct. 1.52 1.59 2.10 1.92 1.74 1.61 2.41 2.47 2.53 2.39

Nov. 1.50 1.57 2.11 1.92 1.74 1.60 2.08 2.08 2.20 2.06

Dec. 1.18 1.25 2.11 1.97 1.85 1.76 2.47 2.56 2.54 2.40

Avg. 1.37 1.45 2.08 1.91 1.76 1.63 2.41 2.42 2.46 2.33

2002 Jan. 1.18 1.25 2.07 1.91 1.79 1.70 2.60 2.66 2.66 2.51

Feb. 1.17 1.25 2.09 1.88 1.78 1.69 2.52 2.52 2.58 2.51

Mar. 1.14 1.22 2.09 1.88 1.78 1.69 2.73 2.73 2.70 2.65

Apr. 1.13 1.20 2.06 1.88 1.78 1.69 2.53 2.64 2.64 2.50

May 1.11 1.19 1.97 1.88 1.78 1.69 2.71 2.73 2.72 2.69

June 1.09 1.17 1.97 1.88 1.78 1.69 2.58 2.58 2.66 2.55

July 1.06 1.13 1.97 1.88 1.78 1.69 2.68 2.73 2.78 2.65

Aug. 1.04 1.12 1.97 1.88 1.78 1.69 2.46 2.51 2.75 2.38

Sept. 1.03 1.12 1.97 1.88 1.78 1.69 2.36 2.25 2.37 2.28

Oct. 1.00 1.09 1.97 1.88 1.78 1.69 2.63 2.58 2.63 2.60

Nov. 1.05 1.13 1.97 1.88 1.78 1.69 2.48 2.57 2.60 2.51

Dec. 1.04 1.12 1.98 1.90 1.80 1.71 2.52 2.59 2.62 2.60

Avg. 1.09 1.17 2.01 1.88 1.78 1.69 2.57 2.59 2.64 2.54

2003 Jan. 1.04 1.13 1.99 1.92 1.81 1.73 2.49 2.58 2.61 2.55

Feb. 1.01 1.10 1.99 1.92 1.81 1.73 2.46 2.53 2.59 2.56

Mar. 0.98 1.06 1.99 1.92 1.81 1.73 2.43 2.43 2.52 2.48

Apr. 0.97 1.05 1.99 1.92 1.81 1.73 2.44 2.49 2.54 2.42
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 85 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Phoenix market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Phoenix for 3.5 

percent milkfat content; the wholesale price is the average of the prices paid by the commissaries at 

Luke Air Force Base and Davis-Monthan Air Force Base, adjusted for a 5 percent markup; and the 

retail price is the price collected by Information Resources, Inc., for the Phoenix market. Prices may 

not average due to rounding.

May 0.97 1.05 1.94 1.88 1.81 1.73 2.43 2.43 2.51 2.44

June 0.98 1.06 1.89 1.84 1.80 1.73 2.51 2.55 2.59 2.52

July 0.97 1.06 1.89 1.84 1.80 1.73 2.30 2.32 2.45 2.27

Aug. 1.08 1.16 1.89 1.84 1.80 1.73 2.09 2.34 2.59 2.06

Sept. 1.31 1.40 2.08 1.99 1.88 1.79 2.44 2.45 2.63 2.45

Oct. 1.36 1.45 2.26 2.17 2.06 1.97 2.67 2.70 2.85 2.67

Nov. 1.37 1.45 2.27 2.18 2.07 1.98 2.33 2.36 2.59 2.38

Dec. 1.33 1.41 2.27 2.18 2.07 1.98 2.13 2.16 2.33 2.14

Avg. 1.11 1.20 2.04 1.97 1.88 1.80 2.39 2.45 2.57 2.41

2004 Jan. 1.15 1.24 2.27 2.18 2.07 1.98 1.97 2.11 2.27 2.02

Feb. 1.13 1.21 2.27 2.18 2.07 1.98 2.07 2.10 2.22 2.05

Mar. 1.16 1.24 2.27 2.18 2.07 1.98 2.14 2.25 2.24 2.16

Apr. 1.31 1.39 2.23 1.94 1.91 1.76 2.00 2.10 2.18 2.03

May 1.83 1.91 2.77 2.35 2.33 2.14 2.62 2.67 2.65 2.55

Avg. 1.32 1.40 2.36 2.17 2.09 1.97 2.16 2.25 2.31 2.16

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 86 GAO-05-50 Dairy Industry

Table 22: Prices for a Gallon of Milk in Salt Lake City, Utah, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.13 $1.21 $2.03 $1.96 $1.84 $1.80 $2.60 $2.18 $2.17 $2.44

Nov. 1.13 1.20 2.04 1.97 1.85 1.81 2.59 2.38 2.39 2.44

Dec. 1.15 1.23 2.06 1.98 1.86 1.81 2.58 2.18 2.24 2.44

Avg. 1.14 1.21 2.04 1.97 1.85 1.81 2.59 2.25 2.27 2.44

2001 Jan. 1.31 1.39 2.14 2.03 1.89 1.81 2.68 2.27 2.17 2.42

Feb. 1.13 1.21 2.15 2.04 1.89 1.82 2.58 2.21 2.19 2.31

Mar. 1.19 1.28 2.09 2.00 1.87 1.82 2.50 2.23 2.21 2.21

Apr. 1.26 1.34 2.15 2.04 1.89 1.82 2.34 2.28 2.27 2.09

May 1.33 1.41 2.22 2.08 1.91 1.82 2.13 2.09 2.03 2.18

June 1.39 1.48 2.28 2.12 1.93 1.83 2.38 2.18 2.16 2.21

July 1.42 1.51 2.34 2.15 1.96 1.84 2.39 2.19 2.12 2.00

Aug. 1.43 1.51 2.36 2.17 1.97 1.84 2.39 2.13 2.13 2.00

Sept. 1.44 1.53 2.37 2.18 1.97 1.85 2.46 2.20 2.20 2.06

Oct. 1.48 1.56 2.39 2.19 1.97 1.83 2.39 2.35 2.37 2.21

Nov. 1.47 1.55 2.41 2.22 2.02 1.91 2.41 2.36 2.33 2.22

Dec. 1.14 1.22 2.28 2.14 1.98 1.90 2.37 2.35 2.34 2.15

Avg. 1.33 1.42 2.27 2.11 1.94 1.84 2.42 2.24 2.21 2.17

2002 Jan. 1.14 1.22 2.16 2.04 1.89 1.83 2.25 2.24 2.24 2.06

Feb. 1.14 1.22 2.16 2.04 1.89 1.83 2.46 2.41 2.42 2.18

Mar. 1.11 1.19 2.15 2.04 1.89 1.83 2.41 2.33 2.34 2.17

Apr. 1.10 1.18 2.02 1.96 1.88 1.75 2.37 2.33 2.29 2.13

May 1.08 1.16 1.89 1.88 1.86 1.67 2.34 2.31 2.30 2.13

June 1.06 1.14 1.88 1.88 1.85 1.66 2.39 2.38 2.42 2.17

July 1.03 1.11 1.85 1.87 1.86 1.68 2.38 2.30 2.26 2.17

Aug. 1.01 1.09 1.84 1.86 1.85 1.67 2.37 2.33 2.37 2.10

Sept. 1.01 1.09 1.84 1.85 1.85 1.68 2.16 2.01 1.94 1.91

Oct. 0.99 1.06 1.84 1.84 1.84 1.68 2.46 2.42 2.40 2.17

Nov. 1.02 1.10 1.85 1.85 1.85 1.70 2.38 2.44 2.41 2.17

Dec. 1.02 1.10 1.87 1.87 1.86 1.71 2.10 1.97 1.99 1.84

Avg. 1.06 1.14 1.95 1.92 1.86 1.72 2.34 2.29 2.28 2.10

2003 Jan. 1.02 1.10 1.87 1.86 1.85 1.70 2.10 2.06 2.01 1.83

Feb. 0.99 1.07 1.86 1.85 1.84 1.68 2.09 2.10 2.08 1.88

Mar. 0.96 1.04 1.85 1.84 1.82 1.66 2.07 2.05 2.03 1.83

Apr. 0.94 1.02 1.88 1.87 1.85 1.69 2.10 2.09 2.07 1.85
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 87 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Salt Lake City market, the farm price is the USDA-estimated farm Class I price for 3.5 

percent milkfat content; the cooperative price is the announced cooperative Class I price for Salt Lake 

City for 3.5 percent milkfat content; the wholesale price is the price paid by the commissary at Hill Air 

Force Base, adjusted for a 5 percent markup; and the retail price is the price collected by Information 

Resources, Inc., for the Salt Lake City market. Prices may not average due to rounding.

May 0.95 1.03 1.90 1.89 1.87 1.71 2.12 2.11 2.09 1.89

June 0.95 1.03 1.90 1.89 1.87 1.71 1.96 2.00 2.01 1.83

July 0.95 1.03 1.90 1.89 1.87 1.71 2.04 2.03 2.01 1.86

Aug. 1.05 1.14 1.96 1.95 1.94 1.77 2.32 2.33 2.23 2.11

Sept. 1.29 1.37 2.13 2.10 2.09 1.92 2.37 2.51 2.28 2.32

Oct. 1.34 1.42 2.27 2.24 2.23 2.07 2.22 2.29 2.28 2.18

Nov. 1.35 1.43 2.29 2.28 2.26 2.09 2.00 2.05 2.06 1.88

Dec. 1.30 1.38 2.28 2.26 2.24 2.07 2.03 2.10 2.10 1.95

Avg. 1.09 1.17 2.01 1.99 1.98 1.82 2.12 2.14 2.10 1.95

2004 Jan. 1.14 1.21 2.21 2.18 2.16 1.99 2.00 2.06 2.08 1.93

Feb. 1.12 1.19 2.12 2.08 2.04 1.86 1.96 2.03 2.09 1.90

Mar. 1.14 1.22 2.13 2.06 2.00 1.80 1.99 2.06 2.13 1.95

Apr. 1.29 1.37 2.20 2.10 2.01 1.78 2.19 2.22 2.21 2.02

May 1.81 1.88 2.52 2.38 2.28 2.03 2.50 2.58 2.63 2.38

Avg. 1.30 1.37 2.24 2.16 2.10 1.89 2.13 2.19 2.23 2.04

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 88 GAO-05-50 Dairy Industry

Table 23: Prices for a Gallon of Milk in San Diego, California, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $0.99 $1.21 $1.90 $1.90 $1.87 $1.69 $2.55 $2.45 $2.66 $2.29

Nov. 1.04 1.21 1.88 1.88 1.85 1.66 2.51 2.54 2.54 2.23

Dec. 1.06 1.28 1.95 1.91 1.88 1.67 2.72 2.63 2.79 2.40

Avg. 1.03 1.23 1.91 1.90 1.87 1.67 2.59 2.54 2.66 2.31

2001 Jan. 1.03 1.43 2.03 1.98 1.95 1.68 2.81 2.72 2.93 2.52

Feb. 1.05 1.21 1.92 1.91 1.91 1.66 2.69 2.75 2.71 2.36

Mar. 1.11 1.26 1.98 1.97 1.94 1.67 2.68 2.57 2.77 2.40

Apr. 1.18 1.33 2.05 2.01 1.96 1.67 2.81 2.74 2.84 2.39

May 1.25 1.39 2.11 2.06 1.98 1.67 2.85 2.71 2.81 2.30

June 1.31 1.46 2.13 2.07 1.98 1.67 2.91 2.85 2.80 2.34

July 1.30 1.49 2.15 2.08 1.99 1.67 3.00 2.94 2.99 2.50

Aug. 1.34 1.49 2.19 2.11 2.00 1.67 3.10 2.99 3.04 2.55

Sept. 1.37 1.49 2.19 2.11 2.00 1.67 3.22 2.95 3.24 2.62

Oct. 1.21 1.55 2.23 2.13 2.00 1.65 3.27 2.95 3.24 2.61

Nov. 1.11 1.41 2.11 2.09 2.02 1.71 3.18 2.93 2.81 2.52

Dec. 1.06 1.19 2.01 2.00 2.00 1.64 3.06 2.94 3.08 2.52

Avg. 1.19 1.39 2.09 2.04 1.98 1.67 2.97 2.84 2.94 2.47

2002 Jan. 1.07 1.18 1.99 1.98 1.99 1.64 3.05 2.91 2.94 2.46

Feb. 1.01 1.20 1.97 1.97 1.97 1.64 2.95 2.76 2.72 2.40

Mar. 0.99 1.16 1.92 1.93 1.96 1.63 2.85 2.71 2.50 2.32

Apr. 0.98 1.16 1.88 1.89 1.88 1.61 2.76 2.47 2.63 2.40

May 0.94 1.14 1.82 1.81 1.79 1.58 2.88 2.67 2.73 2.35

June 0.90 1.10 1.79 1.80 1.78 1.58 2.87 2.62 2.85 2.40

July 0.87 1.10 1.77 1.78 1.77 1.57 2.85 2.49 2.77 2.37

Aug. 0.89 1.08 1.75 1.75 1.76 1.57 2.69 2.58 2.63 2.28

Sept. 0.91 1.08 1.75 1.75 1.76 1.57 2.72 2.64 2.72 2.29

Oct. 0.94 1.05 1.75 1.76 1.77 1.58 2.75 2.71 2.74 2.30

Nov. 0.92 1.16 1.83 1.85 1.86 1.65 2.80 2.70 2.80 2.30

Dec. 0.92 1.08 1.77 1.78 1.78 1.58 2.73 2.71 2.74 2.23

Avg. 0.95 1.12 1.83 1.84 1.84 1.60 2.83 2.66 2.73 2.34

2003 Jan. 0.92 1.11 1.77 1.77 1.77 1.57 2.68 2.59 2.84 2.28

Feb. 0.89 1.06 1.74 1.71 1.71 1.50 2.74 2.63 2.94 2.29

Mar. 0.87 1.05 1.72 1.71 1.69 1.44 2.70 2.58 2.78 2.27

Apr. 0.88 1.02 1.70 1.70 1.67 1.43 2.72 2.60 2.80 2.27
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 89 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by the California Department of Food and Agriculture, the Defense Commissary Agency, 

and Information Resources, Inc.

Note: For the San Diego market, the farm price is the California mailbox price for 3.5 percent milkfat 

content; the cooperative price is the Southern California Class I price for 3.5 percent milkfat content; 

the wholesale price is the average of the prices paid by the commissaries at the Naval Base, San 

Diego; Marine Corps Base, Camp Pendleton; Naval Outlying Landing Field, Imperial Beach; Marine 

Corps Air Station, Miramar; Naval Air Station, North Island; and by the San Onofre Commissary, Camp 

Pendleton, adjusted for a 5 percent markup; and the retail price is the price collected by Information 

Resources, Inc., for the San Diego market. Prices may not average due to rounding.

May 0.87 1.03 1.68 1.69 1.65 1.42 2.81 2.67 2.80 2.29

June 0.87 1.04 1.68 1.69 1.65 1.42 2.80 2.68 2.78 2.30

July 0.99 1.03 1.70 1.71 1.68 1.44 2.82 2.70 2.84 2.32

Aug. 1.10 1.27 1.86 1.89 1.87 1.60 3.00 2.78 2.98 2.36

Sept. 1.14 1.41 2.03 2.06 2.04 1.73 3.13 2.93 3.07 2.50

Oct. 1.16 1.42 2.03 2.08 2.07 1.76 3.19 2.86 3.23 2.43

Nov. 1.10 1.42 2.03 2.07 2.06 1.75 3.12 2.80 3.29 2.44

Dec. 1.08 1.32 1.94 1.98 1.97 1.65 2.72 2.49 2.93 2.23

Avg. 0.99 1.18 1.82 1.84 1.82 1.56 2.87 2.69 2.94 2.33

2004 Jan. 1.04 1.22 1.85 1.87 1.85 1.55 2.64 2.45 2.82 2.19

Feb. 1.09 1.17 1.77 1.77 1.74 1.44 2.62 2.43 2.72 2.17

Mar. 1.26 1.21 1.80 1.77 1.71 1.40 2.55 2.34 2.76 2.13

Apr. 1.48 1.38 1.99 1.87 1.76 1.43 2.76 2.49 2.63 2.15

May 1.52 1.85 2.41 2.34 2.25 1.83 3.03 2.78 2.93 2.40

Avg. 1.28 1.37 1.96 1.92 1.86 1.53 2.72 2.50 2.77 2.21

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 90 GAO-05-50 Dairy Industry

Table 24: Prices for a Gallon of Milk in Seattle, Washington, October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.20 $1.28 $1.59 $1.46 $1.38 $1.31 $2.71 $2.50 $2.50 $2.37

Nov. 1.14 1.22 1.58 1.46 1.37 1.30 2.83 2.62 2.58 2.49

Dec. 1.18 1.27 1.61 1.48 1.40 1.33 2.73 2.57 2.57 2.45

Avg. 1.17 1.26 1.59 1.47 1.38 1.31 2.76 2.56 2.55 2.44

2001 Jan. 1.32 1.41 1.76 1.63 1.55 1.48 2.62 2.39 2.40 2.25

Feb. 1.17 1.25 1.60 1.48 1.39 1.33 2.98 2.77 2.71 2.62

Mar. 1.21 1.29 1.64 1.51 1.43 1.36 2.77 2.52 2.52 2.29

Apr. 1.27 1.36 1.71 1.59 1.50 1.43 2.95 2.72 2.67 2.54

May 1.34 1.42 1.78 1.66 1.57 1.51 2.95 2.65 2.67 2.44

June 1.41 1.49 1.84 1.72 1.63 1.57 2.80 2.77 2.70 2.49

July 1.44 1.52 1.87 1.75 1.66 1.60 3.14 3.01 2.85 2.71

Aug. 1.44 1.53 1.88 1.76 1.67 1.61 3.15 2.99 2.85 2.71

Sept. 1.46 1.54 1.89 1.77 1.68 1.62 2.84 2.65 2.62 2.43

Oct. 1.49 1.57 1.92 1.80 1.71 1.64 2.92 2.72 2.69 2.46

Nov. 1.47 1.56 1.91 1.78 1.70 1.63 3.01 2.76 2.73 2.50

Dec. 1.15 1.23 1.60 1.48 1.39 1.32 2.93 2.75 2.68 2.47

Avg. 1.35 1.43 1.78 1.66 1.57 1.51 2.92 2.73 2.67 2.49

2002 Jan. 1.15 1.23 1.60 1.47 1.39 1.32 3.18 2.93 2.82 2.67

Feb. 1.25 1.33 1.60 1.47 1.39 1.32 3.13 2.86 2.74 2.62

Mar. 1.12 1.20 1.57 1.44 1.36 1.29 3.16 2.91 2.78 2.68

Apr. 1.11 1.19 1.56 1.43 1.35 1.28 2.99 2.66 2.59 2.42

May 1.09 1.17 1.54 1.41 1.33 1.26 3.08 2.70 2.68 2.48

June 1.07 1.15 1.52 1.40 1.31 1.24 3.08 2.56 2.54 2.32

July 1.03 1.12 1.48 1.36 1.27 1.21 3.07 2.67 2.69 2.49

Aug. 1.02 1.10 1.47 1.35 1.26 1.20 2.81 2.62 2.42 2.43

Sept. 1.02 1.10 1.47 1.35 1.26 1.20 3.01 2.70 2.71 2.47

Oct. 0.99 1.07 1.45 1.32 1.24 1.17 3.10 2.77 2.73 2.56

Nov. 1.03 1.11 1.47 1.34 1.26 1.19 2.98 2.73 2.69 2.41

Dec. 1.02 1.11 1.47 1.35 1.26 1.20 2.98 2.76 2.75 2.50

Avg. 1.08 1.16 1.52 1.39 1.31 1.24 3.05 2.74 2.68 2.50

2003 Jan. 1.03 1.11 1.47 1.35 1.26 1.19 3.12 3.04 2.91 2.78

Feb. 1.00 1.08 1.44 1.32 1.23 1.17 3.07 2.92 2.73 2.53

Mar. 0.96 1.05 1.42 1.29 1.21 1.14 2.97 2.75 2.66 2.42

Apr. 0.95 1.03 1.40 1.27 1.19 1.12 3.00 2.93 2.72 2.49
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 91 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Seattle market, the farm price is the USDA-estimated farm Class I price for 3.5 percent 

milkfat content; the cooperative price is the announced cooperative Class I price for Seattle for 3.5 

percent milkfat content; the wholesale price is the average of the prices paid by the commissaries at 

the Naval Station Everett, Smokey Point Support Center; Fort Lewis; and McChord Air Force Base, 

adjusted for a 5 percent markup; and the retail price is the price collected by Information Resources, 

Inc., for the Seattle market. Prices may not average due to rounding.

May 0.95 1.04 1.44 1.32 1.23 1.16 2.94 2.81 2.66 2.45

June 0.96 1.04 1.44 1.32 1.24 1.17 3.00 2.82 2.76 2.54

July 0.95 1.04 1.45 1.33 1.24 1.18 3.07 2.86 2.82 2.55

Aug. 1.05 1.15 1.55 1.43 1.36 1.28 3.11 2.93 2.90 2.65

Sept. 1.29 1.38 1.81 1.69 1.63 1.54 3.22 3.00 3.01 2.72

Oct. 1.34 1.43 1.85 1.72 1.88 1.58 3.06 2.98 2.97 2.69

Nov. 1.35 1.44 1.86 1.73 1.82 1.59 3.10 2.89 2.93 2.63

Dec. 1.30 1.39 1.82 1.69 1.99 1.55 2.75 2.62 2.49 2.39

Avg. 1.09 1.18 1.58 1.46 1.44 1.31 3.03 2.88 2.80 2.57

2004 Jan. 1.13 1.22 1.69 1.56 1.92 1.42 2.59 2.56 2.47 2.37

Feb. 1.10 1.20 1.65 1.53 1.72 1.38 2.81 2.50 2.45 2.33

Mar. 1.13 1.23 1.73 1.60 1.67 1.44 2.44 2.46 2.32 2.16

Apr. 1.28 1.38 1.90 1.76 1.68 1.64 2.56 2.53 2.46 2.32

May 1.80 1.89 2.38 2.24 1.96 2.13 3.06 2.88 2.82 2.61

Avg. 1.29 1.38 1.87 1.74 1.79 1.60 2.69 2.59 2.50 2.36

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 92 GAO-05-50 Dairy Industry

Table 25: Prices for a Gallon of Milk in Washington, D.C., October 2000 through May 2004

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim

2000 Oct. $1.32 $1.40 $1.66 $1.51 $1.49 $1.42 $2.10 $2.10 $2.09 $1.94

Nov. 1.33 1.41 1.66 1.50 1.49 1.42 2.09 2.10 2.09 1.94

Dec. 1.36 1.44 1.68 1.53 1.51 1.43 2.11 2.12 2.11 1.97

Avg. 1.34 1.42 1.67 1.51 1.50 1.42 2.10 2.11 2.10 1.95

2001 Jan. 1.54 1.62 1.83 1.67 1.62 1.54 2.21 2.24 2.22 2.05

Feb. 1.36 1.44 1.67 1.52 1.53 1.44 2.22 2.25 2.23 2.04

Mar. 1.43 1.50 1.73 1.57 1.57 1.48 2.21 2.23 2.22 2.05

Apr. 1.49 1.57 1.79 1.64 1.61 1.52 2.25 2.27 2.27 2.10

May 1.56 1.63 1.86 1.70 1.66 1.58 2.29 2.31 2.32 2.15

June 1.63 1.70 1.93 1.77 1.72 1.65 2.32 2.31 2.30 2.13

July 1.63 1.71 1.96 1.80 1.74 1.68 2.29 2.27 2.25 2.10

Aug. 1.64 1.71 1.96 1.80 1.74 1.68 2.29 2.28 2.26 2.10

Sept. 1.65 1.72 1.97 1.80 1.75 1.69 2.31 2.31 2.30 2.13

Oct. 1.68 1.76 1.99 1.83 1.78 1.71 2.37 2.35 2.34 2.17

Nov. 1.69 1.77 1.99 1.83 1.79 1.74 2.38 2.39 2.40 2.25

Dec. 1.37 1.44 1.73 1.57 1.60 1.60 2.35 2.36 2.35 2.19

Avg. 1.56 1.63 1.87 1.71 1.68 1.61 2.29 2.30 2.29 2.12

2002 Jan. 1.37 1.44 1.71 1.54 1.53 1.55 2.36 2.36 2.35 2.18

Feb. 1.37 1.44 1.68 1.52 1.52 1.52 2.33 2.33 2.32 2.15

Mar. 1.34 1.41 1.65 1.49 1.50 1.50 2.30 2.31 2.30 2.15

Apr. 1.33 1.40 1.64 1.48 1.43 1.49 2.30 2.30 2.30 2.14

May 1.31 1.38 1.63 1.46 1.42 1.48 2.32 2.31 2.32 2.16

June 1.29 1.36 1.61 1.44 1.40 1.46 2.29 2.27 2.27 2.12

July 1.25 1.32 1.57 1.41 1.37 1.44 2.31 2.29 2.29 2.13

Aug. 1.24 1.31 1.56 1.40 1.36 1.43 2.29 2.27 2.28 2.13

Sept. 1.24 1.31 1.56 1.40 1.36 1.43 2.27 2.27 2.29 2.13

Oct. 1.21 1.28 1.54 1.37 1.34 1.41 2.25 2.25 2.27 2.12

Nov. 1.25 1.32 1.57 1.41 1.37 1.44 2.19 2.20 2.22 2.08

Dec. 1.24 1.32 1.56 1.40 1.36 1.43 2.24 2.25 2.24 2.09

Avg. 1.29 1.36 1.61 1.44 1.41 1.47 2.29 2.28 2.29 2.13

2003 Jan. 1.24 1.32 1.56 1.40 1.36 1.43 2.20 2.22 2.20 2.06

Feb. 1.20 1.28 1.53 1.37 1.33 1.41 2.19 2.23 2.22 2.08

Mar. 1.17 1.24 1.50 1.33 1.30 1.38 2.18 2.19 2.20 2.06

Apr. 1.17 1.24 1.48 1.32 1.29 1.38 2.22 2.22 2.21 2.07
Appendix IV

Average Monthly and Annual Farm, 

Cooperative, Wholesale and Retail Milk 

Prices in Selected Markets

Page 93 GAO-05-50 Dairy Industry

Source: GAO’s analysis of price data provided by USDA, the Defense Commissary Agency, and Information Resources, Inc.

Note: For the Washington, D.C., market, the farm price is the USDA-estimated farm Class I price for 

3.5 percent milkfat content; the cooperative price is the announced cooperative Class I price for 

Washington, D.C., for 3.5 percent milkfat content; the wholesale price is the average of the prices paid 

by the commissaries at Bolling Air Force Base; Walter Reed Army Medical Center; Fort Myer; Fort 

Belvoir; the Marine Corps Base, Quantico; Andrews Air Force Base; Aberdeen Proving Ground; the 

Naval Station, Annapolis; Fort Meade; and Fort Detrick, adjusted for a 5 percent markup; and the retail 

price is the price collected by Information Resources, Inc., for the Washington, D.C., market. Prices 

may not average due to rounding.

May 1.17 1.25 1.49 1.33 1.30 1.38 2.23 2.22 2.22 2.07

June 1.18 1.25 1.49 1.33 1.30 1.38 2.25 2.22 2.20 2.06

July 1.19 1.26 1.50 1.34 1.30 1.39 2.28 2.23 2.20 2.07

Aug. 1.29 1.36 1.58 1.43 1.38 1.45 2.34 2.29 2.27 2.14

Sept. 1.52 1.60 1.74 1.61 1.55 1.59 2.50 2.47 2.42 2.28

Oct. 1.57 1.65 1.86 1.70 1.65 1.71 2.58 2.53 2.51 2.35

Nov. 1.58 1.66 1.87 1.71 1.66 1.72 2.59 2.53 2.50 2.34

Dec. 1.53 1.61 1.83 1.67 1.63 1.70 2.59 2.55 2.52 2.37

Avg. 1.32 1.39 1.62 1.46 1.42 1.49 2.35 2.33 2.31 2.16

2004 Jan. 1.36 1.44 1.69 1.53 1.49 1.58 2.59 2.54 2.51 2.36

Feb. 1.34 1.42 1.66 1.50 1.46 1.55 2.56 2.50 2.48 2.33

Mar. 1.37 1.45 1.66 1.50 1.45 1.54 2.53 2.48 2.45 2.31

Apr. 1.51 1.59 1.82 1.66 1.61 1.66 2.58 2.49 2.43 2.25

May 2.03 2.11 2.28 2.12 2.05 2.04 2.90 2.78 2.72 2.51

Avg. 1.52 1.60 1.82 1.66 1.61 1.67 2.63 2.56 2.52 2.35

(Continued From Previous Page)

Wholesale Retail

Year Month Farm Cooperative Whole 2% 1% Skim Whole 2% 1% Skim
Page 94 GAO-05-50 Dairy Industry

Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer ApendxiV

The prices that farmers, cooperatives, wholesale processors, and retailers 

receive are determined by the interaction of many factors, such as forces 

affecting the supply of raw milk and manufactured and fluid milk products, 

consumer demand for manufactured and fluid milk products, federal and 

state dairy programs, the level of services provided by dairy cooperatives, 

market structure at various levels of the marketing chain, and other input 

costs of processing and retailing. Dairy farmers receive a price for raw 

milk, and each entity involved in the processing and marketing of fluid milk 

adds value to the product and retains a portion of the difference between 

the farm and retail prices. (This difference is known as the price spread.) 

This appendix examines the key factors that influence milk prices at the 

different levels of the marketing chain.

Market Forces, in 

Addition to Federal 

and State Policies, 

Influence Milk Prices 

at the Farm Level

Supply and demand forces, which in turn are influenced by federal and 

state dairy programs, determine farm prices for the raw milk that is sold for 

use in fluid milk and other dairy products.1

 For example, in recent months, 

a variety of supply and demand forces have come together to significantly 

increase farm milk prices. On the supply side, the available supply of raw 

milk has been reduced by farmers cutting back production due to a 

previous period of low prices and by the closing of the Canadian border to 

replacement cows as a result of concerns about mad cow disease.2

 On the 

demand side, consumer demand for nonfluid dairy products has increased 

as consumers resumed eating out following the attacks of September 11, 

2001, and as dietary trends, such as the rising popularity of lowcarbohydrate diets, have changed. While these forces have been driving 

recent price trends, federal and state dairy programs continue to influence 

milk prices. For example, major domestic programs such as federal milk 

marketing orders (FMMOs) and price supports help individual farmers who 

lack market power compared to other entities such as wholesale 

processors and retailers and help to ensure that farm prices do not fall 

below a minimum level. At the same time, U.S. import restrictions maintain 

domestic dairy prices at levels higher than average international market 

1

Each year the United States processes about 7 billion gallons of the approximately 20 

billion gallons of raw milk into fluid milk products, such as flavored milks, buttermilk, 

whole, 2 percent, 1 percent, and skim milk. The rest of the raw milk supply is used to 

produce manufactured products, such as butter, ice cream, yogurt, powdered milk, and 

cheese.

2

Bovine spongiform encephalopathy (BSE), commonly referred to as mad cow disease, is a 

degenerative neurological disease affecting the central nervous system in cattle.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 95 GAO-05-50 Dairy Industry

prices by limiting the quantities of milk products that are imported into the 

country.

Supply and Demand Forces 

Affect Farm Milk Prices

The quantity of raw milk that dairy farmers supply (production) is 

determined by the operating costs of producing that milk, such as feed and 

fuel,3

 ownership costs for dairying equipment,4 land costs, and labor costs, 

as well as the price that farmers expect to receive for milk (as based on 

demand). Of these costs, the 2002 annual report on the costs of milk 

production in California, the largest milk producing state, showed that the 

highest cost is feed, at 44 percent of milk production costs. Other major 

costs include replacement cows (14 percent), other operating expenses (13 

percent), and labor (11 percent).5

 Milk production can also vary seasonally, 

according to weather, and is affected by farmers’ management practices.

In February 2004, the U.S. Department of Agriculture (USDA) published a 

report on the characteristics and costs of milk production in the United 

States, which found that dairy farmers in the West had a cost advantage 

over farmers in other regions because western operations were appreciably 

larger.6

 Farms with 500 or more milk cows had substantially lower total 

operating and ownership costs, averaging $11.60 per hundredweight of 

milk sold. This cost advantage arises because as herd size increases, 

associated increases in fixed costs, such as capital investments, are spread 

proportionally over a larger amount of production, thereby lowering the 

fixed costs per hundredweight of milk produced. USDA found that the 

average herd size of low-cost operations was more than three times the size 

3

Operating costs include major inputs such as feed, veterinary services and medicine, 

bedding and litter, marketing, fuel, lubricant, electricity, repairs, and interest on operating 

expenses.

4

Ownership costs include the annualized cost of maintaining the capital investment 

(depreciation and interest) in dairy facilities and equipment, and costs for non-real estate 

property taxes and insurance.

5

This labor estimate includes salary, benefits, and all employer taxes for hired labor. If 

family labor were also included, labor would represent over 12 percent of total production 

costs.

6

S.D. Short, U.S. Department of Agriculture, Characteristics and Production Costs of U.S. 

Dairy Operations. Resource Economics Division, Economic Research Service, Statistical 

Bulletin Number 974-6, February 2004.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 96 GAO-05-50 Dairy Industry

of high-cost operations.7 Table 26 shows the average ownership and 

operating costs by region and herd size in 2000.

Table 26: Average Ownership and Operating Costs by Region and Herd Size, 2000

Source: USDA.

a

States in this survey region included parts of Arizona, California, Idaho, Oregon, and Washington.

b

States in this survey region included Michigan and Wisconsin and part of Minnesota.

c

States in this survey region included Connecticut, Maine, Massachusetts, New Hampshire, New 

Jersey, New York, Rhode Island, and Vermont and parts of Maryland, Ohio, and Pennsylvania.

d

States in this survey region included Illinois, Indiana, and Iowa and parts of Kentucky, Minnesota, 

Missouri, Nebraska, Ohio, and South Dakota.

e

States in this survey region included West Virginia and parts of Alabama, Arkansas, Georgia, 

Kentucky, Missouri, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, and Virginia.

The USDA study also reported that while milk is produced in all 50 states, 

the top 5 milk-producing states in 2000—California, Wisconsin, New York, 

Pennsylvania, and Minnesota—accounted for 53 percent of total milk 

produced. Growth in the importance of western regions as major sources 

of milk over the past 25 years is a significant feature of the United States 

dairy industry. For example, in 1975, midwestern states such as Iowa, Ohio, 

and Missouri were prominent among the top 10 dairy producing states. By 

2000, production in Idaho, New Mexico, and Washington State surpassed 

7

The USDA study defined low-cost producers as the 25 percent of milk producers with costs 

of $12.17 or less per hundredweight of milk sold. High-cost producers were defined as the 25 

percent of milk producers with costs of $18.79 or more per hundredweight of milk sold.

Region

Ownership and operating costs per 

hundredweight

Arizona/Las Vegas, Pacific Northwest, 

Californiaa $11.58

Upper Midwestb $14.40

Northeastc $14.44

Centrald $18.09

Mideast/Southeaste $18.23

Herd size

Small (<50) $17.98

Medium (50-199) $15.16

Large (200-499) $13.32

Industrial (>500) $11.60
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 97 GAO-05-50 Dairy Industry

production in these traditional dairy states. Milk production is 

consolidating so that farms with larger numbers of cows account for a 

growing share of production. In 1993, farms with 100 or more cows 

accounted for 14 percent of all U.S. dairy farms, over half of all cows, and 

over 55 percent of the milk produced. As of 2000, these numbers had grown 

to 20 percent of all dairy farms, 66 percent of all cows, and more than 70 

percent of milk produced. Significantly, farms with 500 or more cows 

accounted for 3 percent of all dairy farms, but 35 percent of cows and 31 

percent of milk produced in 2000.

The production of milk has unique characteristics that distinguish it from 

other agricultural products and that cause relatively small changes in 

supply or demand to result in relatively large changes in price, particularly 

at the farm level. Farmers employ specialized assets or equipment to 

produce milk, and they have limited ability to use their farms, cows, and 

equipment for other purposes during periods of low prices. This limited 

flexibility creates a relatively inelastic supply of milk with respect to price.8

Demand for raw milk is mainly derived from consumer demand for fluid 

milk and manufactured milk products.9

 Consumer demand for different 

fluid or manufactured milk products affects the price of raw milk used for 

other products because increased consumer demand for one particular 

product–causing more of that product to be produced--reduces the supply 

of raw milk available for other products, thus increasing the price that 

manufacturers of other products must pay to acquire raw milk. Over the 

long term, per capita demand for fluid milk products has been steadily 

declining, in large part because consumers have substituted carbonated 

soft drinks and other beverages for fluid milk. On the other hand, consumer 

demand for milk products has varied based on dietary considerations, such 

as the rising popularity of low-carbohydrate diets and changes in food 

consumption patterns, such as an increase in the amount of food consumed 

away from the home. Despite some evidence that consumer demand for 

8

Price elasticity of supply refers to the percentage change in the quantity supplied relative to 

a percentage change in the price received for a product, in this case raw milk. Supply is 

price elastic when a proportional change in the quantity supplied of a product exceeds the 

proportional change in its price; supply is price inelastic when a proportional change in the 

quantity supplied of a product is less than a proportional change in its price.

9

Demand for raw milk is also influenced by the costs of transporting, processing, and 

marketing raw milk to produce dairy products for retail sale.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 98 GAO-05-50 Dairy Industry

fluid milk has become more price elastic, it remains relatively price 

inelastic compared to the demand for many other products.10

Given the relative inelasticities of milk supply and demand with respect to 

price, a number of sources indicated that recent changes in the amount of 

raw milk produced, when combined with changes in demand, have affected 

farm prices. After late 1999, farm prices began falling in response to the 

production surplus that existed at that time. In addition, a number of dairy 

experts indicated that following the terrorist attacks of September 11, 2001, 

prices began to fall even further as people stopped eating out as much, 

thereby reducing the demand for manufactured milk products such as 

cheese.11 This reduced consumption compounded the long-term decline in 

demand for fluid milk products. USDA reported that the combination of 

these supply and demand factors was responsible for the low farm prices 

that occurred during 2002 and 2003.

More recently, however, supply and demand conditions have changed to 

produce record high farm prices in 2004. For example, in response to low 

prices during 2002 and 2003, some farmers began to cut back on production 

by reducing the sizes of their herds. However, with the relative price 

inelasticity of milk supplies, one academic expert noted that it can take 12 

to 18 months to achieve a supply response to low prices. During this time, 

the identification of a cow infected with mad cow disease in Alberta, 

Canada, in May 2003, led to a temporary U.S. ban on imports of Canadian 

beef and cattle. This ban included live animals, some of which would have 

been used as replacement cows in U.S. dairy herds. While some beef 

imports have resumed, USDA has not lifted restrictions on imports of live 

cattle.12 Consequently, in June 2004, a report by USDA’s Economic Research 

Service noted that with relatively few expansions in late 2003 and the tight 

supplies of replacement cows, few dairy farmers could increase production 

10Price elasticity of demand refers to the percentage change in the quantity demanded 

relative to a percentage change in the price of a product, in this case fluid milk products. 

Demand is price elastic when a proportional change in the quantity demanded of a product 

exceeds the proportional change in its price; demand is price inelastic when a proportional 

change in the quantity demanded of a product is less than a proportional change in its price.

11According to USDA officials, a decline in the restaurant business began in mid-2001 and 

may have been related to other economic factors, such as falling stock market values and 

corporate scandals.

12Canadian feedlot operators have filed a class-action lawsuit against the United States 

under the North American Free Trade Agreement.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 99 GAO-05-50 Dairy Industry

in response to rising milk prices, a response that usually limits price 

increases.13

Another factor in reducing milk production has been the lower amount of 

bST—a hormone used in milk production—available to U.S. farmers.14

USDA reported that about 2 percent of the U.S. milk supply can be 

attributed to the use of bST.15 However, in January 2004, Monsanto, the 

maker of the hormone, announced that its customers would receive only 

half their normal supply. This reduced availability began March 1 and is 

expected to continue through the end of 2004. Additionally, drought 

conditions in recent years have led to higher feed costs and have negatively 

affected the quality of the feed.16 Finally, some sources identified the 

National Milk Producers Federation’s Cooperatives Working Together 

program as another factor leading to reduced raw milk supplies.17 Since the 

program began in July 2003, cooperatives have tried to reduce raw milk 

supplies by eliminating some dairy herds, decreasing production, and 

increasing exports. USDA estimates indicate that from January through 

June 2004, milk production in the top 20 dairy producing states averaged 

about 1 percent below production levels during the same period in 2003.

While these factors combined to reduce the available supply of raw milk, 

dairy experts indicated that demand for manufactured milk products has 

recovered during 2004. In part, they cited a general economic recovery as 

contributing to this increased demand. They also indicated that people 

have returned to consuming more food away from home, as they did prior 

13“Dairy Markets Adjust, But Are Expected to Remain Tight,” Livestock, Dairy, and Poultry 

Outlook, ERS, LDP-M-120, June 2004.

14USDA’s Animal and Plant Health Inspection Service indicated that use of bovine 

somatotropin (bST) typically increases average milk yield by 10 pounds per cow per day 

over the course of the cow’s entire lactation, or as long as bST continues to be used.

15“Meat Markets Roiled by Disease Outbreaks,” Livestock, Dairy, and Poultry Outlook, ERS, 

LDP-M-116, February 2004.

16Poor quality feed can reduce milk production and may require farmers to supplement their 

feed, thereby raising overall feed costs.

17This initiative is funded by an assessment of $0.05 per hundredweight of milk that 

participating farmers market. The National Milk Producers Federation estimates a $0.59 per 

hundredweight increase in farm income from the program through September 2004. 

However, while some dairy experts indicated that the program has reduced raw milk 

supplies and thus benefited farmers’ income, they also indicated that this estimate could be 

overstated.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 100 GAO-05-50 Dairy Industry

to September 11, 2001. This recovery in demand, coming at a time of 

reduced milk supplies, pushed farm prices to record high levels in April and 

May of 2004. For example, USDA’s market-based announced minimum 

price for milk to be used in manufactured products, such as cheese, was 

$19.66 and $20.58 per hundredweight in April and May of 2004, respectively. 

These prices compare with $9.41 and $9.71 per hundredweight for April and 

May of 2003. More recently, these high prices have started to moderate; the 

comparable announced minimum price for June 2004 was $17.68. However, 

USDA has estimated that average 2004 farm-level prices will be more than 

$3 per hundredweight higher than they were in 2003.

Federal and State Dairy 

Programs and Policies 

Influence Farm Prices

A complex system of programs and policies influences the price of raw 

milk used to produce fluid milk and manufactured products. USDA’s milk 

marketing orders, as well as some states’ dairy programs, attempt to 

stabilize milk marketing conditions by establishing minimum raw milk 

prices and other marketing rules, thus, these programs assist individual 

farmers and dairy cooperatives, which lack the market power of other 

entities such as wholesale milk processors.18 USDA’s price support program 

attempts to ensure that farm prices do not fall below a minimum level, and, 

together with the Milk Income Loss Contract (MILC) program, provides a 

safety net for individual farmers during periods of low prices. These 

programs and other federal dairy policies operate in a broader context of 

trade restrictions, which can limit competition from imported dairy 

products and maintain U.S. prices above average international market 

prices.

Federal and State Milk Marketing 

Orders

In 2003, the price of about 67 percent of the fluid grade milk marketed by 

dairy farmers in the United States was regulated under the FMMO program, 

created in 1933 and administered by USDA.19 Under this program, USDA 

uses national dairy market price information to set the minimum prices 

that must be paid by processors for raw fluid grade milk in specified 

18According to USDA, the objectives of FMMOs are to promote orderly marketing conditions 

in fluid milk markets, to improve the income situation of dairy farmers by establishing 

minimum milk prices, to supervise the terms of trade in milk markets in such manner as to 

achieve more equality of bargaining between farmers and processors, and to assure 

consumers adequate supplies of good quality milk at reasonable prices.

19The 1933 Agricultural Adjustment Act, as amended and reenacted in the Agricultural 

Marketing Agreement Act of 1937, established the federal marketing order agreements.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 101 GAO-05-50 Dairy Industry

marketing areas, or orders.20 Figure 32 shows a map of the current 10 

FMMOs.

Figure 32: Map of Federal Milk Marketing Orders

20Dairy farmers sell two grades of milk. Grade A may be used for fluid consumption or in 

manufactured products. Grade B may be used only for manufactured products. Farmers 

producing Grade A milk must adhere to higher sanitation requirements than for Grade B 

milk. Prior to World War I, much of the milk marketed by farmers did not meet Grade A 

standards. However, by 1999, only about 3 percent of all milk marketed in the United States 

did not meet Grade A standards.

Pacific

Northwest

Upper

Midwest

Appalachian

Southeast

Central

Southwest

Florida

Arizona/

Las Vegas

Mideast

Northeast

Source: GAO, based on USDA Agricultural Marketing Service Dairy Programs.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 102 GAO-05-50 Dairy Industry

Under the FMMO program, USDA has a classified pricing system for setting 

minimum prices for milk on a monthly basis, based upon the intended use 

of the milk, as shown in table 27. While there is some variation among the 

methods used for setting prices in different orders, in general, FMMO class 

prices are determined by formulas with milk component values derived 

from wholesale dairy product prices. For example, Class III formulas use 

weekly average butter, cheese, and dry whey prices to determine values on 

a monthly basis for butterfat, protein, and nonfat solids. The Class IV 

formulas use weekly average butter and nonfat dry milk prices to 

determine values on a monthly basis for butterfat and nonfat solids, 

respectively. The Class II price is determined by adding a fixed amount—a 

Class II differential of $0.70 per hundredweight—to the advanced Class IV 

skim milk value, while the Class I price is determined by adding a Class I 

differential to the higher of the advanced Class III or IV skim milk values.21

The Class I differentials vary by order. These differentials were, and to 

some extent remain, designed to represent the cost of transporting milk 

from areas with a surplus—traditionally the Upper Midwest region—to 

areas with a deficit, when necessary to meet the demands for fluid milk 

products. Because these differentials vary among orders, Class I prices 

differ from one marketing order to another.

Table 27: USDA’s Milk Classes Used for Setting Milk Prices

Source: GAO presentation of USDA data.

Dairy farmers selling raw milk to manufactured or fluid milk processors 

regulated by an FMMO receive an average, or “blend,” price that is the 

weighted average of the prices of Class I through IV milk. The weights are 

determined by the amount of milk sold in each class in the marketing order. 

21Basing Class I and II prices on the advanced Class III and IV skim milk values ensures that 

minimum prices of raw milk used in these products will be known in the month preceding 

the month to which they apply.

Class Usage (examples)

I Fluid milk for drinking purposes

II Soft manufactured products, such as cream products, cottage cheese, ice 

cream, and yogurt

III Cream cheese, other spreadable cheeses, and hard cheese

IV Butter and dried milk products, such as nonfat dry milk
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The average price farmers receive, therefore, depends in part on the extent 

to which the total raw milk supply in a specific order is used to make fluid 

milk, as opposed to the three classes of manufactured products. Dairy 

farmers located in a milk marketing order sometimes ship their milk to 

another order to obtain a higher price.22 If the farmer meets the receiving 

milk marketing order’s shipping requirements, all of that farmer’s milk, not 

only the shipped milk, can qualify for that order’s blend price.23 However, 

farmers must consider whether the benefit of receiving a higher blend price 

outweighs the cost of transporting a sufficient amount of milk to qualify for 

the receiving order’s blend price.

To generate the money paid to farmers, processors pay into, or draw from, 

a federal order “pool” based on the value of the use for which they are 

buying the raw milk.24 Fluid milk processors are required to participate in 

the federal order pool if they are covered by one of the federal milk 

marketing orders. Processors of manufactured products are not required to 

participate in the pool. Under the classified pricing system, raw milk used 

in fluid products is valued more highly. Therefore, the fluid milk processors 

typically pay money to the pool, while those producing other products 

typically draw money from the pool. This draw represents a benefit to 

processors of manufactured milk products for serving as a reserve supply 

plant for that order’s Class I market. In part, a processor’s payment or draw 

depends on the producer price differential, a measure of the difference 

between the value of that processor’s use of raw milk as determined by the 

market and the value if all of that processor’s raw milk were used in Class 

III products. In times of significant price volatility, it is possible for the 

producer price differential to be negative, so that some processors of 

manufactured products would have to pay into the pool. In such cases, 

22Farmers not located in a federal order can also ship their milk into a federal order. While 

farmers can ship milk independently, generally it is dairy cooperatives acting on behalf of 

their farmer members that assemble and ship milk to processors.

23Each order has its own requirements, such as the minimum amount of raw milk required to 

be shipped to processing plants participating in that order to qualify for its blend price. 

Entities regulated by the FMMO program have the ability to petition USDA for a hearing to 

amend order regulations, including the requirements that outside farmers must meet when 

shipping their milk to another order.

24The term “pool” is used interchangeably to refer to both the amount of money generated by 

applying the minimum federal order class prices to the amount of milk used in each class 

within an order and the raw milk associated with the order for which farmers and 

processors are able to share payments from the amount of money generated by the order 

system.
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some of these processors choose not to participate in the pool, or de-pool 

their milk, because they would be required to pay into the pool instead of 

receiving a draw.

Some states, such as California, Maine, Nevada, New York, Pennsylvania, 

and Virginia, have established their own minimum farm-level milk pricing 

programs that cover all or portions of their states. These states have 

established commissions or boards to perform functions similar to those of 

USDA. For example, Virginia’s milk commission, created in 1934, 

establishes monthly farm prices to ensure dairy farmers an adequate return 

on their investment and to preserve market stability. Similarly, Nevada’s 

dairy commission, established in 1955, sets minimum prices for raw milk 

sold to processing facilities located within that state.

Dairy Price Support Program The dairy price support program, established in 1949, supports farm prices 

by providing a standing offer from USDA’s Commodity Credit Corporation 

(CCC) to purchase butter, cheese, and nonfat dry milk at specified prices.25

The prices offered for these dairy products are intended to provide 

sufficient revenue so that processors of these products can pay farmers, on 

average, a legislatively set support price for raw milk. Since 1999, the 

support price has been set at $9.90 per hundredweight.26

By offering to purchase as much butter, cheese, and nonfat dry milk as 

processors offer to sell at specified prices, the price support program sets a 

floor on the price of these commodities and, thus, indirectly on the raw 

milk used to produce them. Because processors are not required to sell to 

the CCC and milk processing costs vary, farmers may receive prices that 

are either above or below the support price. However, manufactured 

product prices generally will not fall below the floor for very long. Also, 

because the price for raw milk used for fluid purposes under the FMMO 

program is based in part on the price of raw milk used for manufacturing 

purposes, the price support program indirectly influences the price that 

farmers receive for raw milk used for fluid purposes as well.

25The dairy price support program was established by the Agricultural Act of 1949, 

legislation that also expanded the CCC’s role as a government-owned entity to carry out 

price support activities for a variety of agricultural commodities.

26The Federal Agriculture Improvement and Reform Act of 1996 required that the support 

price be reduced $0.15 per year from $10.35 in 1996 to $9.90 per hundredweight in 1999.
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The Secretary of Agriculture can adjust—or tilt—the related CCC purchase 

prices for butter and nonfat dry milk and still achieve the target support 

price for raw milk used in manufactured products. These products are 

considered joint products manufactured from the same 100 pounds of 

milk.27 Therefore, by increasing the support price of butter while lowering 

the support price of nonfat dry milk, or vice versa, USDA is able to adjust 

the CCC purchase prices, while maintaining the overall support price. The 

ability to adjust the relative purchase prices of these products is important 

for correcting imbalances in the CCC’s purchases of milkfat (butter) and 

nonfat solids (nonfat dry milk). Failure to correct for such imbalances can 

create an incentive for farmers to expand production and may alter the 

flow of milk to alternative uses. The 1990 Farm Bill authorized the 

Secretary of Agriculture to adjust the tilt twice annually to limit the 

accumulation of significant government stocks of certain commodities.28

As market prices rise, the support program allows the CCC to release its 

commodity stocks if the market price for a particular commodity exceeds 

that commodity’s purchase price. In this respect, the program helps to 

decrease volatility in milk prices with regard to high-price periods as well 

as low-price periods.

Milk Income Loss Contract 

Program

In 2002, the MILC program began to provide countercyclical payments 

directly to farmers during periods of low prices.29 The MILC program 

provides support to farmers when the price of Class I milk in Boston falls 

27In fact, most of the butter manufactured in the United States is produced independent of 

nonfat dry milk; however, the assumption correctly implies that the relative price 

relationship between butter and nonfat dry milk must conform to relative yields from raw 

milk.

28Food, Agriculture, Conservation and Trade Act of 1990, Pub. L. No. 101-624 (codified at 7 

U.S.C. §7251(d)). Butter/nonfat dry milk tilts were common in the early 1990s—several tilts 

were made between April 1990 and July 1993—to account for market conditions in which 

butter was in surplus relative to nonfat dry milk.

29The MILC program, also known as the National Dairy Market Loss Assistance Payment 

program, was authorized in the Farm Security and Rural Investment Act of 2002. USDA 

began accepting applications for the MILC program in August 2002 (payments were made 

retroactively to December 1, 2001) and will continue to do so until September 30, 2005.
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below $16.94.30 MILC payments are equal to 45 percent of the difference 

between $16.94 and the lower Boston Class I price. Farmers in all regions 

of the country have access to payments under this program, but only 2.4 

million pounds of milk per farm are eligible for payments during each 

federal fiscal year. Farmers may choose the month that they begin 

accepting their payments.31 This discretion may enable farmers producing 

more than 2.4 million pounds of milk per year to target their MILC 

payments during the lowest-price periods of the year to maximize the MILC 

payments they receive before reaching the cap on eligible production.

Trade Restrictions and Export 

Incentives for Dairy Products

According to some government and academic experts, trade restrictions 

have the greatest effect of any federal policy on farm milk prices. Trade 

restrictions maintain U.S. prices above average international market prices 

by restricting the amount of imports, particularly of manufactured dairy 

products, that enter the country.32 In other countries, costs of production 

may be lower, or exports may be more heavily subsidized, possibly 

allowing these countries to export products to the United States at 

competitive prices. Thus, without trade restrictions, manufactured 

products from these other countries might enter the United States in 

greater quantities. This increased supply of manufactured products would 

be expected to decrease the demand for domestic raw milk and lead to 

lower farm prices. Without these trade restrictions, other dairy programs, 

such as the price support program, might not be feasible because lower 

manufactured product prices resulting from international competition 

30This price is the same price that was in place when the Northeast Interstate Dairy Compact 

was effective. The compact included the six New England states—Connecticut, Maine, 

Massachusetts, New Hampshire, Rhode Island, and Vermont. Legislative authority for the 

compact expired at the end of September 2001. MILC serves as an alternative to regional 

dairy compacts and ad hoc emergency payments to farmers.

31However, this discretion is limited. USDA regulations prohibit a farmer from selecting a 

month to receive payments if the month has already begun, if the month has already passed, 

or during which no milk was produced. A farmer also cannot change a previously selected 

start month after the 15th of the month before the month selected. Furthermore, once 

monthly payments begin, the farmer has no discretion in determining which month or 

months to receive payments.

32Between January 1998 and June 2004, U.S. prices remained above average international 

market prices reported by USDA’s Foreign Agricultural Service for four dairy commodities 

whose prices are tracked internationally: butter, cheese, nonfat dry milk, and whole milk 

powder. During this time, U.S. prices averaged between 103 to 125 percent higher for butter, 

44 to 58 percent higher for cheese, 24 to 35 percent higher for nonfat dry milk, and 62 to 74 

percent higher for whole milk powder.
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could trigger an increase in purchases by the CCC, which could render the 

program prohibitively expensive.

The primary U.S. international trade restriction is the tariff-rate quota, 

which is the primary international trade restriction allowed under current 

international agreements. USDA’s Foreign Agricultural Service uses 

licensing to administer a tariff-rate quota system for most dairy products. 

Under tariff-rate quotas, a low tariff rate applies to imports up to a 

specified quantity, and a higher tariff rate applies to any imports exceeding 

that amount. These higher over-quota tariff rates generally limit trade to 

within quota levels. Quota rates and quantities vary by product.

Another aspect of U.S. trade policy that affects farm prices is the Dairy 

Export Incentive Program (DEIP), an initiative that aims to help exporters 

of certain U.S. dairy products–specifically, nonfat dry milk, butterfat, and 

various cheeses–meet prevailing world prices for targeted dairy products 

and destinations.33 A major objective of the program is to develop export 

markets for dairy products where U.S. products are not currently 

competitive. Under the program, the Foreign Agricultural Service pays cash 

to exporters as bonuses, allowing them to buy dairy products at U.S. prices 

and then sell them abroad at lower international prices. DEIP could affect 

farm prices primarily by increasing demand for dairy products through 

export subsidies.34 According to a 2002 report by the Congressional 

Research Service, past studies have indicated that DEIP subsidies have at 

times enhanced farm prices; for example, these studies indicated that DEIP 

subsidies enhanced farm prices by $0.30 to $0.50 per hundredweight in 

1992.35 Additionally, in May 2003, the National Milk Producers Federation 

33The Dairy Export Incentive Program was introduced in the Food Security Act of 1985, Pub. 

L. No. 99-198, Title I, §153 (1985) (codified at 15 U.S.C. §713a-14) and has been reauthorized 

since then in successive farm bills. Most recently, the Farm Security and Rural Investment 

Act of 2002 extended the program to 2007.

34As is the case with other export subsidy programs, the degree to which demand is 

increased under a program such as DEIP depends on the degree to which the exports under 

the program are additional to those that would have occurred in the absence of the program.

35However, the Congressional Research Service study also noted that while DEIP may help 

to raise farm prices when milk markets are relatively balanced, the program would not be 

likely to have such impacts when supplies are relatively tight because the industry would 

not be willing to give up products for export that were needed to supply the domestic 

market. Geoffrey S. Becker, “Agricultural Export Programs: The Dairy Export Incentive 

Program (DEIP),” Congressional Research Service Report for Congress, September 18, 

2002.
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testified that the subsidies for 5,000 metric tons of butterfat provided by 

DEIP in March 2003 increased wholesale butter prices by an estimated 

$0.06 per pound.36 This price increase boosted farm income by between $20 

million and $30 million. DEIP can also help lower government costs by 

reducing the amount of product purchased under the price support 

program to the extent that savings in the price support program exceed the 

costs of subsidies. Given recent market conditions, DEIP has primarily 

been used to encourage exports of nonfat dry milk and cheese,37 and for the 

most part, from 1998 through 2002 the program supported exports of these 

products to the maximum extent allowable under international trade 

commitment limits.38

Services Provided by 

Cooperatives, Market 

Structure, and 

Collective Action Can 

Influence the Price of 

Milk at the Cooperative 

Level

Milk reaches the consumer through a variety of pathways; however, most 

milk produced by dairy farmers in the United States is marketed through 

dairy cooperatives.39 Dairy cooperatives can either sell, or arrange the sale 

of, raw milk purchased from farmers to wholesale milk processors, or they 

can process it into fluid and manufactured milk products and distribute 

them to retail outlets.40 As part of sales to wholesale milk processors, 

cooperatives negotiate with the processors for over-order premiums, which 

represent the difference between the prices charged to the wholesalers and 

regulated minimum prices, in areas with federal or state marketing orders 

or regulations. The difference between the price at which cooperatives sell 

raw milk to wholesale fluid milk processors and the farm price for fluid 

36This testimony was for the U.S. House of Representatives, Committee on Agriculture, 

Subcommittee on Department Operations, Oversight, Nutrition, and Forestry.

37DEIP assisted exports of butterfat have varied depending on market conditions.

38In some years, such as 1998 and 1999, actual shipments appeared to exceed the World 

Trade Organization (WTO) maximum. This excess occured because of provisions that 

enabled unused quantities from previous years to be rolled over into future years. Limits 

established by U.S. trade agreements are explained in greater detail in appendix VII.

39Dairy farmers who produce the raw milk used in fluid and manufactured products can (1) 

market it through dairy cooperatives, (2) sell it directly to wholesale milk processors, or (3) 

process it for direct sale to consumers.

40See GAO, Dairy Industry: Information on Prices for Fluid Milk and the Factors That 

Influence Them, GAO/RCED-99-4 (Washington, D.C.: Oct. 8, 1998) and GAO, Dairy 

Industry: Information on Marketing Channels and Prices for Fluid Milk, GAO/RCED-98-

70 (Washington, D.C.: Mar. 16, 1998) for more information on the role of cooperatives and 

other entities in the marketing of fluid milk.
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milk is influenced by the costs of services that cooperatives provide to their 

members and to their buyers, the relative market power of cooperatives 

and fluid milk processors, and the effects of collective action taken by 

dairy cooperatives in marketing their members’ milk.

Costs of Services Provided 

by Cooperatives Influence 

Milk Prices

Over-order premiums, in part, compensate cooperatives for the services 

they provide to their members and on behalf of their members to 

wholesalers. Some distinctive features of cooperatives include member 

ownership and control, at-cost services for members, and distribution of 

income to members on the basis of patronage. Farmers join dairy 

cooperatives to guarantee a market outlet for their milk, to gain bargaining 

power to obtain the best price in the market, to have their milk marketed 

efficiently, with the assurance that their milk will be accurately weighed 

and tested, and to be effectively represented in legislative, regulatory, and 

public relations matters. Most dairy cooperatives require farmers to sign a 

1-year membership agreement that commits them to market all their milk 

through the cooperative.41

Cooperatives operate like corporate businesses to perform services for 

their members. For example, Dairy Farmers of America, the largest dairy 

cooperative in the country, serves almost 23,000 members, producing about 

21 percent and marketing about 33 percent of the milk in the United States. 

According to the cooperative’s Web site, the cooperative provides a variety 

of services to its members, including the following:

• insurance—medical programs, dental/vision plans, and life insurance 

available to members via a milk check deduction;

• direct deposit—direct deposit of members’ milk checks, ensuring that 

farmers’ pay checks will be available within 24 hours of the pay date;

• forward contracting—a marketing service that allows members to 

protect themselves against price volatility by locking in the future sale 

price of their milk several months before it is produced; and

• financing services—loan packages for cattle, equipment, and operating 

expenses.

41Typically, these agreements are self-renewing.
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In some cases, dairy farmers pay on a per-use basis for the services they 

receive. However, cooperatives may also try to offset the costs of their 

services through negotiations with wholesale milk processors for overorder premiums.

Over-order premiums also compensate dairy cooperatives for a number of 

services that they provide to fluid milk processors on behalf of their 

members. Generally, these services include (1) transporting milk from 

different milk-producing areas, (2) scheduling—or balancing—milk 

deliveries to coincide with demand, and (3) standardizing the component 

content of milk deliveries. Different cooperatives also provide additional 

services for fluid milk processors. For example, one cooperative we 

contacted noted the rigorous quality control procedures it performs on its 

members’ milk. According to the cooperative official, these efforts allow 

the cooperative to market its members’ milk as better quality, potentially 

helping the cooperative negotiate higher over-order premiums. Officials 

from another cooperative said that a major component of the costs of 

services provided by cooperatives is balancing the delivery of raw milk 

supplies to processors’ plants. At certain times processors’ plants have 

surging demand for raw milk, while at other times the plants are empty. In 

addition, supply disruptions, such as labor strikes, create significant 

balancing disruptions. In this environment, few, if any, fluid milk 

processing firms have the capital (plants to make cheese and other 

products during periods of low fluid demand) to assume the risks inherent 

in balancing, and so in most cases this responsibility is met by the 

cooperatives.

Relative Market Power of 

Cooperatives and 

Processors Influences Milk 

Prices

Historically, farmers produced and distributed fluid milk as well as some 

manufactured products. Milk is a highly perishable product that is bulky to 

transport. Traditionally, this left farmers dependent on local markets for 

the sale of their milk. The role of dairy cooperatives developed as farmers 

faced greater demand for fluid milk and dairy products and the number of 

farmers who processed and distributed their own milk products declined. 

Instead, specialized firms began taking on the role of processing fluid and 

manufactured milk products and marketing them for sale to consumers. 

However, in this environment, there were many more farmers than 

processors, so processors had the opportunity to bargain with different 

farmers to obtain a lower price for their raw milk supplies. In this situation, 

farmers were at a disadvantage. Consequently, cooperatives took on the 

role of collecting raw milk from farmers and distributing it to processors. 

By doing so, cooperatives helped to balance the bargaining power between 
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farmers and processors. The 1922 Capper-Volstead Act provides limited 

antitrust immunity to cooperatives that meet certain requirements under 

certain conditions and gives farmers an opportunity to work together in 

setting raw milk prices, including bargaining for market premiums. Thus, 

over-order premiums, in part, reflect market power acquired by 

cooperatives relative to processors.

Since our June 2001 report, the concentration of dairy cooperatives has 

increased, with the potential effect of enhancing their market power in 

negotiations with processors. In 2001, we reported that 83 percent of the 

milk produced in the United States was marketed by cooperatives. 

However, USDA recently reported that in 2002, the share of milk sold to 

processors and other distributors by cooperatives reached 86 percent of all 

the milk produced in the United States.42 Cooperatives attained this market 

share despite a 13 percent decrease in the number of dairy cooperatives 

between 1997 and 2002. During this time the amount of member-produced 

milk marketed by the eight largest dairy cooperatives grew from 52 to 63 

percent of the total volume of milk marketed by cooperatives. This 

translated into an increase from 42 to 52 percent of the total volume of milk 

produced in the United States.

A number of dairy experts cited the need to offset gains in market power 

made by increasingly concentrated firms at the wholesale processor and 

retail levels of the milk marketing chain as a key factor in the continued 

concentration of cooperatives. The greater the percentage of the milk 

supply that a cooperative markets, the greater its ability might be to obtain 

higher over-order premiums in negotiations with wholesale processors. On 

the other hand, one academic source questioned the extent to which 

increased concentration is enhancing the market power of dairy 

cooperatives, particularly over the long term. He noted that although Dairy 

Farmers of America has been consolidating its control over milk supplies in 

some regions, farmers and cooperatives have been able to command larger 

over-order premiums in the East and Upper Midwest regions—where the 

cooperative’s presence is not as strong—than in the West, where milk 

supplies have been increasing. Other sources noted that competition still 

exists among cooperatives and independent dairy farmers and that this 

competition prevents even larger cooperatives from obtaining excessively 

high over-order premiums.

42K. Charles Ling, Marketing Operations of Dairy Cooperatives, 2002, USDA/Rural 

Business-Cooperative Service, Research Report 201, February 2004.
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Collective Action by 

Cooperatives Influences 

Milk Prices

Another factor in determining the over-order premiums received by 

cooperatives for raw milk is collective action taken by cooperatives. 

Cooperatives work together to try to set prices by coordination allowed 

under the protection afforded by the Capper-Volstead Act. For example, 

officials with Dairy Farmers of America said that a major factor in the price 

of milk at the cooperative level is the action of marketing agencies 

composed of cooperatives. Marketing agencies behave like cartels and 

announce prices for their cooperative members. In most cases these 

agencies set prices for raw milk used in fluid milk and other products. Most 

of the prices announced by the marketing agencies represent the minimum 

federal order prices; additional charges may be added representing the 

costs of services provided by the cooperatives to the processors.

Representatives of Dairy Farmers of America said that there are marketing 

agency agreements in most major markets except in the Pacific Northwest 

and that for the most part, cooperatives participate in marketing agencies. 

They further stated that the use of marketing agencies has become more 

common in recent years. The marketing agencies may also market milk for 

independent farmers. The officials noted that while cooperatives and 

independent farmers can choose not to participate in the marketing 

agencies, experience has shown that as more producers choose to market 

milk outside the system, the marketing agencies face significant 

competition and prices fall. Eventually, if the prices get low enough, the 

producers have an incentive to work together again.

In an alternative type of collective action, three cooperatives—the Dairylea 

Cooperative, Dairy Farmers of America, and St. Albans Cooperative 

Creamery—established a milk marketing organization called Dairy 

Marketing Services. According to a Dairy Marketing Services official, the 

organization was formed because the cooperatives realized that they 

needed more market power to compete with increasingly concentrated 

processors and retailers. Cooperatives such as Dairylea, or individual 

farmers, establish contracts with Dairy Marketing Services to market their 

milk. Dairy Marketing Services markets about 16 billion pounds of milk 

annually for farmers in the Northeast area that extends from Maine to 

Maryland, and includes a small area in Ohio. The official estimated that this 

quantity represents about 45 percent of the milk marketed in the Northeast 

and is produced by some 10,000 to 11,000 farmers.

The Dairy Marketing Services official stated that the organization has been 

able to carve a niche for itself in the milk marketing chain by convincing 

processors that it is more efficient for them to have Dairy Marketing 
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Services arrange to have raw milk transported from the farm to the plant 

and allow the processors to focus on processing milk. As a result, Dairy 

Marketing Services has been able to obtain contracts from a number of 

major processors in the Northeast, including Dean Foods, Crowley Foods, 

and Kraft, to ensure an adequate supply of milk for their plants. 

Additionally, Dairy Marketing Services provides specialized services for 

farmers such as health insurance and workmen’s compensation, a livestock 

purchasing service, and risk management operations for farmers engaged 

in forward contracting. Although we were unable to confirm the effects 

that Dairy Marketing Services’ efforts have had, the official stated that the 

organization has provided higher over-order premiums and lower 

transportation charges for its participating cooperatives and farmers than 

would have otherwise been the case.

Input Costs, Service 

Levels, Innovations, 

and Market Structure 

Influence Wholesale 

Fluid Milk Prices

The difference between the price at which wholesale fluid milk processors 

sell fluid milk products to retail firms and the price they pay for raw milk is 

influenced by changes in input costs, such as fuel, labor, packaging, 

transportation, and capital expenses. These costs, in turn, are affected by 

recent innovations that have increased efficiency and lowered costs of fluid 

milk processing, as well as by the level of service that fluid milk processors 

provide to retailers. For example, in addition to shipping the products to 

retailers, some wholesalers provide in-store services, including unloading 

the milk on the store dock, restocking the dairy case, and removing 

outdated or leaking containers. The difference between what fluid milk 

processors pay for raw milk and the wholesale price they charge their retail 

customers is also influenced by continued structural change in the fluid 

milk processing industry, including a steady increase in firm consolidation 

and the market share of some firms. While there have been many reasons 

for these trends, the effects on the market and fluid milk prices at this level 

are unclear.

Input Costs, Service Levels, 

and Innovations Influence 

Wholesale Fluid Milk Prices

Several fluid milk processors stated that the cost of raw milk, and, in 

particular, the federal order minimum price, was the single most important 

influence on wholesale milk prices. We estimate that the price of raw milk 

ranges from about 60 to 70 percent of the wholesale price of 2 percent milk. 

As such, the wholesale price that processors charge would be directly 

linked to the Class I federal order price on a year-to-year basis, with 

adjustments for over-order premiums and other inputs. However, a variety 

of other input costs can also affect the price at which fluid milk processors 
Appendix V

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sell fluid milk products to retailers. Some sources indicated that costs of 

inputs other than raw milk have been increasing in recent years.43 As one 

executive of a milk-processing firm explained, the primary input costs, 

apart from raw milk, include labor and energy. A 2002 study examining 

changes in fluid milk processing plants located in the state of Maine found 

that total processing costs rose at an annual rate of about 2.4 percent 

(adjusted for inflation) from 1993 through 2000.44 The study indicated that 

economywide wage inflation plus a dramatic increase in health care 

premiums paid by employers drove labor costs above the costs of other 

inputs, such as land and building expenses and plant supplies. Equipment 

costs increased 10.9 percent per year with investments in plant automation 

and greater reliance on information technologies. Also, fuel costs increased 

by 4.6 percent per year, reflecting economywide trends in energy costs. 

Moreover, while the cost of operating capital constituted only 1.0 percent 

of processing costs, it increased substantially during this period due to an 

increase in the short-term lending rate. Table 28 displays the percentage 

change in fluid milk processing costs in Maine reported in this study for 

each cost category from 1993 through 2000.

43We could not identify any recent studies that have examined milk processing and 

distribution costs on a national level.

44T.J. Dalton, G.K. Criner, and J. Halloran, “Fluid Milk Processing Costs: Current State and 

Comparisons,” Journal of Dairy Science, Vol. 85, No. 4 (2002): 984-991. The study used costengineering methods to look at four state-of-the-art fluid milk processing plants in Maine 

ranging from 335,000 gallons per week to 600,000 gallons per week.
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Table 28: Change in Costs for Fluid Milk Processing Plants in Maine, 1993 through 

2000

Source: GAO analysis of data from Dalton et al. (2002).

Note: Percentages calculated based on 2000 dollars. Percent of total cost in 2000 was calculated by 

GAO and is rounded to the nearest percent. Annual rates of change and total change from 1993 

through 2000 are from Dalton et al. (2002).

Changes in the level of service that some fluid milk processors provide 

their retail customers have increased the efficiency of the dairy supply 

chain, thus potentially influencing wholesale milk prices. For example, 

some fluid milk processors have begun to undertake supply-chain 

management for their retail customers.45 According to a number of retailers 

and processors, supply-chain management commonly involves shared 

computer systems, which, in the vertical marketing chain, allow processors 

to more efficiently manage the processing and transporting of fluid milk 

products. One processor indicated that it uses an electronic data transfer 

system to manage supplies for certain retailers. In particular, this system 

allows the processor to contract for a certain number of loads of milk per 

day. Further, according to a recent presentation given by company officials, 

Dean Foods’ national, refrigerated, direct-store-delivery system allows it to 

deliver fluid milk to its customers with increased route network efficiency 

Cost category

Percent of total 

cost in 2000 (%)

Annual rate of 

change (%)

Total change from 

1993 through 

2000 (%)

Electricity 5.0 1.6 12.0

Equipment 20.0 10.9 106.0

Fuel oil 1.0 4.6 37.0

Labor 31.0 3.7 29.0

Land and building 13.0 3.8 30.0

Operating capital 1.0 15.5 175.0

Product loss 1.0 0.4 3.0

Supplies 27.0 (3.0) (19.0)

Water and sewer 1.0 (0.3) (2.0)

Total 100 2.4 18.0

45Supply-chain management is an attempt to coordinate processes involving producing, 

shipping, and distributing products, generally performed only by large corporations with 

large suppliers.
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Moves from the Farm to the Consumer

Page 116 GAO-05-50 Dairy Industry

and without customer disruption.46 Dean Foods operates 129 fluid 

processing plants in 39 states, servicing more than 150,000 customers coast 

to coast via its direct-store-delivery system of more than 6,000 routes.47

By allowing fluid milk products to move more efficiently from the 

processor to the retailer, these kinds of services help to ensure quality and 

reduce waste and costs along the supply chain. To the extent that 

processors benefit from the reduced costs of supplying retailers with fluid 

milk products, the provision of these services could have a downward 

effect on wholesale prices. On the other hand, these services could provide 

value to retailers for which they might be willing to pay a higher price when 

acquiring fluid milk products. Therefore, the net effect on wholesale prices 

of the level of service that processors provide to retailers is uncertain.

Additionally, innovations in technology can affect prices at the wholesale 

milk processing level. For example, changes in processing technology, such 

as more automated equipment, can improve the efficiency of processing 

operations and, to the extent that processing firms are successful at 

reducing their costs through innovative practices, they may be able to 

reduce their prices. A representative of one fluid milk processor explained 

that improvements in processing and packaging technology have doubled 

and tripled output. Also, a representative of one firm that processes milk 

for sale in its own retail stores stated that the firm has dedicated a large 

contingent of people toward the goal of reducing milk losses at its 

processing plants and has been successful at cutting these losses in half. He 

noted that a driving force behind these efforts is to try to alleviate increases 

in other input costs, such as labor.

With innovations in technology, the fluid milk processing industry has also 

invested in innovative new products. By developing products with 

extended shelf lives, processors can potentially save shipping costs, 

leading to lower wholesale prices. For instance, the dairy processing 

industry’s collective investment in extended shelf life, ultra high 

temperature, and aseptic packaging technology allows fluid milk products 

46Dean Foods Company, Presentation at the Consumer Analyst Group of New York 

Conference, Scottsdale, Arizona, February 17, 2004. Available online at 

http://www.deanfoods.com/investors.

47Dean Foods Annual Report (2001), 18.
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Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

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to reach the end user more efficiently while maintaining quality.48 The 

benefits to processors and their retailers include the ability to ship these 

products longer distances because they are able to endure more stress than 

traditionally processed milk.

Market Structure in the 

Fluid Milk Processing 

Industry Can Influence 

Wholesale Prices

Since the 1960s, there has been long-term structural change in the 

wholesale fluid milk processing industry as a continuously declining 

number of firms have processed an increasing average volume of milk.49

Structural change in the processing industry has been driven by economies 

of size, technological changes, high concentration at other levels of the 

milk marketing chain, and rapid consolidation into fewer and fewer firms.50

While structural change can lead to lower prices due to cost reduction from 

greater efficiency in production, it can also lead to higher market 

concentration, particularly in individual markets. In general, high and 

increasing market concentration can result in greater market power, 

potentially allowing firms to increase prices above competitive levels. 

Accordingly, the net impact of increased market concentration on 

wholesale prices can be either positive or negative.

In recent years, through aggressive acquisitions of independent dairy 

processing plants, a handful of fluid milk processing firms have changed 

the market structure of the dairy industry at the wholesale level. These 

companies have generally pursued the business strategy of acquiring strong 

regional dairy processing plants so that they can strengthen their presence 

in existing markets, while expanding their geographic coverage to a 

national level. The acquisition and consolidation trend at the wholesale 

level has affected market structure by leading to higher market 

48Aseptic packaging, commonly called “drink boxes,” is the result of a beverage and liquid 

food system that allows perishable food products to be distributed and stored without 

refrigeration for periods up to six months or more. It is used to preserve and package 

everything from milk, juice, and drinks of all kinds to scrambled egg mix, tomato sauce, 

soups, and other liquid foods.

49Structural change is characterized by broad and long-term changes in key industry 

characteristics, frequently including consolidation and changes in concentration, methods 

of vertical coordination, and the mix of products and services offered by firms in an 

industry.

50Don P. Blayney and James J. Miller, “Concentration and Structural Change in Dairy 

Processing and Manufacturing,” Paper presented at the 10th Annual Workshop for Dairy 

Economists and Policy Analysts, Memphis, Tennessee, April 2003.
Appendix V

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Moves from the Farm to the Consumer

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concentration for fluid milk processors in some markets. One common 

measure of market concentration is the four-firm concentration ratio–the 

percentage of sales by the top four firms in a market. According to the 1997 

Census of Manufacturers, the market share for the top four fluid milk 

processors in the nation was about 21 percent. However, the market share 

for top fluid milk processors at the local level was significantly higher. For 

example, in our June 2001 report, we found that in Boston, Massachusetts, 

the market share of the top four fluid milk processors increased from 66 

percent in December 1997 to 88 percent in December 1999.51

Since our last report in 2001 on fluid milk prices, this trend has continued, 

and there have been several significant mergers, acquisitions, and joint 

ventures that have further consolidated the industry. For example, in late 

2001, Dean Foods merged with Suiza, Inc., bringing together the number 

one and two firms in terms of market share in the processing industry. 

Then, in July 2002, the Land O’ Lakes dairy cooperative sold its fluid milk 

operations to Dean Foods. We estimate that these acquisitions and mergers 

gave Dean Foods about a 27 percent market share nationally in fluid milk 

products in 2002. Others have estimated that Dean Foods’ market share is 

about 35 percent nationally and approximately 70 percent in New 

England.52 As of 2002, we estimate that the market share of the top four 

fluid milk processors has increased to approximately 47 percent.53 As seen 

in figure 33, with increased concentration, the number of fluid milk 

processing plants has gone from 1,066 plants producing an average of 50.1 

million pounds of milk per year in 1980 to 385 plants producing an average 

of 154.2 million pounds per year in 2002.

51See GAO-01-561, appendix VI, for more information on consolidation at the wholesale milk 

processor level.

52As a result of a divestiture plan stemming from the Dean-Suiza merger, the second largest 

fluid milk processor, the National Dairy Holdings Group, was created.

53We estimated the four-firm concentration ratio using expert opinion from conversations 

with dairy experts at USDA on the leading four fluid milk processing firms, estimates of 

company sales from the August 2003 Dairy Foods Magazine, “The Dairy 100: The List,” and 

the total value of shipments from the 2002 Economic Census, Industry Series (September 

2004) for fluid milk manufacturing. We also adjusted company sales listed in Dairy Foods, 

per company annual statements and expert opinion, for the percent of sales that would 

account for products such as ice cream and cheese. To make our estimate consistent with 

the 1997 Economic Census four-firm concentration ratio, we also included the same 

categories for fluid milk manufacturing, such as cottage cheese and yogurt, along with fluid 

milk processing, that went into this calculation. This figure does not include the sales that 

firms may have from various joint ventures.
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Figure 33: Number of Fluid Milk Processing Plants and Volume of Milk Processed per Plant, 1980 through 2002

Such increased concentration of fluid milk processing firms, particularly in 

individual markets, can increase the price at which fluid milk is sold to 

retailers because market concentration can provide these firms greater 

market power. Thus, some analysts viewed the trend toward greater 

concentration in the wholesale market as a means toward greater 

dominance and market power in selling fluid milk to retailers. Further, they 

noted that increased market power can also benefit processors in their 

negotiations for raw milk supplies from cooperatives and independent 

farmers. For example, the exercise of market power could allow 

processors to negotiate more favorable supply contracts, which could drive 

down input prices and increase the spread between wholesale and retail 

prices. Other economists who study the causes of market concentration 

described a phenomenon called the “replication hypothesis”—as 

concentration grows at one marketing level, it is likely to be replicated at 

other marketing levels. For instance, high market concentration at the 

retail level can lead to greater concentration at the fluid milk processor 

level, and higher concentration in fluid milk processing can, in turn, lead to 

higher concentration at the cooperative level. One fluid milk processor that 

Average volume (million lbs.)

Source: GAO presentation of USDA data.

Year

Average volume (in millions of pounds)

Number of plants

0

200

400

600

800

1,000

1,200

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

0

20

40

60

80

100

120

140

160

180

Number of plants
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

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we spoke with stated that retail concentration has resulted in retailers 

preferring only one supplier, requiring a processor to have multiple plants 

in order to supply a retailer who serves many markets.

On the other hand, increasing concentration can lead to cost savings 

through efficiency gains, which may be passed on to retailers in the form of 

lower wholesale prices. For example, some economists viewed 

consolidation of processing firms as a result of increasing economies of 

scale and excess plant capacity. That is, processors decrease their costs per 

gallon for items like packaging or processing costs, as they increase the 

amount of milk they process.54 One dairy analyst reported that in plants 

ranging from a monthly volume of 90,000 pounds per month to 30 million 

pounds per month processing costs decreased from about $1 per gallon to 

about $0.50 per gallon. In the end, the impact of market concentration on 

wholesale prices, either positive or negative, depends on whether market 

power or efficiency dominates.55

Retailing Costs, 

Consumer Demand, 

and Market Structure 

Changes Affect Retail 

Prices for Fluid Milk

Three key factors that influence fluid milk prices at the retail level are 

retailing costs, consumer demand, and market structure. Recent increases 

in input costs such as labor and energy have been substantial. In an effort 

to hold down their retailing costs and remain competitive, some retailers 

are implementing supply-chain management and other innovations that 

increase efficiency. At the same time, consumers are purchasing a declining 

amount of traditional fluid milk and are increasing consumption of other 

beverages, such as soft drinks and bottled water. Market structure changes 

include continued consolidation in recent years through mergers and 

acquisitions among large food retailers at the national level and in many 

local markets, along with an increasing number of outlets that are 

competing with traditional supermarkets to sell fluid milk.

54See T.J. Dalton, G.K. Criner, and J. Halloran, “Fluid Milk Processing Costs: Current State 

and Comparisons,” Journal of Dairy Science, Vol. 85, No. 4, 2002, 984-991. Also, Day 3 of the 

Hearing on Pacific Northwest and Arizona/Las Vegas Producer-Handlers, September 25, 

2003, including the exhibit on “Cost Structure of Fluid Milk Plants of Various Sizes.”

55One study that we identified, however, that separated market power and cost-efficiency 

effects on the prices in 33 food processing industries from 1972 to 1992, found that the 

market power effect dominated in fluid milk manufacturing. Rigoberto A. Lopez, Azzedine 

M. Azzam, and Carmen Liron-Espana, “Market Power and/or Efficiency: A Structural 

Approach” Review of Industrial Organization, Vol. 20, March 2002: 115-126.
Appendix V

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Moves from the Farm to the Consumer

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Costs of Retailing Influence 

the Price of Fluid Milk

Representatives of the Food Marketing Institute stated that after the 

wholesale costs of the milk, the primary costs that influence the retail price 

of fluid milk are related to labor and energy.56 They added that all of these 

costs have been rising recently. According to the Bureau of Labor Statistics, 

the average hourly earnings for nonsupervisory food store employees went 

from $7.56 per hour in 1992 to $10.20 per hour in 2002. These payroll costs 

are the largest percentage of retail operating costs, followed by the second 

largest single category, employee benefits such as health insurance.57 Table 

29 shows the breakdown of supermarket operating costs in 2003 as a 

percentage of total sales and gross margin.58

Table 29: Supermarket Operating Costs as a Percentage of Sales and Gross Margin, 

2003

Source: GAO analysis of Food Marketing Institute data.

56The Food Marketing Institute is a trade association that represents segments of the retail 

food industry such as supermarkets. The Food Marketing Institute does not represent 

convenience stores.

57As table 29 shows, the category “other operating costs” is somewhat larger than “employee 

benefits,” but according to the Food Marketing Institute, it is a catch-all category including 

items such as travel, equipment rentals, communication, and services purchased.

58The gross margin is a firm’s sales revenue minus the costs of acquiring products, expressed 

as a percentage of sales.

Expenses Percentage of sales Percentage of gross margin

Depreciation and 

amortization 1.3 4.7

Employee benefits 3.5 12.7

Insurance 0.3 1.1

Maintenance and repairs 0.7 2.5

Other operating costs 3.8 13.8

Payroll 11.4 41.3

Property rentals 1.8 6.5

Supplies 1.1 4.0

Taxes and licenses 0.4 1.4

Utilities 1.3 4.7

Total expenses 25.7 93.1
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Table 30 displays the sales and expense growth as a percentage of sales for 

the supermarket industry during the last decade, from 1993 through 2003. 

During this time, total employment costs increased by 12.0 percent, 

including a 10.7 percent increase in payroll expenses; the cost of supplies 

also increased by 10.0 percent.

Table 30: Growth of Supermarket Sales and Expenses during the Last Decade, 1993 

through 2003

Source: GAO analysis of Food Marketing Institute data.

A 2003 study that was more specific to retailer costs related to fluid milk 

sales noted that these costs include both direct and indirect costs.59 Direct 

costs are those for electricity, labor, store equipment, and fluid milk. 

Indirect costs include corporate, division, and store overhead. While the 

study found variation in the indirect costs, such as store overhead, there 

was less variation across retail stores in direct costs.

Increasing per unit costs have led some retailers to try to improve 

efficiency and reduce total costs. As mentioned in the discussion of factors 

influencing fluid milk prices at the wholesale level, some retailers are 

reducing costs by working with their wholesale suppliers to achieve 

supply-chain management. For example, officials with Wal-Mart noted that 

the firm has tried to reduce its costs and maintain its everyday-low-pricing 

strategy for consumers through

1993 2003

Percent change

1993 through 2003

Supermarket sales (dollars in billions)

Sales from supermarkets with more than 

$2 million in annual sales $292.0 $432.8 48.2

Retailing costs as a percentage of sales

Payroll expenses 10.3 11.4 10.7

Total employment cost 13.3 14.9 12.0

Supplies 1.0 1.1 10.0

Utilities 1.2 1.3 8.3

59George Criner, “Milk Retail Costs and Margins.” Paper presented at the Northeast Dairy 

Policy Summit Meeting, November 17-18, 2003, University of Connecticut, Storrs.
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 123 GAO-05-50 Dairy Industry

• a computerized system called Collaborative Planning Forecast 

Replenishment that allows processors to track stock levels at Wal-Mart 

locations and schedule deliveries to specific locations;

• direct-store-delivery of the majority of its fluid milk products to increase 

the efficiency of its supply chain;60 and

• changes to its shipping practices, such as not putting labels on its cases, 

that have allowed Wal-Mart to save time and money.

Another retailer indicated that it is trying to improve the way it stocks its 

shelves to cut costs. A representative indicated that the retailer has 

invested in retrofitting its stores to use a device called a “bossy cart,” which 

allows store employees to move 80 gallons of milk into the milk case in one 

shelf-stocking.

Consumer Demand 

Influences Retail Fluid Milk 

Pricing

Consumer demand, driven by factors such as taste, convenience, and 

health, influences the retail price of milk. Moreover, since fluid milk 

represents approximately 3 percent of total supermarket sales, it is an 

important category for store performance, and retailers have an incentive 

to price their products competitively. However, over time, fluid milk 

consumption has gradually declined, with per capita demand for milk 

trending downward at a rate of 2 to 3 percent per year. This downward 

trend stems from several key factors including increasing consumption of 

substitute drinks such as carbonated soft drinks, juice drinks, coffee, teas, 

soy products, and bottled water. Also, there has been an increasing trend 

toward more eating outside the home, reducing the demand for fluid milk 

sold in food stores. Within the fluid milk category, whole milk has gone 

from being 92 percent of fluid milk consumed in 1960 to about 35 percent in 

2001. Private labels represent the largest portion of the market, about 60 

percent.61 More recently, however, there has been growth in the 

development of innovative value-added dairy products. These new 

innovations include dairy products for medicine/health (such as low60For most other products, Wal-Mart officials said that the retailer maintains a network of 

approximately 30 food distribution centers.

61Private label refers to products that are “store brands” and have labels that represent the 

retailer. These products may be produced by manufacturers that also produce national 

brands or by retailers who own their own manufacturing operations.
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Moves from the Farm to the Consumer

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carbohydrate products), multipack drinks such as single-serve and vending 

drinks, and organic dairy products.

In response to trends in consumer demand for fluid milk products, retailers 

from high-end supermarkets to mass merchandisers use diverse pricing 

strategies, and no single approach applies to any group. However, 

according to some retail executives, one method that retailers are currently 

using is category management. Using this strategy, a retailer would not 

focus on how much 1 percent, 2 percent, or whole milk it sells, but rather 

on how much is sold from the entire dairy case.62 Accordingly, category 

managers would view product assortment strategically, evaluating the 

performance of entire groups of related dairy products. The goal is to 

maximize the sales for the entire category, which requires continual 

adjustment to match consumer demand. To accomplish this goal, managers 

may feed scanner data and other market information into computer models 

that make product assortment decisions.

A related issue influencing the retail price of fluid milk is the price elasticity 

of demand, that is, the sensitivity of fluid milk consumption to changes in 

price. For many years, empirical studies have indicated that milk prices 

were very price inelastic, meaning that there was little change in demand in 

response to a change in price. Most studies suggest that overall, the 

demand for milk is still price inelastic. However, some recent studies 

suggest that the demand for milk is not as price inelastic as it was 

previously.

Moreover, some researchers have found that for many fluid milk products, 

demand is elastic, or that there is a greater change in demand relative to a 

change in price for certain types of milk. One study reported that price 

elasticities varied considerably by container size, type (such as white or 

flavored), and fat content of the milk.63 For instance, the study found that 

the demand for whole milk, skim milk, and low fat milk in half-gallon 

containers was price elastic. This research also suggested that carbonated 

62Different retailers may define the dairy case differently depending on the market that they 

serve. The dairy case may include products such as fluid milk, cottage cheese, creamers, 

yogurt, butter, and eggs as well as a variety of new “value added” dairy products. A recent 

study by Cornell University on dairy case management found that, on average, stores used 

approximately 37 different milk products in their dairy cases.

63Oral Capps, Jr., “Demand and Marketing Analyses for Fluid Milk Products by Type and by 

Package Size.” Presentation at the 2004 Dairy Forum, Boca Raton, Florida, January 2004.
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Moves from the Farm to the Consumer

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soft drinks are the chief substitute or competitor for fluid milk products, 

while water is a complement in consumption.64 In another study, 

researchers found that the elasticities of demand for skim/low fat and 

whole milk brands are different.65 Demand for skim/low fat milk was found 

to be more price elastic than demand for whole milk, suggesting that 

retailers could increase overall fluid milk sales by lowering the prices of 

skim/low fat milk relative to prices for whole milk.

Retail Market Structure Can 

Influence Fluid Milk Prices

As with the fluid milk processing industry, there have been trends of 

increasing consolidation and concentration at the retail level during recent 

years, especially among retail firms in some individual markets. Structural 

change and increased consolidation at the retail level of the milk marketing 

chain could lead to lower retail prices as individual retailers experience 

increased efficiencies in their operations. On the other hand, high levels of 

concentration can result in greater market power, potentially allowing 

firms to increase market prices above competitive levels.66 Also, greater 

market concentration at this level could increase a retailer’s buying power 

with fluid milk processors, potentially lowering costs. Depending upon 

whether these lower costs are passed on to consumers, this can either 

lower retail milk prices or increase the spread between wholesale and 

retail prices.

According to USDA, since 1996, almost 4,700 supermarkets, representing 

$75.5 billion in sales, were acquired by other firms. Major mergers and 

acquisitions that have occurred in the retail food market in recent years 

include the following:

64If products are substitutes, an increase in the price of one would increase the demand for 

the other. A complement in consumption means that the products are consumed in 

conjunction with one another. An increase in price for one product would decrease the 

demand for the complementary product.

65Tirtha Dhar and Tom Cox, “Strategic Implications of Retail Pricing in the U.S. Fluid Milk 

Market.” Paper prepared for presentation at the American Agricultural Economics 

Association Annual Meeting, Montreal, Canada, July 27-30, 2003.

66Economic studies of the relationship between price and market concentration in food 

retailing have found mixed results. Carolyn Dimitri, Abebayehu Tegene, and Phil R. 

Kaufman, U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail 

Price Behavior, Agricultural Economic Report Number 825, Economic Research Service, 

USDA, September 2003.
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Moves from the Farm to the Consumer

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• In 1998, Kroger, the nation’s largest supermarket chain, acquired Fred 

Meyer, and Albertsons acquired American Stores, the second-largest at 

that time.

• In 2000, Delhaize America, operator of the Food Lion chain of stores, 

purchased Hannaford Brother’s Shop ’n Save supermarkets in New 

England to become the eighth-largest food retailer at that time.

• In 2001, Kroger purchased supermarkets in Oklahoma and Texas from 

Winn-Dixie.

• In 2001, Safeway made several acquisitions including Genuardi’s Family 

Market stores (Pennsylvania, New Jersey, and Delaware), Randall’s food 

markets (Houston, Texas), and Dominick’s supermarkets (Chicago 

metropolitan area).

• In 2004, Albertsons, the third-largest U.S. food retailer, purchased 

Shaw’s, the eleventh-largest at the time.

In June 2001, we reported that, for the 100 largest U.S. cities, the combined 

average market share of the top four firms increased from 69 percent in 

1992 to 72 percent in 1998, with some variation depending upon the 

particular market area.67 An official of one large supermarket chain noted 

that because of Wal-Mart’s large presence in the market, other companies’ 

slices of the “demand pie” got thinner, providing an incentive to expand and 

buy out other companies. According to USDA data, the top four firms 

among all food retailers in 2003 were Kroger, Wal-Mart, Albertsons, and 

Safeway.68

Consolidation in food retail chains has led to high levels of concentration in 

individual metropolitan markets. Table 31 displays market concentration, 

as measured by the four-firm concentration ratio, in the 15 markets that we 

used in this report to analyze the spread between retail and farm milk 

67These were defined by the U.S. Census Bureau as Metropolitan Statistical Areas. See GAO01-561, appendix VI, for more information on concentration among retail firms.

68Sales by Wal-Mart and other super centers and mass merchandisers are not included in the 

supermarket category. Super centers are defined as a large combination supermarket and 

discount general merchandise store, with grocery products accounting for up to 40 percent 

of selling area.
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prices.69 While this threshold varies, some economists have characterized a 

market with a four-firm concentration ratio of 60 percent or greater as a 

“tight oligopoly” or highly concentrated.70 In 2003, the levels of 

concentration varied by metropolitan market, with the percentage of the 

market held by the four largest firms ranging from 62.8 percent in the 

Minneapolis/St. Paul area to 84.9 percent in Denver, with an overall 

unweighted average of 73.9 percent. Moreover, for the 15 markets that we 

analyzed, the overall average four-firm concentration ratio for 1998 that we 

reported in 2001—74 percent—is comparable to the 2003 average.71

Table 31: Market Share of the Top Four Food Retailers in Selected Markets, 2003

69The four-firm concentration ratio in a market is the share of sales made by the four largest 

sellers.

70William G. Shepherd, The Economics of Industrial Organization, 3rd ed. Prentice Hall, 

1990. While a useful tool for categorizing the degree of competition in a market, a numerical 

cut-off of a concentration index, such as the four-firm concentration ratio, is not generally 

considered a precise demarcation between various categories of the degree of competition 

in a market. The Federal Trade Commission and Department of Justice use an index of 

market concentration, the Herfindahl-Hirschman Index, in combination with a number of 

other market factors, in determining the potential anticompetitive effects of a proposed 

merger. Economic studies of various markets, however, have found that the four-firm 

concentration ratio and the Herfindahl-Hirschman Index are highly correlated.

71While very similar, some of the 15 market areas for our 2001 report for retail concentration 

in 1998 did not exactly match those in our present data for 2003 due to a realignment of 

MarketScope’s metropolitan market area definitions.

Retail markets Four-firm market share, 2003 (percent)

Atlanta, Ga. 78.2

Boston, Mass. 70.1

Charlotte, N.C. 82.0

Cincinnati, Ohio 79.4

Dallas, Tex. 67.3

Denver, Colo. 84.9

Miami, Fla. 81.6

Milwaukee, Wisc. 63.2

Minneapolis, Minn. 62.8

New Orleans, La. 74.7

Phoenix, Ariz. 80.2
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Source: GAO presentation of USDA/ERS data.

Note: Four-firm market shares are for supermarkets and super centers only. Smaller grocery stores 

and convenience stores are excluded.

At the same time, the traditional dominance of supermarkets in food sales 

has been challenged by competition from new mass merchandisers and 

super centers such as Wal-Mart, K-Mart, and Target. These retailers tend to 

offer lower prices and often purchase their inventories in large quantities to 

pass on low prices to consumers. According to a recent USDA report, even 

the larger conventional food stores do not have the same buying power as 

these large general merchandisers. They also tend to grow by new 

investment in stores rather than through mergers and acquisitions, in 

contrast to traditional supermarkets. Figure 34 displays the change in food 

sales by market segment of food retailers between 1993 and 2003. Sales 

from supermarkets decreased from 63 percent to 58.3 percent during this 

time period. However, sales from warehouse clubs and super centers 

increased from 3.6 percent to 9 percent, while those of convenience stores 

and drug stores also increased—from 11.9 percent to 13.6 percent. Overall, 

sales from nontraditional food retailers—warehouse clubs and super 

centers, mass merchandisers, and convenience and drugstores—went from 

17.2 percent in 1993 to 24.4 percent in 2003.

Salt Lake City, Utah 67.6

San Diego, Calif. 68.8

Seattle, Wash. 71.8

Washington, D.C. 76.5

Average 73.9

(Continued From Previous Page)

Retail markets Four-firm market share, 2003 (percent)
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Figure 34: Percentage of Retail Food Sales by Market Segment, 1993 and 2003

Within the fastest-growing segment, warehouse clubs and super centers, 

the largest food retailer is Wal-Mart, followed by Target and Meijer’s, while 

the second fastest growing segment includes the major drug chains, such 

as Walgreen’s and CVS. As of 2003, Wal-Mart super center sales reached 

$103.2 billion, with estimated grocery sales of $41.3 billion.72 According to a 

recent ACNielsen study, while all U.S. households still shop in traditional 

grocery stores, the annual number of trips to such stores continues to 

decline.73 In contrast, super centers have shown strong gains in household 

penetration as well as gains in the number of trips per year. In dairy, 

Source: GAO presentation of USDA data. 

9%

58.3%

17.3%

13.6%

Other grocery

stores

1.8%

Mass merchandisers

Supermarkets

Warehouse clubs

and super centers

Convenience stores

and drugstores

11.9%

63%

19.8%

3.6%

Other grocery

stores

1.7%

Mass merchandisers

Supermarkets

Warehouse clubs

and super centers

Convenience stores

and drugstores

1993 2003

72Wal-Mart super center sales for 2003 were taken from Supermarket News, SN’s Top 75 

(supplement), January 12, 2004. The estimate of grocery sales was provided by USDA. These 

grocery sales represent about 40 percent of total super center sales.

73“ACNielsen Study Finds Grocery Stores Continuing to Lose Share of Customer Shopping 

Trips,” news release, ACNielsen, May 4, 2002, 

http://www.acnielsen.com/news/american/us/2002/200220504.htm (accessed Sept. 9, 2004).
Appendix V

Factors That Influence the Price of Milk as It 

Moves from the Farm to the Consumer

Page 130 GAO-05-50 Dairy Industry

however, conventional food stores still offer a larger selection of milk 

products. A recent study by researchers at Cornell and Oklahoma State 

Universities on dairy case management found that the number of milk 

products offered was highest in supermarkets (74) and lowest in drug 

stores (16).74 While the volume of milk products was highest for mass 

merchandisers, the number of products (24) was similar to convenience 

stores (22). The authors explained that historically, mass merchandisers 

concentrated on moving a large volume of product with a limited variety.

74Todd M. Schmit, Harry M. Kaiser, and Chanjin Chung, The Dairy Case Management 

Program: Does It Mooove More Milk? National Institute for Commodity Promotion 

Research and Evaluation, Department of Applied Economics and Management, Cornell 

University, Ithaca, New York, January 2004. Specifically, this study evaluated the Dairy Case 

Management Program operated by the American Dairy Council in the Northwestern Hudson 

Valley Market in New York State.
Page 131 GAO-05-50 Dairy Industry

Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market ApendxiVI

This appendix summarizes the findings of 14 economic studies of price 

transmission in U.S. fluid milk markets. These studies estimated the extent 

to which price changes at one level, such as the farm level, are transmitted 

to other levels, such as the retail level, and the time in which these price 

changes are transmitted. Many of the studies found a difference, or 

asymmetry, in either the extent or speed of price transmission, depending 

on whether the initial price change was an increase or a decrease (see table 

32).1

 Some of the studies analyzed possible causes for price asymmetry and 

often identified the presence of noncompetitive markets as a contributing 

factor.2

 Although most studies estimated how prices are transmitted from 

the farm to the retail level, a few also estimated how price changes are 

transmitted from the retail level back to the farm level.

1

More generally, a recent article in the economics literature looking at 77 consumer and 165 

producer goods suggested that asymmetric price transmission is a broad phenomenon, and 

that prices rise faster than they fall in about two-thirds of the markets that were examined. 

See S. Peltzman, “Prices Rise Faster than they Fall,” Journal of Political Economy, Vol. 108, 

No. 3, 466-502.

2

Other factors identified included the costs of changing prices, government policies, spatial 

market competition, asymmetric information, economies of scale, and differentiated 

products.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 132 GAO-05-50 Dairy Industry

Table 32: Overview of Fluid Milk Price Transmission Studies and Results on Price Transmission Asymmetry/Symmetry

Source: GAO analysis using various sources (see table 33).

a

These results indicate farm-to-retail price asymmetry or symmetry.

b

These cities include the four California markets of Sacramento, San Francisco, Los Angeles, and San 

Diego and the five non-California markets of Seattle, Portland, Salt Lake City, Denver, and Phoenix.

Author Year Model

Period 

of study Geographic area

Results on price 

transmission 

asymmetry/ 

symmetry (long run)a

Additional 

results

Carman and 

Sexton

Forthcoming 

2005

Econometric model based 

on Houck (1977)

1999-

2003

Nine western 

U.S. citiesb

Asymmetry in certain 

milk types and markets

Asymmetry in 

timing in CA 

markets

Sexton, Xia, and 

Carman

2004 Hotelling framework; 

Econometric model

1999-

2003

Nine western 

U.S. citiesc

Asymmetry Asymmetry in 

timing

Capps, Jr. 2004 Houck econometric model 

and error correction model

1994-

2002

Seven U.S. citiesd Asymmetry in majority 

of cities

Linkow, Gould 

and Stiegert

2004 Asymmetric friction model 1997-

2004

Ten U.S. citiese Asymmetry

Chidmi, Lopez, 

and Cotterill

2004 New Empirical Industrial 

Organization model

1996-

2000

Boston N/A

Lass 2004 Econometric model based 

on Kinnucan and Forker 

(1987)

1982-

2002

New England Post-compact 

asymmetryf

Pre-compact 

same as 2001

Wang 2003 Structural econometric 

model based on Emerick 

(1994)

1971-

1997

National Asymmetry Asymmetry in 

short run; 

Symmetry retail 

to farm

Romain, Doyon, 

and Frigon

2002 Marketing margin, 

econometric model

1980-

1997

Upstate New York 

(UNY) and New 

York City (NYC)

Asymmetry UNY and 

NYC prior to pricegouging law; only NYC 

after the lawg

Same results in 

short run

Dhar and 

Cotterill

2002 Two-stage market channel 

model

1996-

1998

Boston N/A

Lass, Adanu, 

and Allen

2001 Econometric model based 

on Kinnucan and Forker

1982-

1997

New England Symmetry Asymmetry in 

short run

Frigon, Doyon, 

and Romain

1999 Marketing margin, 

econometric model

1980-

1997

Northeast U.S.; 

UNY and NYC

Symmetry in all 

markets except 

asymmetry in NYC 

after lawg

Asymmetry in all 

markets in short 

run

Carman 1998 Econometric model based 

on Houck

1985-

1997

Three California 

citiesh

Symmetry Asymmetry in 

short run

Emerick 1994 Structural econometric 

model based on Houck

1971-

1991

National Asymmetry Symmetry in 

short run

Hansen, Hahn, 

and Weimar

1994 Econometric model 1983-

1990

National Asymmetry
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 133 GAO-05-50 Dairy Industry

c

The cities are the same as in Carman and Sexton (forthcoming 2005).

d

These metropolitan markets include Atlanta, Boston, Chicago, Dallas, Hartford, St. Louis, and Seattle.

e

These metropolitan markets could not be disclosed.

f

The Compact refers to the Northeast Interstate Dairy Compact.

g

This law refers to the New York milk price-gouging law of 1991 (codified at NY Gen. Bus. §396-rr).

h

These three California cities include Los Angeles, San Francisco, and Sacramento.

How prices are transmitted within the milk marketing chain is important to 

policy makers because it affects both farmers and consumers. Farmers 

may be concerned with price transmission because they may believe 

increases in retail prices are not fully passed back to the farm level, while 

decreases are passed on. Consumers and farmers may believe that 

decreases in farm prices are not fully passed along to the retail level, while 

increases are passed on. Figure 35 illustrates price transmission through 

the vertical milk marketing chain; the arrows show how price signals are 

transmitted in both directions between marketing levels.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 134 GAO-05-50 Dairy Industry

Figure 35: Marketing Chain and Price Transmission for the U.S. Fluid Milk Industry

The first section of this appendix is a detailed table summarizing the 

models, data, and key assumptions used in each study, and each study’s 

results. The second and third sections discuss the farm-to-retail results, 

including evidence of price asymmetry, with respect to the extent of price 

transmission and the speed of price transmission. The fourth section 

discusses the retail-to-farm results on price transmission. The last section 

discusses the studies’ findings regarding factors that might cause price 

asymmetry.

Source: GAO.

Farm level 

fluid milk 

production

Cooperative 

level

Fluid milk 

processor 

level

Food retail 

level

Final 

consumers

Price transmission 

coop/processor

Price transmission 

farm/coop

Price transmission 

processor/retail
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 135 GAO-05-50 Dairy Industry

Summary of Recent 

Economic Studies of 

Price Transmission in 

the U.S. Fluid Milk 

Market

While most of the studies summarized in table 33 use, as a basis for their 

models, the standard Houck (1977)3

 and Kinnucan and Forker (1987) 

models to identify price asymmetry,4 others use newer methods such as the 

error correction model, which some researchers believe provides a more 

appropriate specification for examining asymmetric price transmission.5

Most of the studies estimated only “forward” price transmission, or price 

transmission from the farm to the retail level, but we also report on one 

study that estimated “backward” price transmission, from the retail level to 

the farm. The studies also differed in whether they estimated short-run or 

long-run price transmission asymmetry or both.6

 We take all of these 

differences into account in interpreting the studies’ overall conclusions and 

discussing their results.

3

James P. Houck, “An Approach to Specifying and Estimating Nonreversible Functions,” 

American Journal of Agricultural Economics 59 (1977): 570-572. In the Houck model 

(1977), changes in the retail price are linked to increases and decreases in the farm level 

price as well as changes in other marketing costs. Also, the estimated parameters on the 

farm-level price increases and decreases can be tested to determine if retail price 

movements in response to farm price changes are symmetric or asymmetric.

4

H.W. Kinnucan and O.D. Forker, “Asymmetry in Farm–Retail Price Transmission for Major 

Dairy Products,” American Journal of Agricultural Economics 69 (1987): 285–292. 

Kinnucan and Forker combine the mark-up model proposed by Heien (1980) and the 

approach used by Houck (1977) to estimate asymmetric functions using a dynamic 

approach for fluid milk, cheese, butter, and ice cream.

5

A recent study by von Cramon-Taubadel and Fahlbusch (1994) points out that in the case of 

cointegration between two time series, an error correction model, extended by the 

incorporation of asymmetric adjustment terms, provides for a more appropriate 

specification for testing for asymmetric price transmission. See S. von Cramon-Taubadel 

and S. Fahlbusch, “Identifying Asymmetric Price Transmission with Error Correction 

Models.” Poster session at the European Association of Agricultural Economists European 

Seminar in Reading, UK, 1994.

6

Short-run asymmetry occurs when increasing and decreasing prices have different 

immediate responses when the farm price is changed. Long-run asymmetry occurs when 

increasing and decreasing farm prices have different responses over the full adjustment 

period. For most of the studies that we examined, both the short run and long run 

represented fairly short time horizons. For example, the short run typically extended from 

the current month to one month out, while the long run was usually from 2 to 4 months. 

Nevertheless, in most of the studies, the long run was the time required for the lag structure 

to run its course.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 136 GAO-05-50 Dairy Industry

Table 33: Recent Price Transmission Studies of the Fluid Milk Market

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results

Carman and 

Sexton, 

“Supermarket 

Fluid Milk 

Pricing 

Practices in 

the Western 

United States,” 

Agribusiness, 

forthcoming 

2005.

Econometric 

model based 

on the farm-toretail price 

transmission 

model of Houck 

(1977) for 

whole, skim, 1 

percent, and 2 

percent milk. 

Estimated time 

lags using an 

Almon 

distributed lag 

model.

Average 

monthly prices 

for nine 

California and 

non-California 

metro markets,

1999–2003.

Farm prices:

California: 

Class I 

California milk 

prices.

Other states:

FMMO Class I 

prices.

Retail prices:

ACNielsen 

average 

monthly retail 

prices.

Market power 

based on 

hypothesis 

tests of 

parameter 

size, 

parameter 

tests for 

asymmetry, 

and a 

departure from 

cost 

differences of 

fluid milk 

products due 

to different fat 

contents.

Timing/price asymmetry:

California and non-California: Contemporaneous 

to 3-month period.

California markets: Some evidence of price 

symmetry and some of price asymmetry, 

depending on market and product.

Non-California markets: Price transmission in 

almost all markets was asymmetric.

Degree of price transmission:

California:

Sacramento: 

Increases: 72%-122% 

Decreases: 52%-97% 

Los Angeles: 

Increases: 60%-115% 

Decreases: 75%-106%

San Francisco:

Increases: 65%-115%

Decreases: 49%-94%

San Diego:

Increases: 56%-109%

Decreases: 58%-110%

Non-California:

Seattle: Increases: 57%-72% 

Decreases: 39%-64% 

Portland: 

Increases: 3%-25%

Decreases: 4%-30%

Phoenix:

Increases: 5%-59%

Decreases: 6%-63%

Salt Lake City:

Increases: 39%-56%

Decreases: 54%-83%

Denver

Increases: 43%-56%

Decreases: 40%-55%

Analysis 

revealed 

evidence of 

market power in 

fluid milk pricing 

in each of the 

nine metro 

markets 

analyzed.

In Portland, 

estimated retail 

price 

coefficients did 

not respond to 

farm prices.

In nonCalifornia 

markets, only 3 

of 40 estimated 

coefficients 

were consistent 

with perfect 

competition in 

pricing.

Addition of 

retail skim milk, 

1 percent, and 

2 percent led to 

different results 

than previous 

analysis of only 

whole milk.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 137 GAO-05-50 Dairy Industry

Sexton, Xia, 

and Carman, 

“Horizontal 

Differentiation 

with 

Differential 

Input Costs: 

Retail Prices 

for Milk by Fat 

Content.” 

Paper 

presented at 

the annual 

AAEA 

meetings, 

Denver, 

Colorado, 

2004.b

Theoretical 

model based 

on Hotelling 

framework of 

horizontally 

differentiated 

products with 

differential 

costs. 

Econometric 

estimation –

seemingly 

unrelated 

regression–of a 

differentiated 

product, market 

competition 

model using 

metropolitan 

retail markets 

for whole and 

skim milk.

Average 

monthly prices 

for nine 

California and 

non-California 

cities. 

California data, 

1999–2003; 

Non-California 

data, 2000–

2003.

Farm prices:

Class I prices 

from California 

Dairy 

Information 

Bulletin and 

FMMO Class I 

component 

prices.

Retail prices:

California Dairy 

Information 

Bulletin.

Three 

competition 

scenarios 

examined for 

retail fluid milk 

markets: 

perfect 

competition, 

monopoly, and 

oligopoly.

Skim milk 

(low-cost) and 

whole milk 

(high-cost) 

represent 

products with 

differential 

costs 

transmitted 

differently in 

different 

competition 

scenarios.

Farm prices do 

not contain 

over-order 

premiums.

Timing/price asymmetry:

California:

Los Angeles and San Diego have longer 

transmission periods than Sacramento and San 

Francisco.

Non-California:

Prices are transmitted gradually for Denver, Salt 

Lake City, Portland, and Phoenix, while prices in 

Seattle are transmitted quickly, within 1 month.

Degree of price transmission:

N/A

Competition 

results:

California:

Results suggest 

oligopoly 

scenario for 

Sacramento, 

San Francisco, 

and Los 

Angeles 

markets. Some 

evidence of 

oligopoly 

scenario for 

San Diego 

market.

Non-California:

Results suggest 

oligopoly 

scenario for 

Phoenix, Salt 

Lake City, and 

Seattle 

markets. Model 

also suggests 

Denver market 

is closer to 

oligopoly, while 

Portland is 

closer to 

monopoly 

scenario.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 138 GAO-05-50 Dairy Industry

Capps, Jr., 

“Asymmetry in 

Farm-Retail 

Price 

Transmission 

Associated 

with Whole 

Milk and Two 

Percent Milk in 

Selected U.S. 

Cities: A 

Comparison of 

the 

Conventional 

Houck 

Approach and 

the Error 

Correction 

Model 

Approach.” 

Working 

paper, 

Department of 

Agricultural 

Economics, 

Texas A&M 

University, 

2004.

The standard 

Houck 

econometric 

price 

transmission 

approach is 

compared to 

the error 

correction 

model using 

co-integration 

procedures. 

Model 

estimates 

results for 

whole milk and 

2 percent milk.

Monthly data 

from January 

1994 to 

October 2002 

for seven U.S. 

cities: Atlanta, 

Boston, 

Chicago, 

Dallas, 

Hartford, St. 

Louis, and 

Seattle.

Farm prices:

USDA 

Agricultural 

Marketing 

Service.

Retail prices:

USDA 

Agricultural 

Marketing 

Service.

Elasticities of 

price 

transmission 

are calculated 

for each 

product and 

market.

The model 

does not 

include any 

other 

marketing 

input costs.

Houck method Error correction

model

Price asymmetry:

 (Whole milk)

AsymmetricAtlanta, Boston, Chicago, Atlanta, Chicago, 

and Dallas, and Hartford and Dallas

SymmetricSt. Louis and Seattle St. Louis 

 (2 percent)

AsymmetricAtlanta, Boston, Chicago, Atlanta, Chicago, 

and Hartford and Seattle

SymmetricDallas, St. Louis, and St. Louis and 

Seattle Dallas 

Elasticity of price transmission (ranges):

 (Whole milk)

Increases: Increases:

(+0.23)–(+0.58) (+0.24)–(+0.35)

Decreases: Decreases:

(-0.02)–(+0.12) (-0.03)–(+0.06)

 (2 percent)

Increases: Increases:

(+0.11)–(+0.46) (+0.05)–(+0.29)

Decreases: Decreases:

(-0.06)–(+0.25) (-0.006)–(+0.12)

Author notes 

that results 

suggest there is 

a possible 

market failure 

due to a highly 

concentrated 

retail sector, 

with the 

exception of St. 

Louis and 

Seattle.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 139 GAO-05-50 Dairy Industry

Linkow, Gould, 

and Stiegert, 

“Retail 

Consolidation, 

Market 

Concentration, 

and FarmRetail Price 

Asymmetry in 

the U.S. Fluid 

Milk Market.” 

Working 

paper, 

Department of 

Agricultural 

Economics, 

University of 

WisconsinMadison, 

2004.

Authors use an 

asymmetric 

friction model 

that accounts 

for the 

existence of 

menu costs 

(the costs of 

repricing 

products). 

Estimated 

model uses the 

price of private 

label whole 

milk.

Weekly panel 

data from 

1997--2004 for 

10 metropolitan 

fluid milk 

markets.

Farm prices:

FMMO Class I 

announced 

cooperative 

price.

Retail prices:

IRI retail price 

data; private 

label (store 

brand) whole 

milk.c

Price 

asymmetry 

and menu 

costs are 

allowed to vary 

by city.

Includes a 

marketing cost 

index variable 

based on a 

paper by 

Romain et al., 

(2002).

Includes a 

measure of 

market 

concentration 

and a measure 

of spatial 

market 

concentration.

Timing/price asymmetry:

Asymmetric-Farm price decreases are passed on 

less completely than increases.

Responses to price increases do not differ 

considerably across cities. Responses to price 

decreases do differ across cities.

Degree of price transmission:

N/A 

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 140 GAO-05-50 Dairy Industry

Chidmi, 

Lopez, and 

Cotterill, 

“Dairy 

Compact, 

Market Power, 

and Milk 

Prices in 

Boston.” 

Working 

paper, 

Department of 

Agriculture 

and Resource 

Economics, 

University of 

Connecticut, 

2004.

The New 

Empirical 

Industrial 

Organization 

structural 

model of 

Appelbaum 

(1982) that 

includes 

measures of 

market power 

and price 

transmission. 

The model 

tests for values 

of these 

variables with 

and without the 

Northeast 

Interstate Dairy 

Compact 

(NEDC).d

Weekly data 

from1996-2000 

for Boston 

metropolitan 

fluid milk 

market.

Farm prices: 

The higher of 

the FMMO 

Class I prices 

or Compact 

Class I prices, 

plus over-order 

premiums.

Retail prices: 

Computed from 

IRI retail data 

by dividing total 

sales by total 

volume.c

Assesses 

retail prices 

under four 

scenarios: 

NEDC, no 

NEDC, with 

perfect 

competition, 

and oligopoly; 

estimates 

market power 

and market 

conduct 

variables.

Assumes costplus pricing 

between 

processors 

and retailers in 

the Boston 

area.

Model does 

not estimate 

the timing of 

price 

transmission.

Timing/price asymmetry:

N/A

Degree of price transmission:

Increases: 68%

Transmission elasticities were estimated at 0.331 

pre-Compact and 0.2911 post-Compact.

Retail price 

increases due 

to market power 

outweighed 

impact of 

NEDC by nearly 

7 times.

Both the preand post-NEDC 

retail price 

markup over 

marginal cost 

(the competitive 

benchmark) is 

about 25% of 

the retail fluid 

milk price.

Market 

conduct–

supermarkets 

do not ignore 

each other’s 

actions.

MILC program 

provides 

benefits to 

farmers, 

consumers, and 

retailers at the 

expense of 

taxpayers.e

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 141 GAO-05-50 Dairy Industry

Lass, “Impacts 

of the 

Northeast 

Dairy 

Compact on 

New England 

Prices 

Revisited: 

New Data, 

New Lessons.” 

Working 

paper, 

Department of 

Resource 

Economics, 

University of 

Massachusett

s, Amherst, 

2004.d

Update of the 

previous 2001 

econometric 

mark-up model 

of Kinnucan 

and Forker 

(1987) allowing 

for rising and 

falling farm 

prices and 

different 

speeds of 

adjustment.

Monthly timeseries price 

data for New 

England 

(Boston and 

Hartford), 1982 

to 2002.

Farm prices:

FMMO Class I 

price for the 

New England 

market.

Retail prices:

USDA 

Agricultural 

Marketing 

Service retail 

price series for 

Boston and 

Hartford.

Longer data 

series than 

2001 paper 

with time 

periods split 

into pre and 

post-Compact; 

a pre-1997 

period and a 

1997-2002 

period.

Parameters of 

the pre- and 

post-Compact 

periods were 

tested to 

determine 

changes in 

price 

transmission.

Assumes 

constant 

returns to 

scale and a 

competitive 

market beyond 

the farm gate.

Included 

variable to 

measure 

changes in 

processing 

costs using 

USDA’s Food 

Marketing 

Cost Index. 

Timing/price asymmetry:

Pre-Compact period:

Results were consistent with original findings 

(Lass et al., 2001); price asymmetry in the short 

run and symmetry in the long run.

Post-Compact period:

Short run: Price asymmetry

Long run: Price asymmetry.

Degree of price transmission:

N/A

Boston:

There was 

greater 

variation in farm 

prices without 

the Compact, 

leading to 

higher retail 

prices.

Hartford:

There was 

greater 

variation in farm 

prices without 

the Compact, 

with greater 

increases in 

retail prices.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 142 GAO-05-50 Dairy Industry

Wang, Price 

Transmission 

and the Role 

of Federal 

Dairy Policy in 

U.S. Dairy 

Markets. 

Master’s 

thesis, Cornell 

University,

2003.

Structural 

econometric 

model using a 

simultaneous 

system of 

equations of 

national dairy 

prices, 

including farm 

and retail fluid 

milk. Models 

both farm-toretail and retailto-farm price 

transmission. 

Model based 

on a previous 

one by Emerick 

(1994).

National in 

scope; uses 

national 

monthly 

average data 

from 1971–

1997.

Farm prices: 

Announced 

cooperative 

Class I price.

Retail prices:

U.S. retail price 

from Bureau of 

Labor 

StatisticsUSDA.

Competitive 

fluid milk 

market and 

constant 

returns to 

scale.

Policy variable 

for changes in 

price support 

in 1980s.

Price lags 

chosen from 

dairy market 

literature.

1988 – 1997 Period

Farm-to-retail: Retail-to-farm:

Timing/price asymmetry:

Short run: Short run:

(1 month) (1 month) 

Asymmetric Asymmetric

Long run: Long run:

(3 months) (3 months)

Asymmetric Symmetric

Degree of price transmission:

Short run: Short run:

Increases: 94% Increases: 94%

Decreases: 31% Decreases: 2%

Long run: Long run:

Increases: 83% Increases: 40%

Decreases: 64% Decreases: 34%

Decreases in 

dairy price 

supports in the 

mid-1980s led 

to greater 

asymmetric 

price 

transmission 

and more 

volatility in the 

post-1988 

period than in 

the pre-1988 

period for fluid 

milk and nonfat 

dry milk.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 143 GAO-05-50 Dairy Industry

Romain, 

Doyon, and 

Frigon, 

“Effects of 

State 

Regulations 

on Marketing 

Margins and 

Price 

Transmission 

Asymmetry: 

Evidence from 

the New York 

City and 

Upstate New 

York Fluid Milk 

Markets,” 

Agribusiness, 

2002.

Marketing 

margin model 

that includes 

quantity of 

commodity 

marketed and 

marketing costs 

combined with 

the Houck 

(1977) model. It 

includes 

variables 

measuring 

cumulative 

increases and 

decreases in 

farm-level 

prices. The 

Akaike 

Information 

Criterion was 

used to 

determine the 

appropriate lag 

structure.

Monthly data 

from 1980 –

1997 for 

Upstate New 

York (UNY) and 

New York City 

(NYC) markets.

Farm prices:

UNY and NYC 

prices are the 

FMMO Class I 

prices. 

Retail prices:

UNY and NYC 

prices are from 

the New York 

State 

Department of 

Agriculture.

Model allows 

for testing of 

constant 

returns to 

scale.

Model allows 

for asymmetry 

of other 

marketing 

costs.

Model includes 

state policy 

variables–such 

as 

deregulation of 

milk 

distribution in 

NYC and the 

NYC pricegouging law.f

Model does 

not account for 

over-order 

premiums in 

farm prices.

Timing/price asymmetry:

Short run: 

Asymmetric–NYC and UNY before price-gouging 

law.

Asymmetric–NYC after price-gouging law.

Long run:

Asymmetric–UNY and NYC, before price-gouging 

law.

Asymmetric–NYC after price-gouging law.

Price transmission elasticities:

 NYC UNY

Before the price-gouging law:

 Increasing elasticities: 0.70 0.62

 Decreasing elasticities: 0.30 0.49

After the price-gouging law:

 Increasing elasticities: 0.52 0.52

 Decreasing elasticities: 0.43 0.51

Model results 

indicate 

constant 

returns to scale.

NYC 

experienced 

price 

asymmetry in 

the long run 

prior to 1991, 

before the 

price-gouging 

law came into 

effect, but much 

less thereafter.

The 

deregulation of 

milk distribution 

to NYC in 1987 

allowed 

Farmland 

Dairies’ entry 

into the NYC 

market and 

significantly 

reduced 

marketing 

margins.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 144 GAO-05-50 Dairy Industry

Dhar and 

Cotterill, 

“Price 

Transmission 

in 

Differentiated 

Product 

Market 

Channels: A 

Study of the 

Boston Fluid 

Milk Market 

and the 

Northeast 

Dairy 

Compact,” 

Food 

Marketing 

Policy Center, 

Department of 

Agricultural 

and Resource 

Economics, 

University of 

Connecticut, 

2002.

A two-stage 

structural 

market channel 

model of the 

Boston milk 

market using a 

nonlinear 

model of costs 

and demand. 

The model 

looks at the 

Boston fluid 

milk processor 

and retailer 

market 

channels.

Monthly 

average data 

for Boston 

market from 

March 1996 to 

July 1998.

Farm prices:

Boston FMMO 

Class I fluid 

milk price.

Retail prices:

IRI data for 

aggregate retail 

and top 4 

supermarket 

chains in the 

Boston market.c

Model allows 

for both 

vertical and 

horizontal 

market 

channel 

effects.

Model allows 

for the 

identification of 

cross-firm 

pass-through 

rates.

Authors 

specify three 

different 

oligopoly 

games.

Study does not 

test for the 

timing of price 

transmission 

or price 

transmission 

asymmetry.

Timing/price asymmetry:

N/A

Degree of price transmission (ranges):

Processor-to-wholesale: 55%-65%

Wholesale-to-retail: 54%-62%

Firm-specific transmission: 32%-47%

Industrywide transmission: 88%-100%

Competition 

between 

retailers was 

lessened due to 

focal point 

pricing and the 

Compact.

Industrywide 

and firmspecific cost 

shocks were 

not identical, 

nor did the 

latter aggregate 

to the former.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 145 GAO-05-50 Dairy Industry

Lass, Adanu, 

and Allen 

“Impacts of 

the Northeast 

Dairy 

Compact on 

Retail Prices,” 

Agricultural 

and Resource 

Economics 

Review, 2001.

Econometric 

model based 

on the basic 

markup model 

of Kinnucan 

and Forker 

(1987) allowing 

for rising and 

falling farm 

prices and 

different 

speeds of 

adjustment.

Monthly timeseries price 

data for New 

England 

(Boston and 

Hartford), 1982 

to 1997.

Farm prices:

Class I FMMO 

price for the 

New England 

market.

Retail prices:

USDA 

Agricultural 

Marketing 

Service retail 

price series for 

Boston and 

Hartford.

Uses national 

data to 

determine the 

lag structure 

for fluid milk–

uses lags of 1 

and 2 months.

Model uses 

impacts of 

price 

transmission 

to determine 

the impact of 

the Compact.

Assumes 

constant 

returns to 

scale and a 

competitive 

market beyond 

the farm gate.

Includes 

variable to 

measure 

changes in 

processing 

costs using 

USDA’s Food 

Marketing 

Cost Index.

Timing/price asymmetry:

Boston: Retail prices increased most rapidly in 

the current period; for declines, the greatest 

decreases occurred after a one-period lag.

Hartford: Current period effects of rising farm 

prices were greater than current period falling farm 

prices.

Boston and Hartford:

Short run: Price asymmetry.

Long run: Price symmetry.

Degree of price transmission and elasticities 

of price transmission:

Degree of Boston Hartford 

price transmission: 58% average 48% average

Elasticities: SR LR SR LR

Rising elasticity 0.46 0.35 0.30 0.33 

Falling elasticity 0.14 0.35 0.15 0.25 

In the long run, 

increases in 

margins were 

primarily 

accounted for 

by other factors, 

such as 

processing 

costs, rather 

than the 

Compact.

Impact of the 

Compact on 

retail prices 

was less than 

the over-order 

premium, 

suggesting that 

less than the 

full amount of 

the premium 

was passed on 

to consumers.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 146 GAO-05-50 Dairy Industry

Frigon, Doyon, 

and Romain, 

“Asymmetry in 

Farm-Retail 

Transmission 

in the 

Northeastern 

Fluid Milk 

Market,” Food 

Marketing 

Policy Center, 

Department of 

Agricultural 

and Resource 

Economics, 

University of 

Connecticut, 

1999.

Hybrid of the 

marketing cost 

model, which 

includes the 

quantity of 

commodity 

marketed and 

costs, with the 

Houck model, 

which includes 

variables of 

cumulative 

increases and 

decreases in 

farm-level 

prices.

Northeast 

United States, 

Upstate New 

York (UNY), 

and New York 

City (NYC) 

markets using 

monthly data, 

1980–1997.

Farm prices:

UNY and NYC 

prices are the 

Class I FMMO 

prices; for 

Northeast 

United States–

FMMO Class I 

average prices 

of the four 

FMMO regions 

at that time.

Retail prices:

UNY and NYC 

prices from 

New York State 

Department of 

Agriculture; 

Northeast 

United States 

prices from the 

Bureau of 

Labor 

Statistics.

Competitive 

market and 

constant 

returns to 

scale 

assumptions 

are relaxed.

A variable for 

market 

concentration, 

the four-firm 

concentration 

ratio, included 

for UNY and 

NYC.

Model allows 

for marketing 

costs.

Model includes 

policy 

variables such 

as the NYC 

price-gouging 

law. 

Model does 

not account for 

over-order 

premiums in 

farm prices.

Timing/price asymmetry:

Short run: 

Asymmetry existed for UNY after 2 months, and 

still existed in NYC and the Northeast United 

States after 3 months.

Long run:

After 4 months, the Northeast United States, UNY, 

and NYC (postgouging law) fully adjusted. Only 

NYC (pregouging law) had not adjusted.

Symmetry existed in all regions in the long run 

except NYC prior to 1991.

Degree of price transmission:

N/A

NYC 

experienced 

price 

asymmetry in 

the long run 

prior to 1991, 

before the 

price-gouging 

law came into 

effect.

Variable for 

market 

concentration 

was found 

insignificant for 

both UNY and 

NYC. Authors 

believed that 

the problem of 

consumer 

information was 

the 

predominant 

cause of 

asymmetric 

price 

transmission.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 147 GAO-05-50 Dairy Industry

Carman, 

“California 

Milk Marketing 

Margins,” 

Journal of 

Food 

Distribution 

Research, 

1998.

Response of 

retail-level milk 

prices to 

changes in 

farm prices 

using Houck’s 

(1977) model 

for estimating 

nonreversible 

functions. The 

model is 

estimated using 

prices for whole 

milk.

Three 

California 

market areas: 

Los Angeles, 

San Francisco, 

and 

Sacramento. 

Monthly data, 

January 1985 

to March 1997.

Farm prices:

Class I prices 

for Northern 

and Southern 

California from 

California Dairy 

Information 

Bulletin.

Retail prices:

California Dairy 

Information 

Bulletin.

Uses lags of 1 

month for price 

increases and 

2 months for 

price 

deceases.

Uses an index 

of marketing 

costs from the 

USDA/Econo

mic Research 

Service 

marketing cost 

index.

Timing/price asymmetry:

Short run: 

Asymmetric–Unlike price increases, there was a 

significant 1-month lag between farm price 

decreases and total retail price decreases for each 

city.

Long run: 

Symmetric–Retail milk price changes were not 

significantly different for increases and decreases 

of farm prices.

Degree of price transmission:

Sacramento:

Increases: (111%-112%) 

Decreases: (110%-117%)

San Francisco:

Increases: (117%-118%) 

Decreases: (94%-103%)

Los Angeles:

Increases: (76%-88%) 

Decreases: (62%-94%) 

For five of the 

six equations, 

the one-for-one 

price 

transmission 

process is 

consistent with 

constant dollar 

markup pricing.

For Los 

Angeles, tests 

showed that 

retailers were 

maintaining 

prices by 

absorbing some 

cost increases, 

and reducing 

prices less than 

farm prices 

decreased.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 148 GAO-05-50 Dairy Industry

Emerick, An 

Econometric 

Analysis of 

Dairy Market 

Price 

Transmission 

Processes.

Master’s 

thesis, Cornell 

University, 

1994.

Structural 

econometric 

model based 

on Houck’s 

method (1977) 

using a 

simultaneous 

system of 32 

equations and 

a distributed 

lag formulation. 

The model 

estimates price 

transmission 

for five dairy 

products, 

including fluid 

milk.

National scopenational 

monthly 

average data 

series, 1971-

1991.

Farm prices:

Announced 

cooperative 

Class I price.

Retail prices:

U.S. average 

city retail fluid 

milk price from 

Consumer 

Price Index, 

Bureau of 

Labor 

Statistics.

Price lags 

chosen from 

knowledge of 

the dairy 

market-lag 

length 2 

months for 

farm price 

increases and 

decreases.

Models both 

farm-to-retail 

and retail-tofarm price 

transmission 

results.

Model uses 

slope and 

intercept 

dummy 

variables used 

to separate 

time periods 

into 1977–

1988 and 

1988–1991 to 

account for 

government 

support price 

decreases and 

greater price 

volatility.

Farm-to-retail: 

Timing/price asymmetry

Short run: Symmetric

(Immediate)

Long run: Asymmetric

(2 months)

Degree of price transmission

Short run:

Increases: 45%

Decreases: 41%

Long run:

Increases: 107%

Decreases: 55% 

Author 

estimates 

causality for 

fluid milk using 

data 

from 1971–

1991 and finds 

it 

multidirectional.

Since 1988, 

different retail 

price responses 

(asymmetric) 

occur 1 and 2 

months after 

the initial farmlevel price 

change. Author 

notes this may 

be due to 

greater volatility 

causing 

difficulties in 

determining the 

“appropriate” 

price at 

wholesale or 

retail.

Asymmetry is 

not a short-run 

phenomenon in 

most other 

dairy products 

including retail 

butter, 

wholesale 

nonfat dry milk, 

and retail ice 

cream.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 149 GAO-05-50 Dairy Industry

a

The degree or level of price transmission is represented by the percentage of full price pass-through 

from farm to retail. Some studies, however, measured instead the elasticity of price transmission, 

which is defined as the percentage change in the retail price of a product due to a 1 percent change in 

the corresponding farm price. As noted in the table, some studies do not measure the degree of price 

transmission or the elasticity of price transmission and only report on the timing and symmetry of 

transmission.

b

The AAEA is the American Agricultural Economics Association.

c

IRI stands for Information Resources, Inc.

d

The Northeast Interstate Dairy Compact was a pricing program established by the 1996 Farm Bill that 

set a minimum price for raw milk to be used for and sold as fluid milk in the New England states of 

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. This program 

expired on September 30, 2001.

Hansen, 

Hahn, and 

Weimar, 

Determinants 

of the Farmto-Retail Milk 

Price Spread, 

Economic 

Research 

Service, 

USDA, 1994.

Statistical 

techniques 

similar to those 

used by Hahn’s 

(1989, 1990) 

markup model 

in his study of 

price 

transmission. 

Estimates price 

transmission 

for whole milk.

National 

average 

quarterly data, 

1983–1990 for 

farm, 

wholesale, and 

retail levels.

Farm prices: 

Class I FMMO 

prices from 

AMS/USDA 

plus over-order 

premiums.

Wholesale 

prices:

Firm-level 

private costaccounting 

company data 

for 30 

companies 

across the 

country.

Retail prices:

Bureau of 

Labor Statistics 

data based on 

retail prices in 

91 areas.

Unlike other 

studies, 

includes the 

wholesale 

market level in 

the model.

Timing/price asymmetry:

Farm-to-wholesale:

Asymmetric

Farm price increases: wholesale price adjusted in 

three quarters.

Farm price decreases: wholesale price adjusted in 

one quarter.

Farm-to-retail: 

Asymmetric

Farm price increases: 

retail price adjusted in one quarter.

Farm price decreases: retail price adjusted in 10 

quarters.

Degree of price transmission:

Retail price adjustment:

Asymmetric

Farm price increases: 173%

Farm price decreases: 92%

Wholesale 

prices exhibit 

short-run 

asymmetric 

responses to 

farm prices, 

while retail 

prices exhibit 

short-run and 

long-run, or 

irreversible, 

price 

adjustments.

In this study, 

wholesale milk 

price 

adjustments 

were more 

rapid for farm 

price decreases 

than for farm 

price increases.

(Continued From Previous Page)

Model Description Price Transmission Results

Author/

Study/Year

Type of 

economic 

model

Scope of 

model and 

price data 

used

Additional

assumptions/

variables/

limitations

Timing/symmetry and

degree of price transmissiona

Other model 

results
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 150 GAO-05-50 Dairy Industry

e

The Milk Income Loss Contract program (MILC) is similar to the Compact, in that it is based on the 

Boston raw milk price and provides a partial subsidy to dairy farmers; however, it is funded through 

taxpayers rather than processors.

f

The New York City price-gouging law (codified at NY Gen. Bus. §396-rr) imposed a duty on the New 

York Commissioner of Agriculture and Markets to determine if prices of fluid milk are unconscionably 

excessive whenever the retail price of fluid milk exceeds 200 percent of the price for Class I fluid milk. 

The New York State Legislature passed this law, in part, because of a perceived lack of response in 

retail milk prices to decreases in farm prices.

Results on the Extent 

of Farm-to-Retail Price 

Transmission and Price 

Transmission 

Asymmetry

On both national and regional or citywide levels, the majority of the fluid 

milk studies that we identified found evidence of farm-to-retail price 

transmission asymmetry in price levels. While the studies estimated a wide 

range of price transmission levels, in general, the estimates of price 

transmission for initial farm price increases were greater than for farm 

price decreases.

National Level Results The fluid milk price transmission studies that we identified using national 

aggregate data estimated a wide range of price transmission levels and 

generally found evidence indicating asymmetric price transmission—farm 

price increases were more fully transmitted to retail prices than farm price 

decreases. Using national average farm and retail prices for whole milk, 

Emerick (1994) and Wang (2003) developed two similar studies that 

identified the degree of price transmission nationally. While both studies 

used similar models, the Wang study used somewhat more recent data. 

Taken together, both studies’ short-run results suggest that about 45 

percent to 94 percent of farm price increases were passed along to the 

retail level, while only 31 percent to 41 percent of farm price decreases 

were similarly passed along. These studies estimated that in the long run, 

transmission levels for price increases ranged from 83 percent to 107 

percent, while transmission levels for price decreases ranged from 55 

percent to 64 percent. Both researchers found price asymmetry in the long 

run, but Wang also found price asymmetry in the short run. In his study of 

seven metropolitan markets across the country using data from 1994 to 

2003, Capps Jr. (2004) also identified price asymmetry in a majority of 

selected fluid milk markets for whole and 2 percent milk. Measuring the 

level of price transmission by using the elasticity of price transmission, he 

estimated elasticities for farm price increases ranging from 0.23 to 0.58 for 

whole milk and 0.11 to 0.46 for 2 percent milk. For farm price decreases, 

these elasticities were much lower, ranging from –0.02 to 0.12 for whole 
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 151 GAO-05-50 Dairy Industry

and –0.06 to 0.25 for 2 percent, respectively.7, 8 Similarly, in Linkow et al. 

(2004), using an asymmetric friction model of 10 metropolitan markets 

across the country, the authors found evidence of price asymmetry—retail 

prices were more responsive to cooperative farm price increases than 

decreases.

Regional and City-Level 

Results

Many studies that used regional or city-level data also estimated a wide 

range of price transmission levels as well as asymmetric price 

transmission. In an econometric model for whole, skim, 1 percent, and 2 

percent milk, Carman and Sexton (forthcoming 2005) estimated farm-toretail price transmission for nine metropolitan markets in the Western 

United States. Estimated levels of price transmission for all types of fluid 

milk combined for the California markets ranged from 56 percent in San 

Diego to 122 percent in Sacramento for price increases, and from 49 

percent in San Francisco to 110 percent in San Diego for price decreases. 

For the non-California markets, for both increases and decreases, the 

estimated levels of price transmission were much lower, ranging from 3 

percent in Portland to 72 percent in Seattle for price increases and 6 

percent in Phoenix to 83 percent in Salt Lake City for price decreases. The 

authors also noted that none of their price transmission parameters for all 

types of fluid milk for Portland was statistically different from zero, 

indicating no evidence that retail prices responded to farm price changes in 

this market.

Several researchers have also estimated farm-to-retail price transmission 

for markets in the Northeast United States. Lass et al. (2001) estimated 

price transmission in reference to the Northeast Interstate Dairy Compact 

for the Boston and Hartford metropolitan areas. For price increases, they 

found that the level of price transmission for a farm price increase was 58 

percent for Boston and 48 percent for Hartford. While Lass et al. only found 

price asymmetry in the short run, in a subsequent study, using more recent 

data, Lass (2004) found price asymmetry in the short run and in the long 

run. Using the New Empirical Industrial Organization approach, Chidmi, 

Lopez, and Cotterill (2004) found a similar result: a degree of price 

7

The elasticity of price transmission from the farm to retail level is the percentage change in 

the retail price of a product due to a 1 percent change in the corresponding farm price.

8

While these elasticity estimates are ones obtained from using the Houck method, the author 

found similar results, although smaller, using a time-series, cointegration approach: the 

error correction model (see table 33).
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 152 GAO-05-50 Dairy Industry

transmission of 68 percent for farm price increases for the Boston market.9

Within the same study, the authors also note that Cotterill (2003), in other 

research for Boston, estimated a pass-through rate of between 20 and 26 

percent for price decreases, suggesting price asymmetry in this market. In 

another study of the Boston market, using a two-stage market channel 

model, Dhar and Cotterill (2002) found that the firm-specific price pass 

through rate was 32 to 47 percent, while industrywide pass through was 88 

to 100 percent for price increases.10

In yet another study of the Northeast market, Romain et al. looked at price 

asymmetry before and after the imposition of the New York price-gouging 

law in 1991 and tested for price asymmetry using the elasticity of price 

transmission. Before the price-gouging law, they found that a 1 percent 

increase in the farm price translated into a 0.70 percent and 0.62 percent 

increase in retail prices in New York City and Upstate New York, 

respectively, while a 1 percent decrease translated into a 0.30 percent and 

0.49 percent decrease in these markets. After the law went into effect, they 

found that a 1 percent increase in the farm price translated into a 0.52 

percent increase in retail prices in both New York City and Upstate New 

York, while a 1 percent decrease translated into a 0.43 percent and 0.51 

percent decrease in these markets, respectively. Therefore, long-run price 

asymmetry was significant in both regions prior to the price-gouging law, 

but remained statistically significant only in New York City afterwards, 

though at a much lower level.

9

The New Empirical Industrial Organization is an approach that focuses primarily on the 

relationship between prices and marginal costs that has been used to identify and estimate 

the degree of oligopoly market power in a market. Specifically, the Chidmi et al. study is a 

structural oligopoly model that measures market power, demand, marginal cost, and the 

farm-to-retail price transmission.

10This approach is a cost-pass through model consisting of a two-stage vertical market 

system where there are two processors at the first stage and two retailers at the second 

stage. Within these stages the authors assume different conduct and game theoretic 

assumptions. This study, however, did not address price asymmetry because it did not 

estimate the extent to which price decreases were passed through.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 153 GAO-05-50 Dairy Industry

Results on Farm-toRetail Speed of 

Adjustment and Price 

Transmission 

Asymmetry

We identified fewer studies that examined the speed of adjustment and 

related price asymmetry, or differences in the time required for farm and 

wholesale level price increases and decreases to be passed through to the 

retail level. Hansen et al. (1994), using national aggregate price data for 

whole milk, estimated that it took 3 months after the wholesale price 

increased for the retail milk price to increase, but that it took 30 months for 

the retail price to adjust to wholesale price decreases. In another study 

using national data, Wang (2003), using a structural model, found that, for 

farm price increases, retail prices adjusted more quickly in the first month 

after the increase and more slowly in subsequent periods. Conversely, for 

farm price decreases, the speed of price adjustment was slower in the 

initial month and increased in the following months, implying speed of 

adjustment asymmetry.

Nearly all of the studies of regional or metropolitan price transmission 

found asymmetry in timing—the price adjustment process for price 

decreases much exceeded that for farm price increases. Carman (1998) 

found a 1-month lag for price decreases and no lag for price increases in the 

California markets. In a later study, Carman and Sexton (forthcoming 2005) 

found that for the majority of cities they analyzed, the time lags estimated 

for price decreases generally exceeded those for price increases. For the 

four types of fluid milk, Carman and Sexton found that farm price 

decreases generally took from 1 to 3 months to be transmitted to the retail 

level, while price increases took no more than 1 month. In the California 

markets, the authors found that, in general, retail prices responded more 

quickly to farm price increases than to decreases. Lass et al. (2001) found 

that for the Boston and Hartford markets, retail price adjustments to rising 

farm prices were much more rapid than similar adjustments to falling farm 

prices. Lass (2004) also found evidence of slower price transmission to the 

retail level when farm prices were falling. For markets in the Northeast, 

Frigon et al. (1999) reported short-run asymmetry in price adjustment for 

several markets: price adjustment was complete in Upstate New York after 

2 months and in New York City and the Northeast United States after 3 

months. The authors concluded that short-run asymmetry seemed to be 

milder in Upstate New York, because it lasted for only 2 months. In the long 

run, after 4 months, the Northeast United States, Upstate New York, and 

New York City (after enactment of the gouging law) markets had fully 

adjusted, with only the New York City (before enactment of the gouging 

law) market not fully adjusting.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 154 GAO-05-50 Dairy Industry

Results for Retail-toFarm Price 

Transmission and Price 

Transmission 

Asymmetry

Using data from 1971 through 1991, Emerick (1994) tested for causality in 

fluid milk pricing between the farm and retail levels and found that it was 

bidirectional. That is, the author found that for these data, in addition to 

farm price changes affecting retail prices, retail price changes also affect 

prices at the farm level. However, this specification resulted in some 

parameter values for retail-to-farm price transmission that were 

inconsistent with economic expectations. In a later study, Wang (2003) 

estimated results for retail-to-farm price transmission. In the short run, 

which was estimated to be 1 month, the author found that price increases 

were immediately passed on to the farm level with a level of transmission 

of 94 percent, while price decreases were passed on at a level of 2 percent. 

However, in the longer run, which was estimated as 3 months, price 

increases were passed through at a level of 40 percent, while price 

decreases were passed through at a level of 34 percent. In the long-run 

specification, neither increases nor decreases in price were fully passed 

through. Thus, while the author found price asymmetry in the short run, 

she found price symmetry in the long run for retail-to-farm level price 

changes. As in Wang’s farm-to-retail analysis, increases in the retail price 

were passed through nearly fully in the initial month, and then decreased 

substantially. However, although decreases in the retail price were not 

passed on initially, they were passed on at an increasing rate in the 

following months.

Possible Causes of 

Asymmetry in the 

Extent and Speed of 

Price Transmission

Even fewer economic studies have provided evidence on what causes price 

transmission and price transmission asymmetry. For the U.S. fluid milk 

market in particular, we found few studies that examined factors affecting 

the extent of price transmission and price transmission asymmetry. While 

two major explanations are cited in the economic literature as central to 

explaining price transmission and transmission asymmetry—

noncompetitive markets and adjustment costs—there are several others 

cited, including the role of government policies, spatial market 

competition, substitution in processing technology, asymmetric 

information, economies of scale, and differentiated products. However, 

only the presence of noncompetitive markets and the effects of 

government policies were examined in the studies of price transmission 

that we identified.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 155 GAO-05-50 Dairy Industry

Noncompetitive Markets In general, economic research has found that a higher degree of market 

power can reduce the degree of price transmission.11 Particularly relevant 

to the fluid milk market, researchers have also shown that the number of 

vertical stages and the extent to which a market varies from the 

competitive norm both influence the degree of price pass through.12 Of the 

14 studies that we examined, only 5 explored the role of competition in 

combination with the degree of price transmission and price transmission 

asymmetry in the milk marketing chain. In particular, 2 of these studies 

examined market power stemming from product differentiation of different 

milk types. The evidence from these studies is somewhat mixed. While 1 

study did not find a linkage between market concentration and price 

transmission, other studies using a variety of methods did find evidence of 

either a lack of price transmission or price transmission asymmetry in 

markets that also possessed a degree of market power.

Carman and Sexton (forthcoming 2005), using multiple analytical 

techniques, found that fluid milk markets in the Western United States that 

displayed noncompetitive pricing also tended to lack price transmission 

and show price asymmetry. Using monthly data from 1999 through 2003, 

the authors (1) analyzed the effects of horizontal differentiation among 

fluid milk types by ranking milk with different fat contents for different 

markets based on the costs that would be predicted under perfect 

competition, (2) performed correlation analysis between changes in the 

monthly farm and retail prices of milk with different fat contents, with a 

lack of correlation indicating the exercise of market power, and (3) 

analyzed price transmission, along with the estimated price transmission 

coefficients, to determine competition in the market.

In the first analysis, rank values for all milk types did not conform with 

price expectations, with the exception of whole milk for all the months in 

Seattle. Moreover, except in Portland, they found that the rankings of retail 

milk prices for whole, skim, 1 percent, and 2 percent milk provided 

11S. McCorriston, C. W. Morgan, and A. J. Rayner, “Processing Technology, Market Power, 

and Price Transmission,” Journal of Agricultural Economics, Vol. 49, No. 2, 1998, 185-201. 

Steve McCorriston, “Why Should Imperfect Competition Matter to Agricultural 

Economists?” European Review of Agricultural Economists, Vol. 29, No. 3, 2002, 349-371.

12Steve McCorriston and Ian M. Sheldon, “The Effect of Vertical Markets on Trade Policy 

Reform.” Working paper, September 1994. Also, S. M. McCorriston and I. M. Sheldon, 

“Agricultural Policy Reform in Successive-Oligopolistic Markets: A General Framework,” 

University of Exeter and Ohio State University, December 1995.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 156 GAO-05-50 Dairy Industry

evidence of not being based on costs, as would be expected in perfect 

competition. For the price correlations, the results indicated that only a 

few product pairs in the nine markets have a high degree of 

interdependence, as one would expect for close substitutes. Low 

correlations ranging from nearly complete independence to moderate 

independence for at least one pair of products were evident in each market. 

For instance, retail price changes for skim milk appeared independent of 

other milk prices in Sacramento, Seattle, Portland, Salt Lake City, and 

Denver. The authors explained that these correlations all indicated pricing 

that was inconsistent with competitive pricing.

For the price transmission analysis, the estimated results differed among 

the California markets, depending on the city and type of milk. For 

instance, in certain California markets, such as Los Angeles and San Diego, 

farm price decreases lagged farm price increases by 2 to 3 months, 

depending on the product, indicating price asymmetry in timing. Some of 

these price coefficients were consistent with competitive pricing and 

others were not. However, price transmission estimates for other 

metropolitan regions in the West (Seattle, Portland, Phoenix, Salt Lake City, 

and Denver) provided stronger evidence of noncompetitive pricing, and 

some also indicated price adjustment asymmetry, such as Salt Lake City 

and Phoenix. For these markets, only 3 of the 40 estimated price 

transmission coefficients were consistent with perfect competition.

Using another model of horizontal product differentiation, a subsequent 

study by Sexton, Xia, and Carman (2004) econometrically estimated the 

timing of fluid milk price transmission and tested for market power for four 

California and five non-California cities from 1999 to 2003. While the results 

were somewhat mixed, hypothesis tests for the cities indicating oligopoly 

or monopoly scenarios also displayed more gradual price transmission 

results than those indicating more competitive scenarios, suggesting a link 

between noncompetitive market structures and a lack of price 

transmission.

Chidmi et al. (2004) estimated price transmission and market power for the 

Boston fluid milk market using the New Empirical Industrial Organization 

approach and data from 1996 through 2000. The empirical results of the 

model, in particular the conjectural variation elasticity, suggest that 

participants in this market may possess market power and that 
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 157 GAO-05-50 Dairy Industry

supermarkets do not ignore each other’s actions.13 Although the model did 

not account for speed of adjustment, the authors estimated a price 

transmission level of 68 percent, suggesting that market power is 

associated with incomplete price transmission. A study by Frigon et al. 

(1999) includes a measure of market power, the four-firm concentration 

ratio, in its model of price transmission for Upstate New York and New 

York City. However, this variable did not prove to be significant. Later, in a 

similar study (Romain et al., 2002), the authors explain that their results of 

price asymmetry prior to 1991 in New York City were evidence that 

middlemen in the fluid milk market were exercising market power prior to 

the price-gouging law. The authors found that price asymmetry decreased 

after the law went into effect. They acknowledged, however, that to 

rigorously address the issue of a noncompetitive market, an alternative 

market power model would have to be developed.

Government Policies Two studies looked at the effects of national government intervention on 

price transmission. Emerick (1994) and Wang (2003) both examined the 

question of whether changes in dairy policy, especially the reduction in the 

dairy price support level that began in the mid-1980s, had changed the 

nature of price transmission for dairy products. Both authors basically 

came to the same conclusions. Emerick noted that asymmetry is more 

likely to have occurred since 1988, adding that the greater price volatility 

may have caused some difficulties for retailers and wholesalers in 

determining the “appropriate” price. Wang, using additional data through 

1997, found that reductions in the price support level tend to have a large 

impact on the fluid milk and nonfat dry milk price transmission 

relationships. In the fluid milk market, the farm-to-retail price transmission 

process became asymmetric, with the greater price volatility in the post1988 period. While the degree of price transmission increased for both 

increases and decreases in price, it increased proportionately more for 

increases than for decreases.

Six of the studies examined price transmission in conjunction with other 

state and federal policies and programs, such as the New York pricegouging law and the Northeast Interstate Dairy Compact. Four studies, 

Lass et al. (2001), Lass (2004), Chidmi et al. (2004), and Dhar and Cotterill 

13For this model, the conjectural variation elasticity, a measure of market conduct and firm 

interdependence within the market, was significantly different from zero at the 5 percent 

level.
Appendix VI

Economic Studies of Price Transmission in 

the U.S. Fluid Milk Market

Page 158 GAO-05-50 Dairy Industry

(2002), estimated price transmission while the Northeast Interstate Dairy 

Compact was in effect. Lass et al. found that processors and/or retailers did 

not fully pass through their price increases and, in fact, may have absorbed 

part of the cost of the Compact’s over-order premium. In his 2004 study, 

Lass explained that the greater variation in farm prices that occurs without 

the Compact would actually lead to higher retail prices because of the 

larger estimated impacts on retail prices of increasing farm prices than 

decreasing farm prices. Dhar and Cotterill disagreed and contended in their 

study that the risk reduction benefit from the Compact was completely 

overpowered by a shift toward tacit collusion in the post-Compact period. 

In the studies of New York markets (Frigon et al., 1999, and Romain et al., 

2002) that looked at the effect of the price-gouging law, researchers found 

that after the law took effect, price asymmetry was not present or was 

present at much lower levels.
Page 159 GAO-05-50 Dairy Industry

Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options ApendxiVI

Recent changes in federal dairy programs vary in their effects on policy 

considerations that we identified, such as farm income, milk production, 

federal costs, price volatility, economic efficiency, and consumer prices.1

 A 

number of options have been proposed or discussed to further modify 

existing programs or introduce alternative policies, all of which could 

affect these policy considerations in different ways. The likely effects of 

these program modifications or alternative policies are influenced by 

prevailing conditions, such as high and low dairy prices, and may be 

different in the short and long terms.

Recent Changes in 

Federal Dairy 

Programs Vary in Their 

Effects on Policy 

Considerations We 

Identified

Since 2000, three major changes have taken place in federal dairy 

programs. First, in response to legislative requirements, the U.S. 

Department of Agriculture (USDA) reformed the federal milk marketing 

order (FMMO) system. Second, USDA adjusted the relative purchase prices 

of butter and nonfat dry milk under the price support program. Finally, 

Congress authorized and USDA established the Milk Income Loss Contract 

(MILC) program. These changes had mixed effects on the policy 

considerations included in our analysis. Reforms to the FMMO system had 

mixed effects on farm income, depending on the geographic location of the 

farmer, while the overall effects on all farmers are less clear. Because of 

their effect on fluid milk prices, changes in the price support program 

tended to reduce the level of support for farm income and reduce federal 

costs, but increase economic efficiency. Introduction of the MILC program 

typically had the opposite effects, while maintaining production.

Federal Milk Marketing 

Order Reforms

In carrying out requirements in the Federal Agriculture Improvement and 

Reform Act of 1996 to reform FMMOs, USDA conducted extensive research 

and held public hearings. Agricultural Marketing Service (AMS) officials 

indicated that as a result of this process USDA implemented reforms to the 

FMMO system in January 2000 that were consistent with the findings of its 

research. Its major reforms included

1

There can be different kinds of economic efficiency effects. Government policies may be 

more or less economically efficient depending upon the extent to which they prevent the 

transmission of market price signals and lead to a misallocation of resources into excess 

production. Policies may also be more or less efficient depending upon the extent to which 

they affect the distribution of production between farmers with high or low costs of 

production.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

Page 160 GAO-05-50 Dairy Industry

• consolidating the number of marketing orders from more than 30 to 11;2

• changing the classified pricing structure by creating a new class for 

manufactured milk products, Class IV, with the “higher of” the 

advanced3

 Class III or Class IV skim milk values as the basis—or 

mover4—for Class I prices; reducing the lag between the Class I and 

Class III and IV price announcements; and establishing a fixed 

differential of $0.70 per hundredweight to be added to the advanced 

Class IV skim milk value in determining the price to be paid for milk 

used in Class II products;

• introducing a new product formula pricing system; and

• relaxing restrictions on pooling milk in some marketing orders.5

2

The Federal Agriculture Improvement and Reform Act of 1996 required USDA to 

consolidate the number of marketing orders. Two marketing orders were discontinued 

between 1996 and 1999, so 31 orders were actually consolidated.

3

Basing Class I and II prices on the advanced Class III and IV skim milk values ensures that 

minimum prices of raw milk used in these products will be known in the month preceding 

the month to which they apply.

4

The mover links the dairy price support program to the FMMO system, so that changes in 

one program are reflected in the other. The dairy price support program maintains the 

prices of manufactured products throughout the United States regardless of whether a 

particular area is part of the FMMO system. By using these manufactured product prices as 

the basis for other milk class prices, the FMMO system aims to ensure that its minimum 

prices will reflect the level of support provided by the price support program.

5

In addition to these major reforms, USDA made other changes, including modifying the 

system of differentials used to determine Class I prices. USDA increased Class I differentials 

in 21 markets, ranging from $0.01 per hundredweight in New England (Boston) and New 

York/New Jersey (New York City), to $0.50 per hundredweight in the Upper Midwest 

(Minneapolis). Class I differentials in 4 markets were not changed. Class I differentials in 8 

markets were reduced, ranging from $0.04 per hundredweight in the Ohio Valley 

(Columbus) to $0.18 in Eastern Colorado (Denver). In general, these changes retained the 

existing Class I pricing surface in markets east of the Rocky Mountains. USDA originally 

proposed an alternative set of differentials, but the Consolidated Appropriations Act, 2000 

required adoption of the differentials noted above.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

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USDA implemented additional reforms to the classified pricing system in 

April 2003 that modified aspects of the Class III and IV pricing formulas.6

Federal Order Consolidation In response to the legislative requirement, USDA reduced the number of 

FMMOs to 11, which were typically combinations of pre-existing orders.7

For example, the Central Order is a combination of several smaller 

marketing orders in the central part of the United States. According to 

USDA’s final regulatory impact analysis for the order reforms, these 

consolidation decisions were based on structural factors such as milk 

movement, the number of market participants, and natural boundaries.8

USDA officials and other dairy experts told us that nationally, the prices 

received by farmers for their raw milk did not change much as a result of 

FMMO consolidation. One academic study reported that order 

consolidation probably increased the economic efficiency of the FMMO 

system by more closely aligning areas where raw milk is marketed by dairy 

farmers with areas where it is distributed as fluid milk products. 

Additionally, the study noted that consolidation helped to reduce the 

amount of market distortion created by order regulation.

However, the magnitude of the effects on farm income varied among orders 

because, in some cases, the consolidation combined orders that had 

substantially different raw milk utilization rates for the manufactured and 

fluid products in the various milk classes, particularly Class I (fluid milk). 

As a result, some dairy farmers experienced higher or lower utilization of 

their raw milk in Class I products than they had in the past. Changes in 

utilization rates are significant because farmers receive a blend price for 

their milk based on the utilization rates for the different milk classes within 

an order; thus, farmers in orders where Class I utilization rates increased 

generally saw their incomes increase, while farmers in orders where the 

Class I utilization rates decreased generally had their incomes reduced.

6

The Consolidated Appropriations Act, 2000 also required USDA to reconsider the Class III 

and IV pricing formulas that were implemented with the 2000 reforms. USDA conducted a 

hearing on the issue in May 2000. The reforms implemented in April 2003 stemmed from the 

changes USDA proposed as a result of this hearing.

7

In some cases the new orders included areas previously unregulated by the FMMO system.

8

U.S. Department of Agriculture, Federal Milk Marketing Order Reform: New England et 

al., Final Decision, Regulatory Impact Analysis, Agricultural Marketing Service, Dairy 

Programs, March 1999.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

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The changes in utilization rates associated with FMMO consolidation were 

particularly evident in the Western Order. When USDA created the Western 

Order, it combined the Great Basin and the Southwestern Idaho–Eastern 

Oregon Orders. These orders had substantially different Class I utilization 

rates. In 1999, the Great Basin Order had a Class I utilization rate of 51 

percent, while the Southwestern Idaho–Eastern Oregon Order had a Class I 

utilization rate of 8 percent. When these orders were combined into the 

Western Order, the resulting Class I utilization rate was estimated to be 

about 23 percent, lowering income for the farmers in the Great Basin Order 

who had previously received much higher blend prices. To address this and 

other concerns, Dairy Farmers of America, a cooperative representing a 

number of farmers in the Western Order, requested that USDA hold a 

hearing to reform the order’s provisions. USDA made some changes based 

on the concerns presented at the hearing; however, the revised order 

provisions did not receive the two-thirds approval necessary to be adopted, 

and USDA terminated the order as of April 1, 2004, stating that the 

continuation of the existing Western Order would not be in conformance 

with declared policy.9

Elimination of the Western Order has raised concerns that increased 

amounts of Idaho milk, which had been pooled on the Western Order, 

would be pooled on the Upper Midwest Order. Based on past experience, 

this would reduce the Class I utilization rate and lower the blend price for 

Upper Midwest farmers. However, dairy experts had mixed views on 

whether additional orders would be terminated. In particular, one industry 

expert noted that it remains unclear whether farmers in the former Western 

Order will be able to receive higher prices for their milk without their 

order. Some of these farmers, particularly those that had been in the Great 

Basin Order, could benefit by not having to pool their Class I milk. On the 

other hand, one source stated that these farmers could face increased 

shipping requirements to pool their milk on a remaining order. Additionally, 

some experts stated that without FMMOs farmers and cooperatives do not 

9

After USDA holds a hearing, it may decide to issue proposed amended regulations for 

notice and comment. At the end of the administrative process, USDA issues a final rule, and 

those covered by the order must vote to adopt the order in its amended form. The amended 

order must be approved by at least two-thirds of the affected dairy farmers, or dairy farmers 

who produce at least two-thirds of the milk produced in that order. In addition, the amended 

order will not become effective until the handlers of at least 50 percent of the milk covered 

by the order have signed a marketing agreement, or until a hearing has been held and the 

Secretary of Agriculture makes particular determinations that the marketing order should 

nonetheless be effective.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

Page 163 GAO-05-50 Dairy Industry

have the market power to obtain high prices for their raw milk in 

negotiations with processors.

Classified Pricing Structure 

Changes

FMMO reform changed the structure of the classified pricing system by 

creating a new Class IV, representing the minimum price that processors 

pay for raw milk used in butter, nonfat dry milk, and other dry milk 

powders.10 Additionally, the new mover of Class I prices became the 

“higher of” the advanced Class III or Class IV skim milk values. Use of the 

“higher of” mover was intended to enable fluid milk processors to attract 

milk from butter, nonfat dry milk, and cheese processors by helping to 

ensure that the blend price would exceed both the Class III and IV prices. 

USDA also reduced the lag period—the time between when the Class I 

price is announced and the Class III and IV prices are announced—from 

approximately 8 weeks, to 6 weeks. Class I prices are announced in the 

month preceding the month to which they apply, based on the “higher of” 

the advanced Class III and IV skim milk values.11 However, the Class III and 

IV prices that determine the price of raw milk used to manufacture these 

products are not announced until the Friday on or before the 5th of the 

month following the month to which they apply. Consequently, there is a 6-

week lag between these two price announcements. Further, USDA 

established that the minimum prices paid for skim milk used in Class II 

products would be the advanced Class IV skim milk and butterfat values, 

plus a fixed differential of $0.70 per hundredweight.12 In its March 1999 

regulatory impact analysis, USDA concluded that these changes would help 

to eliminate situations in which prices of milk used in manufactured 

products rise above the price of milk used in fluid milk products and thus 

make the Class I mover more representative of current market conditions.

10Over time, the number of classes has varied by order, from at least two, to seven or eight. 

Class I use has consistently been defined as the milk going into fluid milk products. Class II 

includes soft manufactured products such as ice cream and yogurt, Class III includes 

cheese, and Class IV includes butter and nonfat dry milk.

11Advanced values are derived from formulas that use weighted average prices of butter, 

cheese, dry whey, and nonfat dry milk reported by the National Agricultural Statistics 

Service on the Friday on or before the 23rd of the month preceding the month to which the 

prices apply. There is a 1-week lag in reporting by the Service, so the advanced values are 

usually based on the commodity prices for the first two weeks of the preceding month.

12Class II butterfat is priced by adding $0.007 per pound to the monthly Class III/IV butterfat 

price. Consequently, Class II skim milk is advanced priced but Class II butterfat is not.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

Page 164 GAO-05-50 Dairy Industry

Academic researchers and an industry official indicated that the creation of 

Class IV continued disincentives that were present prior to the 2000 

reforms to shift milk to its highest-valued use. Previously, separate 

minimum prices were established for raw milk used in manufactured 

products that are now included in the new Class IV. Raw milk used in the 

production of butter was priced under Class III, which also included cheese 

and other products. However, nonfat dry milk was priced in a separate 

Class III-A. According to AMS officials, the development of Class III-A was 

necessary because manufacturers were unable to sell nonfat dry milk at 

market prices that would allow them to pay the Class III minimum price for 

their raw milk. They noted that for a classified pricing system to work, the 

minimum class prices must be below the market clearing prices for 

products produced with that raw milk (taking into account the cost of 

other inputs to these products). However, one study found that the creation 

of Class IV institutionalized separate pricing for nonfat dry milk.13 By 

separating out the price for nonfat dry milk (the lowest-valued use), the 

classified pricing system might maintain production of nonfat dry milk 

even when market signals indicate that raw milk should be used to 

manufacture cheese as the higher-valued use.

Additionally, a 2004 study sponsored by the American Farm Bureau 

Foundation for Agriculture (American Farm Bureau) reported that creating 

a separate Class IV and then basing Class I prices on the “higher of” the 

advanced Class III or IV skim milk values, has reduced the influence that 

cheese prices traditionally had over other prices in the FMMO system, and 

thus partially isolated Class I prices from market forces.14 For example, in 

every month from January 2000 through July 2001, advanced Class IV skim 

milk values were higher than advanced Class III skim milk values. 

However, as of 2000, utilization of milk for Class IV products across all 

federal orders averaged 7 to 8 percent, while Class III products accounted 

for about 45 percent of milk utilization.15 According to the American Farm 

Bureau study, without the advanced Class III skim milk value as the mover 

13Bob Cropp and Ed Jesse, “The Butter-Powder Tilt,” Marketing and Policy Briefing Paper 

Number 72, Department of Agricultural and Applied Economics, University of Wisconsin–

Madison, June 2001.

14David Anderson, Bob Cropp, Wilson Gray, Joe Outlaw, and Mark Stephenson, “Milk Pricing 

Policy Options and Consequences,” an Analysis for the American Farm Bureau Foundation 

for Agriculture, February 2004.

15According to a USDA official, Class IV use averages about 12 percent across all federal 

orders and is much higher than 12 percent in several orders.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

Page 165 GAO-05-50 Dairy Industry

for Class I prices, when the Class IV price exceeds the Class III price, 

similar price signals are no longer received by farmers in relatively high 

Class I utilization markets and in high Class III utilization markets. This 

difference occurs because during these times farmers in high Class I 

utilization markets are receiving their price signals based on the high Class 

IV prices, which are heavily influenced by the price support program during 

periods of excess production and low manufacturing product prices. 

Therefore, farmers in high Class I utilization areas receive higher farm 

prices than would otherwise be the case, and higher prices encourage 

increased production by these farmers. However, the higher production 

levels of these farmers puts downward pressure on the Class III prices and 

causes regional inequities in farm income.

Furthermore, because Class I prices are now more closely related to the 

level at which the price support program sustains nonfat dry milk prices, 

proposed changes to the price support program have become much more 

controversial. Prior to the 2000 FMMO reforms, Class I prices were based 

on the Class III price, which, as noted previously, did not include nonfat dry 

milk. However, with the 2000 reforms, the level of support provided by the 

price support program for nonfat dry milk prices directly influences the 

Class IV price. During periods when the Class IV price is higher than the 

Class III price, changing the price support program in such a way that Class 

IV prices are reduced will cause the Class I price to similarly fall, thus 

having a greater impact on the overall blend prices received by farmers.

Introduction of a New Product 

Formula Pricing System

As part of FMMO reform, USDA introduced a new product formula pricing 

system that established minimum prices for raw milk based on milk 

component values for butterfat, protein, nonfat solids, and other solids. 

These values are derived from the wholesale prices of cheddar cheese, 

butter, nonfat dry milk, and dry whey as announced in weekly surveys 

conducted by the National Agricultural Statistics Service.16 The minimum 

prices also factor in allowances based on estimates of manufacturing costs 

for these products and product yield factors representing the amount of a 

particular product that can be manufactured from specified quantities of 

the underlying components. Seven of the 11 orders (primarily the Northern 

orders) adopted the new product formula pricing system, while the other 

16Whey is the water and solid components of milk that remain after the curd is removed in 

cheese-making. It contains about 93.5 percent water and 6.5 percent lactose, protein, 

minerals, enzymes, water-soluble vitamins, and traces of fat.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

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four orders (primarily the Southern orders) use a pricing system that bases 

milk prices on skim milk and butterfat.17

During much of the time that classified pricing has been part of the federal 

order system, the formulas used to set minimum prices paid to farmers 

were based on competitive pay prices. The pay price was known as the 

Minnesota–Wisconsin price, and it represented the results of state surveys 

of competitive market prices for Grade B milk paid by manufacturing 

plants in Minnesota and Wisconsin. However, with a reduction in Grade B 

milk production, this milk was very thinly traded and the pricing series 

became less representative of the value of Grade A milk used for 

manufacturing.18

According to a number of dairy experts, the change from a competitive pay 

to a product formula pricing system that incorporates fixed manufacturing 

allowances has enhanced the effects of price volatility on dairy farmers.19

As noted in appendix V, there are a variety of input costs to the 

manufacturing process, including labor, energy, and capital. With product 

formula pricing, manufacturing allowances, which are supposed to 

compensate for these other input costs, and product yield factors are fixed. 

To the extent that changes in these other input prices are reflected in the 

prices at which manufacturers sell their products, fixed manufacturing 

allowances will allow changes in other input costs to more readily affect 

the minimum raw milk prices paid to farmers.

17Raw milk quality is also factored into the pricing formulas in all but two orders.

18As a result of declining Grade B milk production, the Minnesota–Wisconsin price was 

replaced by the basic formula price in the mid-1990s. The basic formula price established 

the minimum prices for raw milk by updating the Minnesota–Wisconsin competitive pay 

price series with wholesale product price information on the value of cheese, butter, and 

nonfat dry milk. This system was in place from June 1995 through December 1999.

19This is not to say that the FMMO classified pricing system is causing additional volatility in 

milk prices. As noted by AMS officials, an historical review of milk prices shows that price 

volatility existed well before the product pricing formulas were introduced in 2000. AMS 

officials indicated that there are several causes of price volatility including: the level of 

support provided by the price support program, exposure to international trade, and the 

responses to changes in prices by farmers and consumers. However, according to a number 

of dairy experts, the fixed manufacturing allowances in the new product formula pricing 

system have more readily transmitted price volatility within the classified pricing system 

and thus enhanced its effects.
Appendix VII

Effects of Recent Federal Dairy Program 

Changes and Alternative Policy Options

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Dairy experts also indicated that the fixed manufacturing allowances in the 

product pricing formulas reduced economic efficiency by reflecting raw 

milk supply and demand conditions less clearly. Moreover, one large 

processor stated that the manufacturing allowances in the pricing formulas 

are too low and do not adequately represent the costs of manufacturing.20

Regardless of the market price of cheese, butter, or nonfat dry milk, the 

fixed manufacturing allowances provide manufacturing plants with the 

same net returns from 100 pounds of raw milk. Therefore, when market 

conditions reflect higher prices for one of these products, relative to the 

others, manufacturers have less of an incentive to shift production to the 

higher-valued use because any gains they might have realized from selling a 

higher-priced product would be negated by the fact that their 

manufacturing allowance is fixed.21 The 2004 American Farm Bureau study 

noted that prior to the introduction of the new product formula pricing 

system, manufacturers that produced butter, cheese, and nonfat dry milk 

competed more aggressively for raw milk. The study found that if the 

prices of nonfat dry milk and butter, for example, were depressed relative 

to cheese prices, cheese manufacturers would attract milk away from the 

manufacturers of these other products. Therefore, raw milk would more 

readily move to its highest-valued use.22

Further, some dairy experts noted that the additional volatility introduced 

by the fixed manufacturing allowances in the new product formula pricing 

system, when combined with the disincentives these allowances and 

separate manufacturing classes create against shifting milk to its highestvalued use, might have contributed to negative producer price 

20AMS officials indicated that USDA has been working with researchers at Cornell 

University to collect manufacturing plant costs, which these officials believe will assist 

them in establishing the proper level of manufacturing allowances should the dairy industry 

propose a change.

21Other factors that could affect the incentive to shift milk to a higher-valued use include 

transportation costs and changes in processing technology. In addition, when cooperatives 

own the capacity to produce butter, cheese, and nonfat dry milk, they may still have an 

incentive to shift milk to the higher-valued use despite fixed manufacturing allowances, in 

order to provide greater returns to their members.

22One source also noted that by not providing incentives to shift milk to its highest-valued 

use, the product formula pricing system could discourage the development of innovative 

dairy products.
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differentials23 and de-pooling.24 Negative producer price differentials can 

occur because with the 6-week lag between the Class I and Class III and IV 

price announcements, rapid increases in the manufactured product prices 

from which Class III and IV prices are derived can raise these prices above 

the Class I price.25 USDA officials noted that the change to a “higher of” 

mover for Class I prices and the reduction of the lag period were designed 

to reduce the frequency of negative producer price differentials. However, 

to the extent that the fixed manufacturing allowances have introduced 

additional volatility into the pricing system, and the disincentives created 

by these fixed manufacturing allowances and separate manufacturing 

classes have prevented raw milk supplies from moving to their highestvalued use, negative producer price differentials and de-pooling have 

continued.

During times when the producer price differential is negative, some 

processors of manufactured products who normally receive a draw from 

their federal order pool to pay farmers instead have to pay into the pool. In 

such circumstances, many of these processors choose to de-pool because 

by doing so, they gain a competitive advantage over those that remain and 

have to pay into the pool.26 One study on FMMO pooling issues reported 

that since June 2003, negative producer price differentials and de-pooling 

have become more common.27 The study noted that the producer price 

differential in the Upper Midwest Order was negative from July through 

November 2003 and reached a record low level in April 2004 of $4.11 per 

23The producer price differential represents the difference between the value of milk 

established by the classified pricing system as paid by processors and the weighted average 

value of milk as paid to farmers for milk components (butterfat, protein, and other solids). 

The producer price differential is calculated by multiplying the volume of each class of milk 

used in the order by its announced price to obtain a total classified value of milk for that 

order, and then subtracting the total value of milk paid to farmers for butterfat, protein, and 

other solids on a per hundredweight basis.

24This presumes that minimum prices are the effective prices.

25Rapidly rising Class IV prices are a remote possibility at this time due to the surplus of 

nonfat dry milk.

26Processors may remain in a federal order pool despite negative producer price 

differentials for a variety of reasons. For example, Class I processors are not allowed to depool under FMMO regulations.

27Bob Cropp and Ed Jesse, “Federal Milk Marketing Order Pooling, Depooling, and Distant 

Pooling: Issues and Impacts,” Marketing and Policy Briefing Paper Number 85, Department 

of Agricultural and Applied Economics, University of Wisconsin–Madison, June 2004.
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hundredweight. For example, cheese prices in the Upper Midwest Order 

began to rise sharply in mid-July 2003; thus the advanced Class III skim 

milk value that served as the Class I mover for August did not include these 

higher prices. However, the Class III price that was announced in August 

did include these higher prices, creating a negative producer price 

differential. As a result, a number of cheese processors de-pooled in 

August, reducing the order’s Class III utilization, which is usually around 75 

to 77 percent, to just 8.4 percent. Nationally, negative producer price 

differentials were reported for this month in the 7 FMMOs that used the 

new product formula pricing system. For the 11 FMMOs existing at the 

time, de-pooling resulted in 33 percent less milk being pooled compared to 

the same month in the prior year.

De-pooling reduces the overall value of the federal order pool and 

increases differences in the abilities of processors to pay for raw milk. As a 

result, dairy farmers do not receive uniform prices. Farmers marketing 

milk with processors who are able to de-pool may receive higher prices and 

thus an increase in farm income, while farmers marketing milk with 

processors who do not de-pool may receive lower prices. According to the 

June 2004 University of Wisconsin study, this situation represents an 

inequity and is contrary to one of the stated purposes of the FMMO system: 

orderly marketing conditions.

Relaxed Pooling Provisions In some cases, the 2000 FMMO reforms resulted in more relaxed pooling 

provisions. AMS officials noted that when USDA consolidated the 

marketing orders, the pre-existing orders each had its own pooling 

provisions, such as minimum amounts of raw milk required to be shipped 

to processing plants participating in that order’s pool to qualify for its blend 

price or restrictions on rejoining the pool after de-pooling.28 AMS officials 

indicated that where two orders were combined that had different pooling 

provisions, USDA applied the more liberal pooling standard to the 

combined order to prevent farmers from being shut out of the consolidated 

order pool.

28Because these provisions are established on an order-by-order basis, the minimum 

shipping percentages vary by order. In federal milk orders with relatively high Class I use, 

such as the Southeast and Florida Orders, the shipping percentage requirements are higher 

than in orders with relatively low Class I use, such as the Upper Midwest Order. Shipping 

requirements may also vary by months of the year. In orders where milk production tends to 

vary a lot seasonally, the minimum shipping requirements may be greater during low 

production months.
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According to AMS reports from 2000 and 2001, relaxed pooling provisions 

contributed to the pooling of more distant raw milk to receive other orders’ 

attractive blend prices. Pooling was easier because most of the milk that 

was pooled from outside individual federal orders was not required to 

actually be shipped to those orders. Therefore, distant farmers were able to 

share in an order’s blend price without incurring substantial transportation 

costs for shipping milk. For example, under the Upper Midwest Order’s 

pooling provisions, an Idaho dairy cooperative could choose to ship raw 

milk from some of its Idaho farmers to a processing plant that participates 

in the Upper Midwest Order. All subsequent milk deliveries of those 

designated farmers would be priced under the Upper Midwest Order, even 

if only one day’s production was actually shipped to the participating 

processing plant. Other deliveries from these farmers would stay in Idaho 

for processing. In 2001, USDA reported that raw milk from California was 

pooled on the Central, Upper Midwest, and Western Orders. However, most 

of this 4 billion pounds of milk was actually processed in California plants 

that are not regulated by the federal order system. Also during 2001, large 

volumes of raw milk from Minnesota and Wisconsin were pooled on the 

Central, Mideast, and Northeast Orders, while increasing amounts of raw 

milk from Idaho were pooled on the Upper Midwest Order.

According to some dairy experts, the increased pooling of milk across 

orders has had mixed effects on farm income. Those farmers who were 

able to have their milk pooled on distant orders that had higher blend 

prices received an increase in their farm income after accounting for the 

costs of transporting their milk. However, farmers in the receiving orders 

had their farm income reduced as milk from outside the orders reduced the 

value of the pool that could be shared among farmers in the receiving 

orders. The combination of more milk pooled on these orders and constant 

sales of higher-valued Class I and II products decreased the weighted 

average value of the orders’ pools by decreasing the utilization rates of the 

higher-valued classes.

In response to this loss in value, participants in some orders petitioned 

USDA to hold hearings to address relaxed pooling provisions. For example, 

through the hearing process, the Central and Mideast Orders tightened 

their pooling provisions to control the large quantities of milk from 

Minnesota and Wisconsin that were being pooled on these two orders. With 

these tightened provisions, those seeking to pool milk on the Central or 

Mideast Orders have to ship more milk per year or meet other requirements 

to become eligible to share in the receiving orders’ blend prices. A number 
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of dairy experts indicated that these changes have significantly reduced the 

incentive for distant pooling on these orders.

2003 Classified Pricing Reforms USDA made additional reforms to the classified pricing system that went 

into effect in April 2003, modifying aspects of the Class III and IV pricing 

formulas. The principal changes in 2003 were increasing the manufacturing 

allowance in the formula that established a price for the other solids 

component of milk used in Class III products; eliminating the lower bound 

of zero on the Class III other solids component price;29 reducing the 

product yield for the nonfat solids components of milk used in Class IV 

products; and altering the Class III protein formula to prevent Class III 

prices from being lowered by rising butter prices. The 2003 changes were 

partly the result of a court-ordered injunction against the implementation 

of other changes that USDA had proposed based on the 2000 requirement 

that USDA reconsider the Class III and IV pricing formulas.

An analysis by researchers at the University of Wisconsin before 

implementation of the changes indicated that the differences from many of 

these changes would not be dramatic.30 However, the researchers 

estimated that the changes would increase Class III prices by as much as 

$0.57 per hundredweight. More specifically, the study found that the 2003 

changes would eliminate the negative effect that rising butter prices were 

having on the Class III price. Under the prior protein price formula, a $0.10 

per pound increase in the butter price would lower the Class III price by 

$0.04 per hundredweight. The researchers found that the revised formula 

instead yields about a $0.04 per hundredweight increase in the Class III 

price for a $0.10 per pound increase in the butter price. The study also 

reported that the new protein price formula would make it somewhat less 

29The Class III other solids component price (per pound) is calculated by taking the 

difference between the dry whey price reported by the National Agricultural Statistics 

Service and a manufacturing allowance of $0.159, multiplied times a product yield factor of 

1.03. The lower bound of zero, or “snubber,” was designed to prevent the price of other 

solids components from being negative should the market price for dry whey fall below the 

manufacturing allowance. Removing this lower bound created the possibility that the other 

solids component price could actually lower the Class III price during periods of low market 

prices for dry whey, which in fact, occurred from April to June of 2003. However, because 

other solids comprise a small percentage of the overall component value of Class III milk, 

the effect of this change was minor.

30Bob Cropp, Brian Gould, and Ed Jesse, “Federal Milk Marketing Order Reform: November 

2002 Final Decision on Class III/IV Formulas,” Marketing and Policy Briefing Paper Number 

79, Department of Agricultural and Applied Economics, University of Wisconsin–Madison, 

November 2002.
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likely that the advanced Class IV skim milk value rather than the advanced 

Class III skim milk value would consistently serve as the mover for Class I 

prices.31 Increased Class III prices would most likely benefit farmers in 

areas where cheese is an important commodity and where processors do 

not typically pay premiums in excess of federal order minimum prices.

Dairy Price Support 

Program Adjustments

Since 2000, USDA twice adjusted—or tilted—the purchase prices of butter 

and nonfat dry milk as part of its efforts to administer the dairy price 

support program. The first tilt occurred in May 2001, when USDA reduced 

the nonfat dry milk purchase price by approximately $0.10 per pound (to 

$0.90 per pound) and increased the butter purchase price by about $0.20 

per pound (to approximately $0.85 per pound). USDA adjusted the tilt again 

in November 2002 by reducing the nonfat dry milk purchase price another 

$0.10 per pound (to $0.80 per pound) and increasing the butter purchase 

price approximately $0.20 per pound (to $1.05 per pound). USDA took 

these actions because the Commodity Credit Corporation (CCC) was 

accumulating large stocks of nonfat dry milk, leading to high purchase and 

storage costs for USDA, as well as significant market distortions.

As a result of the 2000 FMMO reforms, the federal order class prices and 

the level of support provided by the price support program for nonfat dry 

milk were tied more closely. Many dairy experts noted that, subsequently, 

tilts became more politically controversial because they can have a greater 

negative effect on the FMMO class prices. Lowering the purchase price of 

nonfat dry milk while raising the purchase price of butter decreases the 

overall Class IV price when market prices for nonfat dry milk are at the 

level of the purchase price and market prices for butter are above the level 

of the purchase price. When the advanced Class IV skim milk value is 

serving as the mover for the Class I price, this reduction in Class IV prices 

also reduces Class I prices. Further, because the advanced Class IV skim 

milk value serves as the basis for Class II prices, Class II prices are 

similarly reduced. This scenario occurred during both the May 2001 and 

November 2002 tilts. A representative of one dairy cooperative stated that 

these impacts were particularly pronounced in areas with high Class I 

utilization rates, such as the Northeast and Southeast.

31However, the study noted that Class III prices would have been the driver in only one 

additional month between January 2001 and November 2002.
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According to a report published by the International Trade Commission in 

May 2004, estimates of the actual impacts of these tilts on farm prices 

varied.32 The study presented a USDA estimate that the November 2002 tilt 

reduced fiscal year 2003 average milk prices from $12.10 to $11.90 per 

hundredweight. While USDA reported that this decrease lowered the 

amount of raw milk produced and thus was partially offset by an increase 

in butter prices from reduced production, it still led to a loss in net farm 

income of $192 million.33 Alternatively, the study reported that the National 

Milk Producers Federation estimated that the two tilts ultimately lowered 

farm prices by $0.19 per hundredweight in 2001, $0.48 per hundredweight 

in 2002, and $0.76 per hundredweight in 2003. With these price reductions, 

the organization projected that farm income would fall by $156 million in 

2001, $816 million in 2002, and about $1.3 billion in 2003. Another study 

cited by the International Trade Commission’s report estimated that the 

2002 tilt could have decreased average milk prices by $0.16 per 

hundredweight, reducing production by 814 million pounds and farm 

income by $371 million. However, that study also found that these impacts 

varied substantially, depending upon the assumption of high or low prices 

and the effects of other government programs.

While the tilts reduced farm income and raw milk production, a number of 

dairy experts indicated that USDA’s tilts have increased economic 

efficiency and reduced federal costs associated with the dairy price 

support program. Additionally, some experts noted that by maintaining 

nonfat dry milk prices at artificially high levels, the price support program 

was inducing surplus production of nonfat dry milk. In some cases, nonfat 

dry milk was produced specifically for sale to the government at the CCC 

purchase price. From the beginning of October 2000 through the end of 

May 2001, the CCC purchased approximately 330 million pounds of nonfat 

dry milk (more than 40 percent of national production), and government 

purchase costs exceeded $340 million. Furthermore, in 2002, the CCC 

stocks of nonfat dry milk were equivalent to two-thirds of domestic 

production and exceeded annual domestic consumption by more than 30 

32U.S. International Trade Commission, Conditions of Competition for Milk Protein 

Products in the U.S. Market, Publication 3692 (Washington, D.C.: May 2004). The U.S. 

International Trade Commission is an independent federal agency. Its purpose is to assist in 

the administration of trade laws and to protect U.S. industry, as well as to provide advice 

and research on trade issues.

33The USDA estimate also factored in the benefits provided by the introduction of the Milk 

Income Loss Contract program.
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percent. By reducing the purchase price of nonfat dry milk, USDA reduced 

the incentive to produce surplus nonfat dry milk. The International Trade 

Commission study reported that while production of nonfat dry milk 

continued to rise between 2001 and 2002, after the second tilt production 

declined by about 5 percent between 2002 and 2003. The tilts also helped to 

reduce federal costs associated with purchasing and storing nonfat dry 

milk.

Some sources also indicated that the tilts affected the balance of trade in 

dairy products between the United States and its trade partners. The 

International Trade Commission study reported that during the majority of 

the period from January 1998 to November 2002, U.S. prices for nonfat dry 

milk exceeded international market prices by more than $500 per metric 

ton. Consequently, domestic manufacturers had an incentive to import 

alternative dairy protein products such as milk protein concentrates. By 

lowering the purchase price of nonfat dry milk through the tilts, USDA 

decreased this incentive because domestic manufacturers could obtain 

nonfat dry milk more cheaply.

Introduction of the Milk 

Income Loss Contract 

(MILC) Program

With the introduction of the MILC program in 2002, dairy farmers began 

receiving payments on milk production up to 2.4 million pounds annually 

when the Class I price in Boston dropped below $16.94 per hundredweight. 

MILC payments are equal to 45 percent of the difference between $16.94 

and the lower Boston Class I price. From the program’s inception, MILC 

payments were made every month from the retroactive start date of 

December 2001 through August 2003 because there was an extended period 

of depressed farm prices, which reached a 25-year low in early 2003. Prices 

temporarily recovered from September through December 2003, so no 

MILC payments were made in those months; however, payments resumed 

during January and continued through April 2004. During the spring of 

2004, farm milk prices reached record highs and remained strong through 

the fall of 2004, so no MILC payments were required for the remainder of 

fiscal year 2004.

As a result of depressed farm milk prices during 2002 and 2003, federal 

costs associated with MILC payments exceeded original estimates. Based 

on market conditions in March 2002, the Congressional Budget Office 

estimated total federal costs of the MILC program at $963 million over the 

life of the program (i.e., about 4 years). However, 1 year later, the 

Congressional Budget Office revised its total cost estimate for the MILC 

program to $4.2 billion. USDA distributed approximately $1.8 billion in 
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MILC payments to dairy farmers in fiscal year 2003.34 Thus, the cost of 

MILC through fiscal year 2003 alone exceeded the previously estimated 

total costs for the entire 4-year period through 2005 by about $800 million. 

The Congressional Budget Office’s March 2004 estimate for total MILC 

program costs was $3.8 billion, somewhat lower than the 2003 estimate 

because of higher farm milk prices in 2004.35

Many dairy experts indicated that by providing income support during lowprice periods, the MILC program has helped keep some farmers, 

particularly smaller farmers, in business.36 For example, some academic 

experts noted that some farmers received MILC checks of about $20,000 to 

$25,000, and others said that despite low prices, fewer farmers exited the 

market in 2003 than in previous years. USDA officials indicated that these 

payments delayed the supply response to low prices and maintained 

depressed milk prices over a longer period of time. By providing direct 

payments when prices were low, MILC obscured market signals that would 

normally cause farmers to decrease production, and continued high levels 

of production retained downward pressure on milk prices. To the extent 

that these lower farm prices were passed on through the retail level, 

consumers may have experienced lower prices for dairy products.

Despite this effect, dairy experts stated that smaller farmers receive a net 

benefit from MILC because those with about 100 to 130 cows can have all 

of their production covered under the 2.4 million-pound annual cap. In 

contrast, larger farmers do not receive net benefits from MILC because the 

negative farm income effects of reduced milk prices are greater than the 

payments they receive under the production cap. A couple of dairy experts 

noted that the break-even size, at which MILC payment benefits just offset 

the negative farm income effects of prolonged low prices, is about 400 

cows. Because the effects of MILC vary by producer size, they also vary 

34This included retroactive payments made for production in fiscal year 2002.

35The $3.8 billion estimate comprises actual outlays of about $1.8 billion in fiscal year 2003 

and forecasts of $935 million in fiscal year 2004, $963 million in fiscal year 2005, and $77 

million in fiscal year 2006. Some MILC payments will extend into fiscal year 2006 for milk 

produced in fiscal year 2005. USDA noted that its estimate of MILC payments for fiscal year 

2004 is $300 million, much less than the Congressional Budget Office’s estimate.

36While MILC has helped some farmers to weather low price periods, USDA officials stated 

that the program has not necessarily changed the long-term strategy of farmers to exit 

production. When making a decision to remain in production, farmers have to weigh a 

number of considerations in addition to MILC payments, particularly costs and market 

conditions.
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regionally. States with many small dairy farmers, such as Pennsylvania, 

Wisconsin, and Vermont, have received greater proportional benefits from 

MILC. However, the MILC program has disadvantaged states with larger 

producers, such as western states.

Effects of Alternative 

Dairy Policies Differ 

under Various 

Scenarios

A number of options have been proposed or discussed to further modify 

existing programs and policies or introduce alternative ones, all of which 

could affect the policy considerations we identified in different ways. 

These options span a range of existing and potential federal dairy programs 

and policies, including FMMOs, price supports, MILC, target price 

deficiency payments, the proposed National Dairy Equity Act, trade 

restrictions and export incentives, risk management, and supply 

management. Current international trade agreements and ongoing 

negotiations can have implications for certain of these policy options, such 

as price supports, export incentives, and trade restrictions.37 The purpose 

of this analysis is not to take a position for or against any of these options 

or to analyze them in terms of their overall economic impacts, but simply to 

discuss their likely effects on the policy considerations we identified. The 

likely effects of these alternatives sometimes differ under various 

scenarios, such as high or low prices, and may be different in the short and 

long terms.

In general, options that increase farm income over the short term also tend 

to increase milk production and thus the potential for oversupply and 

37In the 1994 Uruguay Round Agreement on Agriculture of the General Agreement on Tariffs 

and Trade, World Trade Organization (WTO) members, including the United States, made 

commitments to improve market access, reduce export subsidies, and limit and in some 

cases reduce trade-distorting domestic agricultural supports. For example, Uruguay Round 

commitments on domestic agricultural subsidies include annual aggregate ceiling levels for 

certain types of direct government support, which include price supports for dairy products. 

The United States and other WTO members are currently engaged in another round of 

multilateral trade negotiations that began in Doha, Qatar, in 2001, where they reaffirmed 

their commitment to agricultural trade liberalization, and in July 2004, WTO members 

agreed on a framework to guide negotiations on agriculture. The U.S. negotiating position 

has emphasized harmonizing, reducing, and further disciplining agricultural subsidies. In 

the interim, existing Uruguay Round commitments will continue at established levels. WTO 

members found to be in violation of these commitments can be subject to retaliatory 

measures, such as punitive tariffs on exports.
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lower average farm prices over the long term.38 These options also tend to 

be costly for the federal government during periods of low prices. In some 

cases options that increase the economic efficiency of federal dairy 

programs also increase price volatility because they allow clearer 

transmission of market price signals.39 Further, to the extent that price 

changes at the wholesale level are passed through to the retail level, a 

number of options would likely have mixed effects on consumer prices 

depending upon the particular product under consideration (e.g., butter, 

cheese, or fluid milk). The potential impacts of the options also vary 

according to the size of the producer and region of the country. In general, 

options that affect farm income without respect to farm size or cost of 

production could further shift production towards larger, western farms. 

Production shifts toward larger farms could increase the potential for 

oversupply in the market, because such farms have a greater capacity to 

increase production in response to policy incentives. In some cases, 

options that reduce support for farm income could have disproportionately 

negative impacts on smaller farmers, who often have higher costs of 

production.40

Change the Federal Milk 

Marketing Order Program

Dairy experts have cited a number of concerns with FMMOs, including that 

with the increasing ability to transport milk products longer distances, the 

differences in Class I differentials provide incentives for overproduction in 

some regions; that recent revisions to the classified pricing system 

enhanced the effects of price volatility on dairy farmers; that changes in 

pooling restrictions increased the flow of milk between different regions of 

the country, which disrupts the market; that consolidation of the FMMOs 

combined some areas of the country that were not part of the same natural 

“milksheds;” and that it takes too long to change the federal order system 

38Small surpluses or shortages in the short term may be the result of market corrections and 

may not represent inefficiencies in the allocation of production resources.

39The level of price volatility could influence both the supply and demand for milk products. 

For example, manufacturers of products using dairy ingredients might purchase larger 

quantities of these ingredients if prices are more stable.

40To evaluate the impacts of various options on policy considerations such as farm income, 

milk production, and federal costs, we compared these options against a baseline scenario 

of the policies in place as of August 2004: FMMO regulations, a MILC program that is 

scheduled to expire at the end of fiscal year 2005, a price support program at $9.90 per 

hundredweight, a Dairy Export Incentive Program (DEIP), trade restrictions, and milk 

regulatory policies in some states.
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through the USDA hearing process. A number of options have been 

proposed or discussed to modify the FMMO program, including revising 

the classified pricing system, making administrative changes such as 

tightening pooling provisions, or eliminating FMMOs altogether. Figure 36 

shows the effects of various options to change the FMMO program over the 

short and long terms.

Figure 36: Potential Effects of Options to Change FMMOs on Various Policy Considerations

?

? ? ?

?? ?

?

? ?

? ?

? ?

?? ?

? ?

?

?

? ? ? ?

? ?

?? ? ?

? ? ??? ?

? ? ? ?

?? ? ?

?

?

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Revise classified pricing

Change administration of FMMOs

Eliminate FMMOs

Use competitive pay prices

Combine Class III/IV

Change Class I mover

Tighten pooling with increased shipping requirements

Tighten pooling by restricting de-pooling

Split up FMMOs

Accelerate USDA hearing process

Eliminate FMMOs

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Short term Long term
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Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

Revise Classified Pricing Academic, industry, and government sources cited a variety of concerns 

with recent reforms in the classified pricing system, including that these 

changes enhance the effects of price volatility on farmers; lessen the 

transmission of market price signals; reduce incentives for market 

participants to shift milk to its highest-valued use; discourage innovation; 

and contribute to de-pooling during periods of price volatility. A number of 

options exist to revise the classified pricing system, including basing the 

class pricing formulas on competitive pay prices instead of product prices, 

combining Class III and IV into a single manufacturing class of milk, and 

changing the Class I mover from being the “higher of” the advanced Class 

III or IV skim milk values to a weighted average of these prices.

Use Competitive Pay Prices Instead of Product Formula Pricing

One option to reform the classified pricing system would be to return to a 

system of competitive pay prices as the basis for the minimum prices that 

manufacturers pay for raw milk. As indicated by AMS officials, the change 

to a product formula pricing system has enhanced the effects of price 

volatility on the prices that farmers receive for their raw milk. The AMS 

officials, as well as academic and industry sources, noted that competitive 

pay prices for raw milk would be a better basis for the minimum class 

prices. However, the officials noted that the lack of good data is a major 

challenge to developing a competitive pay system that is more broadly 

based than the old Minnesota-Wisconsin price series.41

In an earlier report, we compared the concept of a competitive pay system 

to a product formula pricing system, among other options.42 We found that 

while a product formula pricing system would be superior to other 

mechanisms in reflecting national prices of manufactured dairy products, 

41With declining Grade B milk production, any alternative competitive pay system would 

have to include Grade A milk. Consequently, a key challenge in developing a good 

competitive pay price series is obtaining data that are not already influenced by the FMMO 

classified pricing system. AMS officials noted that during FMMO reform and consolidation, 

AMS commissioned a blue-ribbon committee of academics to evaluate various milk pricing 

methods. Although the committee’s preference was for a competitive pay price series, they 

were unable to develop or suggest a way of creating such a series.

42GAO, Milk Pricing: New Method for Setting Farm Milk Prices Needs to Be Developed, 

GAO/RCED-90-8 (Washington, D.C.: Nov. 3, 1989).
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the accuracy of price levels under the system would depend on a number of 

factors, including whether the manufacturing allowances—deductions 

made for the costs of manufacturing different dairy products—are 

accurate. Setting accurate manufacturing allowances is difficult because 

individual plants could have different cost structures. As noted earlier, we 

heard from several academic, industry, and government sources that the 

fixed manufacturing allowances in the current product pricing formulas 

have negative impacts on the economic efficiency of the classified pricing 

system by reflecting supply and demand conditions less clearly.43

On the other hand, we found that while a competitive pay system for Grade 

A milk was similar to a product formula pricing system in that it would 

generally reflect national prices of manufactured dairy products, it would 

more readily reflect national supply and demand conditions for raw milk 

used for manufacturing. Also, it would more accurately reflect competitive 

pressures from the fluid milk market because Grade A milk is used to meet 

shortages in areas of the country with high Class I utilization. Furthermore, 

we reported that a competitive pay system would be better than a product 

formula pricing system at self-adjusting automatically because the 

competitive system would be based on actual reported prices. Therefore, a 

competitive pay system could improve the economic efficiency of the 

classified pricing system by providing clearer market price signals.

AMS officials stated that if it were possible to obtain adequate data, 

returning to a competitive pay system would introduce greater stability into 

farm milk prices because basing the price formulas on competitive pay 

prices allows manufacturers’ margins to be set outside the federal order 

system. According to the officials, when manufacturing costs increase, 

manufacturers tend to decrease their margins; they then increase their 

margins when costs go back down. The AMS officials also stated that to the 

extent the effects of price volatility are reduced by eliminating fixed 

manufacturing allowances, raw milk production would increase, holding 

average milk prices constant.

43Another alternative modification to the classified pricing system would be to raise the 

manufacturing allowances; however, the accuracy of any adjustment that does not change 

according to market forces would eventually decrease. Further, the problem of trying to 

develop an allowance that adequately represents costs of production in an environment of 

widely varying cost structures would still exist.
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Combine Class III and IV

A second option discussed by some of the academic and industry sources 

we contacted would be to combine Class III and IV into a single 

manufacturing class.44 While an objective of USDA’s FMMO reforms, 

including developing separate manufacturing classes on which to base fluid 

milk prices, was to avoid situations in which the price of milk used in 

manufactured products rises above the price of milk used in fluid products; 

as we noted earlier, this change has muted market price signals and has 

reduced incentives to move milk to its highest-valued use. However, an 

academic source indicated that a potential challenge in combining Class III 

and IV is identifying an appropriate formula that considers the products in 

an expanded class. In addition, AMS officials cited this issue noting that 

one barrier would be finding a way to price the lowest-valued use, nonfat 

dry milk, so that manufacturers of this product would be able to afford to 

pay the minimum class price to farmers.

A number of industry and academic sources said that combining Class III 

and IV into a single manufacturing class would allow milk to move to its 

highest-valued use. With a separate Class IV, processors of butter and 

nonfat dry milk can pay less for their raw milk supplies under certain 

market conditions, which can stimulate additional allocation of raw milk 

into Class IV products. Under such conditions, by reducing these market 

distortions, combining Class III and IV might help to increase the economic 

efficiency of the classified pricing system.45 It could also help to limit the 

decline in market prices caused by overproduction of nonfat dry milk and 

thus reduce the federal costs of CCC purchases of this commodity. Over the 

long term, limiting overproduction incentives will help all farmers by 

maintaining higher average farm prices. However, these benefits could be 

limited by constraints on the extent to which raw milk is free to move 

between different uses. Some USDA officials have indicated that 

manufacturing capacity for different products varies by region and that 

manufacturing plants are often specialized. In addition, fixed supply 

agreements within the dairy industry may not allow manufacturers 

44Class I includes fluid milk products, Class II includes soft manufactured products such as 

ice cream and yogurt, Class III includes cheese, and Class IV includes butter and nonfat dry 

milk.

45As discussed later in this appendix, this distortion could also be reduced by changing the 

price support program.
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significant freedom to shift raw milk between uses in response to price 

signals in the short term.

Combining Class III and IV could have mixed impacts by region on farm 

income because with a combined manufactured product price, high prices 

for one particular use of milk would offset low prices for other uses in 

creating a weighted average price. Utilization rates for the different 

manufacturing uses vary among orders, and farmers whose average blend 

prices might be higher based on utilization of their raw milk for a highervalued use under a separate class price scenario could experience lower 

average returns under a combined class price scenario if the price of their 

higher-valued use were weighted down by the inclusion of the lower-valued 

use. Conversely, farmers whose average blend prices might be lower based 

on utilization of their raw milk for a lower-valued use under a separate 

class price scenario could experience higher average returns under a 

combined class price scenario. For example, in regions with higher Class IV 

utilization, the loss of a separate Class IV could result in lower average 

farm income during periods when Class IV prices would otherwise be 

higher than Class III prices. In regions with higher Class III utilization, 

however, the loss of a separate Class IV could result in higher average farm 

income during periods when Class III prices would otherwise be lower than 

Class IV prices.

Change Class I Mover

If Class III and IV prices are kept separate, a third option to modify 

classified pricing would be to use a weighted average of Class III and IV 

prices as the mover for Class I prices. This option would tie fluid milk 

prices more closely to market related manufacturing prices, particularly 

when prices of Class III products are depressed relative to Class IV 

products. One academic study that modeled the price volatility impacts of 

using a weighted average of Class III and IV prices to set Class I prices 

reported that using the weighted average, rather than the “higher of” the 

advanced Class III or IV skim milk values, slightly decreases the volatility 

of farm prices, largely through a more substantial decrease in the volatility 

of the Class I price.46 As a result of this reduced volatility, the study 

estimated that the average Class I price would decline by roughly $0.40 per 

46Charles F. Nicholson and Thomas Fiddaman, “Dairy Policy and Price Volatility.” Paper 

presented at the 10th Annual Workshop for Dairy Economists and Policy Analysts, Memphis, 

Tennessee, April 2003.
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hundredweight, causing an average farm price decline of $0.09 per 

hundredweight. The study found that there would be essentially no change 

in the volatility of other class prices or product prices.

These effects are likely to vary by region. As the Class I price is expected to 

decrease more than the average farm price, the effects of this option could 

be more significant in regions with high Class I utilization of raw milk. The 

reduction in farm prices could cause a marginal downward supply 

adjustment over the long term, the effects of which would also be stronger 

in high Class I utilization areas. The effects of reduced prices on farm 

income could be partially offset by increased MILC payments as long that 

program remains in existence. Increased MILC payments would raise 

federal costs, particularly during periods of low prices. However, this 

option could also help USDA minimize the costs of the price support 

program by making it less controversial to adjust the tilt between butter 

and nonfat dry milk purchase prices because these prices would no longer 

exert as great an influence on the Class I price.

AMS officials cautioned, however, that this option could increase the 

likelihood that manufactured product prices would rise above blend prices, 

leading to more frequent negative producer price differentials and depooling.47 The officials noted that the purpose of implementing the “higher 

of” the advanced Class III or IV skim milk values provision was to reduce 

the frequency of negative producer price differentials. They said that 

implementing an option that reduces blend prices makes it more likely that 

the value of one of the manufacturing class prices will rise above the blend 

price. The officials also indicated that consumers may benefit from lower 

prices to the extent that the Class I and blend price decreases are 

transmitted through the milk marketing chain. One AMS official questioned 

the extent to which this option would reduce the volatility of Class I prices, 

noting that since January 2000 the volatility of Class I prices would have 

been about the same under a weighted average mover.

Change the Administration of 

FMMOs

Another set of options to modify FMMOs involves changing their 

administration. Pooling provisions could be tightened by increasing the 

amount of milk that must be shipped to an order to qualify for that order’s 

blend price or by placing restrictions on de-pooling. Alternatively, federal 

47AMS officials noted that other alternatives, not discussed in this appendix, that could 

prevent negative producer price differentials include eliminating the advanced Class I price 

announcement and setting minimum prices for all classes in advance.
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order reform could be reconsidered by splitting up some of the 

consolidated orders. Finally, USDA may be able to shorten the time 

between a hearing request and implementation of a final decision.

Tighten Pooling Provisions with Increased Minimum Shipment 

Requirements

Federal order reforms relaxed the pooling provisions of many orders, 

which negatively affected some farmers by diluting their Class I utilization 

rates and lowering their blend prices as increased amounts of distant milk 

were pooled on their orders. In response, participants in some orders 

called for hearings to tighten their pooling provisions, often by increasing 

the minimum amount of milk that must be delivered to processing plants 

participating in their pool to qualify for the blend price. With the end of the 

Western Order, the concern that some milk formerly pooled on that order 

could be pooled on the Upper Midwest Order led two groups of dairy 

cooperatives operating there to request a hearing to tighten the order’s 

pooling provisions.48

According to some AMS officials, restricting the pooling of raw milk 

through increased shipping requirements would not have a significant 

national impact. However, they said there could be mixed regional effects 

on farm income and production. Farmers in areas seeking to pool milk to 

other orders would generally see a negative impact on their farm incomes 

because they would incur greater transportation costs trying to share in the 

value of another order’s pool and would, therefore, pool less milk in other 

orders. However, farmers in the receiving order could see an increase in 

their farm income because with less milk pooled from outside the order, 

their pool would retain more of its value and they would receive higher 

blend prices. In each case, there could be localized production effects 

depending upon whether farmers experience an increase or a decrease in 

their farm income. The AMS officials stated that tightening pooling 

provisions would have minimal effects on price volatility because the 

tighter provisions would not change overall supply and demand conditions. 

However, the officials also indicated that the economic efficiency of the 

FMMO system would increase to the extent that reducing the amount of 

milk pooled on distant orders would reduce the amount of money spent on 

transporting milk. Because impacts on national production levels are likely 

to be limited, impacts on federal costs would be minimal.

48This hearing took place in August 2004.
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Tighten Pooling Provisions with Restrictions on De-Pooling

A second option for tightening federal order pooling provisions is to place 

additional restrictions on those who choose to de-pool. As noted earlier, 

price volatility leading to negative producer price differentials and depooling can negatively affect those who remain in a federal order pool 

because the overall value of the pool is reduced.49 Some orders restrict depooling by preventing milk handlers who choose to de-pool from re-pooling 

for a specific period of time.50 One such restriction recently proposed by 

cooperatives in the Upper Midwest Order would limit a processor’s pooled 

milk in any month to a specified percentage of that processor’s pooled milk 

in the previous month. Under that restriction, if a processor partially depooled in one month, it could only partially re-pool in the subsequent 

month. If it fully de-pooled, it would have to wait a month before it could 

re-pool.

Restricting de-pooling would have mixed effects on farm income. Because 

de-pooling allows some processors to pay farmers higher prices, some 

farmers would be harmed if de-pooling were restricted. Conversely, those 

farmers who are harmed by de-pooling could benefit if more of the pool 

value were retained during periods of volatile prices. While nonuniform 

farm prices do not help to achieve orderly marketing, restricting de-pooling 

could make this problem worse if it encourages some processors to leave 

the order system permanently. In that case, the reserve supply of milk for 

fluid production would shrink, and orders would have to increase 

minimum shipping requirements for remaining pooled processors and dairy 

cooperatives. If restricted de-pooling actually caused fewer processors to 

be associated with the federal order system, volatility in fluid milk prices 

could increase because with less milk available in reserve to supply the 

Class I market, seasonal or episodic fluctuations in milk supply and 

demand could have greater price impacts. However, an AMS official 

indicated that in general processors benefit over the long term from being 

pooled, and so restrictions on de-pooling would not necessarily decrease 

the supply of milk available for fluid milk products. If the supply of milk 

49Changes in federal dairy policy that reduce price volatility, such as increasing the level of 

support provided by the price support program, would help to reduce instances of negative 

producer price differentials and de-pooling.

50Handler is the federal order term for cooperatives, processors, or dealers of milk who 

commonly purchase raw milk and sell pasteurized milk and milk products. See 7 C.F.R. 

§1000.9 for a more complete definition.
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available for fluid milk products did not decrease, then the volatility of fluid 

milk prices would not increase. The effects of restricted de-pooling on 

other policy considerations, such as federal costs or consumer prices, are 

unclear.

Split Up Consolidated Federal Orders

A third option to revise the administration of FMMOs is to split up some of 

the consolidated orders where the combination of orders with different 

utilization rates of the different classes of milk has created problems. Many 

industry, academic, and government sources stated that federal order 

consolidation has had some significant regional effects, including the 

demise of the Western Order. One source stated that because of order 

consolidation, some orders have become so large that they include milk 

that would not normally be in the milkshed for particular marketing areas. 

This increases the potential that some farmers’ blend prices will decrease 

with lower utilization rates of raw milk in Class I products. To address this 

problem, USDA is currently considering a proposal to split up the 

Southeast Order and create a “Mississippi Valley” Order.51

Splitting up certain orders could have mixed effects on farm income. In 

cases in which experts have cited problems with federal order 

consolidation, the problems developed because two previously existing 

orders that had largely different Class I utilization rates were combined. 

With the additional milk pooled under the consolidated order, farmers that 

had been in the order with the higher Class I utilization rate saw a decrease 

in their blend price. However, farmers that had been in the order with the 

lower Class I utilization rate experienced an increase in their blend price. 

Therefore, splitting up the consolidated orders in these instances would 

affect farmers differently depending on the Class I utilization rates of the 

new orders. AMS officials indicated that splitting up orders would affect 

the distribution of farm income but would not affect overall production and 

therefore would have minimal impacts on federal costs. They also noted 

that splitting up orders could increase the movement of milk because 

having smaller orders makes farm prices more closely reflect local supply 

and demand conditions. Therefore, to the extent that smaller orders would 

increase the blend prices in some areas, this option could create incentives 

to transport more milk to those areas.

51Also under consideration are alternative proposals that would merge the Southeast and 

Appalachian Orders, as well as add areas to the merged orders.
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Accelerate USDA’s Hearing Process

Some experts suggested that USDA’s federal order hearing system is too 

slow to effectively respond to problems and changing market conditions. 

The American Farm Bureau study reported that it can take 2 or more years 

from the time USDA receives a request for a hearing or direction from the 

Congress before USDA implements the rules of a final decision. The study 

noted that within this long time frame, either the industry may have 

struggled under faulty rules or, by the time final rules are effective, industry 

changes may have occurred rendering the final rule obsolete. For example, 

a couple of industry sources stated that the dairy industry is changing 

rapidly, with a number of new products coming onto the market. They 

indicated that USDA would have difficulty regulating these products 

because it takes too long to get a decision on the class under which they 

would be priced.

USDA faces a number of challenges in shortening the time between 

receiving a hearing request and implementing the rules of a final decision, 

while still ensuring the promulgation of economically sound regulation.

• The USDA hearing process is set forth by law.52 Before issuing or 

amending marketing orders, the Secretary of Agriculture must conduct a 

formal on-the-record rulemaking proceeding. USDA must notify the 

public and provide an opportunity for a public hearing and comments. 

Before an order regulation or amendment to a milk marketing order can 

become effective, it must meet certain requirements including that it be 

approved by at least two-thirds of the affected dairy farmers in the 

order, or dairy farmers who produce at least two-thirds of the milk 

produced in that order.

• If individual parties do not agree with the USDA decision, they can seek 

review of that decision in federal court. For example, after the 2000 

FMMO reforms, several industry groups received an injunction that 

prevented USDA from implementing new pricing rules that would have 

established separate Class III and IV butterfat prices. In response, USDA 

issued a revised decision, but these new rules were not implemented 

until April 2003.

527 U.S.C. §608(c).
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• Making informed decisions about changes in complex federal dairy 

policy can be time-consuming. For example, such decisions require 

thorough analysis and possibly modeling. In addition, AMS officials 

indicated that hearing participants are not always ready on time, and 

keeping a stricter schedule could result in an incomplete hearing record. 

Furthermore, they stated that it is difficult to compile the hearing 

transcripts quickly and accurately. However, they noted that USDA has 

recently begun evaluating its transcript contracts using an approach that 

considers timeliness and accuracy.

• The politicized nature of dairy policy makes it difficult to agree on 

proposed changes to FMMOs. Because FMMO provisions affect 

cooperatives and processors in different ways, these entities may not 

always agree on a proposed change. Moreover, given regional 

differences in production and utilization, farmers in different regions 

may not agree on changes in federal dairy policy.

AMS officials said that delays are also caused by the lack of available 

judges and attorneys who deal with milk pricing issues. The officials said 

that increasing the speed of the decision-making process is likely to 

increase federal costs because more of these resources would be required. 

USDA officials indicated that they do not believe the hearing process 

inhibits the ability of FMMOs to respond to changing market conditions or 

the marketing of new dairy products.

Eliminate FMMOs or Classified 

Pricing

Rather than trying to reform the FMMO system, some dairy experts have 

considered the possibility of eliminating FMMOs and thus the classified 

pricing system.53 To the extent that manufactured product prices stay 

above the level of the price support program, market forces would set 

prices for all uses of milk. In a 1988 report on FMMOs,54 we found that the 

production and marketing conditions used to justify federally guaranteed 

milk prices under marketing orders no longer existed because most milk 

53This would be such a major change in federal dairy policy that its impacts are uncertain. 

This uncertainty is reflected in the differences in the estimated impacts of various empirical 

studies that considered this alternative. AMS officials indicated that without the FMMO 

system of minimum prices set for milk based on wholesale dairy product prices, it is unclear 

whether or not a structure would evolve that similarly transmits wholesale price signals to 

farmers.

54GAO, Milk Marketing Orders: Options for Change, GAO/RCED-88-9 (Washington, D.C.: 

Mar. 21, 1988).
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being produced is now Grade A and is eligible to serve the fluid milk 

market during periods of supply and demand imbalance.55 Also, our study 

noted that improvements in refrigeration and the transportation system 

have made it less expensive to rely on milk supplies from other markets. 

Further, we reported that the differences in Class I differentials—which 

were, in part, intended to represent the costs of producing and transporting 

milk from areas with a surplus to areas with a deficit—actually bear little 

relationship to differences in either production or transportation costs for 

milk, thereby providing incentives for overproduction in certain regions. A 

2002 University of Wisconsin study argued that this overproduction has 

hurt farmers in areas with low Class I utilization through an overall 

reduction in the price of milk used for manufacturing purposes.56

Academic and USDA studies have generally concluded that without the 

classified prices established by FMMOs, fluid milk processors would likely 

pay lower average prices to farmers, which would decrease farm income in 

high fluid milk utilization areas, especially in the short term. Estimates of 

impacts on farm prices varied among studies. For example, the American 

Farm Bureau study estimated that average farm prices for raw milk would 

fall by about $0.50 per hundredweight during the first couple of years 

following federal order elimination.57 Another study, published by USDA, 

estimated that eliminating the federal order system would decrease Class I 

prices an average of $0.95 per hundredweight over the period from 2002 

55Dairy farmers sell two grades of milk. Grade A may be used for fluid consumption or in 

manufactured products. Grade B may be used only for manufactured products. Farmers 

producing Grade A milk must adhere to higher sanitation requirements than for Grade B 

milk. The FMMO system was developed to ensure an adequate supply of Grade A milk to 

meet the fluid milk needs of consumers.

56Tom Cox, Bob Cropp, Randy Fortenbery, and Ed Jesse, “Rethinking Dairyland Chapter 3: 

The Effects of Federal Dairy Programs on the Competitiveness of Dairying in Wisconsin,” 

Marketing and Policy Briefing Paper Number 78C, Department of Agricultural and Applied 

Economics, University of Wisconsin–Madison, September 2002.

57This analysis assumed that a fluid milk premium of $0.50 per hundredweight would remain 

nationally and that California would make no changes to its state milk marketing system. If 

the assumption of a fluid milk premium is dropped, the study showed a farm price decrease 

of closer to $0.70 per hundredweight during the first couple of years following FMMO 

elimination.
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through 2007.58 Further, the 2002 University of Wisconsin study estimated 

that farm prices would decrease around $0.05 to $0.10 per hundredweight. 

AMS officials indicated that farmers would likely reduce production to the 

extent they receive lower average farm prices.

The effects of FMMO elimination could be different based on farm size. 

Some of the academic and industry sources we contacted noted that 

farmers are at a disadvantage in terms of market power within the dairy 

industry. Without the pooling of milk proceeds and the payment of uniform 

blend prices, larger farms would have increasing incentives to establish 

contracts directly with processors, and processors would increase their 

efforts to procure milk directly from larger farms closer to their own 

plants. Smaller and more distant farms could be more likely to be bypassed. 

Also, to the extent that dairy cooperatives are unable to cover the costs of 

balancing and other services they provide, processors may be able to 

deflect the costs of these operations back to farmers.

Studies also indicated that the magnitude of these effects could vary by 

region. Without classified pricing, the prices of raw milk used in fluid milk 

products are likely to fall, while the prices of raw milk used in 

manufactured products are likely to rise. As a result, farmers in regions 

with higher utilization of raw milk for fluid purposes, such as the 

Northeast, would be worse off without classified pricing, while farmers in 

regions with high utilization of raw milk for manufacturing purposes, such 

as the Upper Midwest, could be better off without classified pricing. For 

example, the American Farm Bureau study reported that states with less 

than 20 percent fluid utilization of raw milk would have higher average 

farm prices with the elimination of federal orders, while those states with 

fluid utilization of raw milk in excess of 35 percent have higher farm prices 

with the federal order system in place.

In the short term, to the extent that lower farm prices paid for raw milk 

used in fluid products are passed on to consumers, fluid milk consumption 

could marginally increase. The American Farm Bureau study estimated a 

58J. Michael Price, U.S. Department of Agriculture, Effects of U.S. Dairy Policies on Markets 

for Milk and Dairy Products, Market and Trade Economics Division, Economic Research 

Service, Technical Bulletin Number 1910, May 2004. This analysis assumed a national fluid 

milk premium of $1.30 per hundredweight. According to the USDA study, this change is in 

the effective Class I price. Since Class I prices and prices for raw milk used for 

manufacturing purposes would move in opposite directions with elimination of the FMMO 

program, the change in average prices would be less than $0.95 per hundredweight.
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2.5 percent increase in fluid milk demand, while the USDA study estimated 

a 2 percent increase. On the other hand, the University of Wisconsin study 

reported that the combination of less milk production and more fluid milk 

consumption would reduce the amount of raw milk available for 

manufactured products and increase manufactured product prices 

accordingly.59 To the extent that manufactured product prices increase, 

consumers may buy less of these products.

Over the long term, increased prices for milk used in manufactured 

products could limit reductions in both farm income and production 

resulting from elimination of FMMOs and classified pricing. In fact, the 

American Farm Bureau study found that once a supply adjustment occurs, 

average milk prices would return to levels similar to those prior to FMMO 

elimination. However, to the extent that farmers in areas with high 

manufacturing use experience higher prices for their milk, the incentive to 

produce more milk could limit potential increases in manufacturing 

product prices. In the end, some decline in production could be expected 

over the long term because the overproduction incentive resulting from the 

classified pricing system would be removed.

Eliminating FMMOs and classified pricing could also affect other federal 

dairy policies and, therefore, affect federal costs. If MILC payments were 

still based on the relationship between what fluid milk processors pay to 

acquire milk in Boston and a target price of $16.94, MILC payments would 

likely increase in size and frequency.60 At the same time, elimination of 

FMMOs could decrease federal costs related to the price support program 

because an increase in manufactured dairy product prices resulting from 

eliminating classified pricing could reduce the need for dairy commodity 

purchases by the CCC. However, it is unclear whether this effect would be 

large enough to offset additional payments under the MILC program.

Some AMS officials also indicated that farmers could experience increased 

price volatility without FMMOs. In the absence of minimum class prices, 

greater price volatility could result, in part, from seasonal production 

variation or short-term factors, such as holidays or weather events. 

Further, while some sources questioned the extent to which a state 

59The May 2004 USDA study estimated that manufactured product prices would increase by 

2 percent above the study’s baseline estimate for the period 2002 through 2007.

60Should the MILC program not be extended beyond fiscal year 2005, this scenario would 

only exist in the short term.
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regulatory system, such as California’s, could continue to exist in the 

absence of the federal classified pricing system, others indicated that state 

regulation of milk could increase if the federal system were eliminated. A 

couple of industry sources that we contacted indicated that an increase in 

the number of states that regulate milk could make it more difficult for 

them to do business and would be a less efficient system of regulation.

On the other hand, eliminating FMMOs and classified pricing could also 

provide greater incentives for product innovation. Without classified 

pricing, the market would price products more openly based on supply and 

demand and would increase the incentives for processors to develop 

alternative dairy products. To the extent that alternative products generate 

new demand for milk, this innovation could benefit farmers. For example, a 

recent study by researchers at Cornell University on the assignment of new 

products under a classified pricing system found significant difficulties.61

The study reported that the assignment of a new product to a higher-priced 

class increases farm income in the short run; however, the incentive to 

increase production provided by the use of raw milk in this higher-priced 

class and reduced demand for raw milk stemming from these higher prices 

can offset farm income gains in the long run. Furthermore, the study found 

that whether the new product detracts from sales of existing fluid milk 

products could also affect whether assignment to a higher-priced class 

increases net revenues to farmers. One USDA representative stated that a 

number of new products, such as low-carbohydrate milk beverages, have 

recently entered the market. In some cases, according to the 

representative, these products are intended to compete with Class I 

products but are formulated to avoid regulation as Class I products. 

Processors seek to avoid having these products regulated as Class I 

products because they would then be required to pay more for raw milk. 

Conversely, farmers want these products classified as Class I products so 

that their raw milk used in these items will be priced at the higher level.

Some sources suggested that classified pricing could be eliminated without 

eliminating FMMOs altogether. In this case, FMMOs might continue to 

perform functions such as pooling revenue, auditing, verifying weights and 

milk components, and collecting statistical information. A few dairy 

experts indicated that these particular aspects of the FMMO system benefit 

61Andrew M. Novakovic, Charles F. Nicholson, and Mark W. Stephenson, “Assignment of 

New Products Under Classified Pricing: A Conceptual Dynamic Model of Class Assignment 

Outcomes,” Cornell University, January 2004.
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the dairy industry. While some of these functions might be picked up by the 

private sector if FMMOs were eliminated, they would come at a cost to 

dairy farmers.

Retaining FMMOs while eliminating classified pricing would probably 

lessen the impacts of deregulating raw milk prices but would be unlikely to 

change the direction of most effects or who benefits. For example, while 

farm income would still fall without classified pricing, continuing to pool 

revenues through FMMOs, if possible, could help cooperatives negotiate 

over-order premiums because pooling could help cooperatives maintain 

their market power relative to processors. Thus, farm income might fall by 

less than it would if FMMOs were eliminated entirely. Moreover, by 

continuing to pool revenues, retaining FMMOs could limit increases in 

price volatility resulting from the elimination of classified pricing. In 

addition, the orders would continue to aim to ensure equitable treatment 

for producers and processors. Maintaining orders is not likely to change 

the fact that farmers in regions with high fluid milk utilization would 

experience greater reductions in farm income from eliminating classified 

pricing than farmers in regions with high manufacturing utilization. 

Production would still adjust downward in response to lower milk prices, 

and retail fluid milk prices would also decrease to the extent that lower 

prices for raw milk used in fluid milk products are passed on to the 

consumer. However, to the extent that cooperatives are able to maintain 

higher over-order premiums by retaining FMMOs, these production and 

consumer price effects might be less than they would be if orders were 

eliminated entirely. Effects on federal costs would still be mixed.

Change the Dairy Price 

Support Program

Dairy experts have raised several concerns about the price support 

program in recent years, including that the support level is too low to 

adequately support farmers; that the program provides incentives to 

overproduce milk and certain commodities purchased by the CCC; that 

USDA has not managed the program to maintain the established support 

price during periods of low market prices; that there are additional costs of 

selling dairy products to the government, which diminish the effectiveness 

of the support price; and that the program stifles innovation in the industry. 

Accordingly, a number of options have been discussed to modify the price 

support program, including raising the overall level of the support price 

(and thus the related commodity purchase prices), making administrative 

changes such as allowing the CCC to purchase a wider range of dairy 
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products, and eliminating the program altogether.62 Figure 37 shows the 

effects of various options to change the dairy price support program under 

low- and high-price scenarios over the short and long terms.

Figure 37: Potential Effects of Options to Change the Price Support Program on Various Policy Considerations

62Changes in the dairy price support program could potentially conflict with the U.S.’s WTO 

commitments.

?

?? ? ???

? ? ??

??? ??

?

?? ???

?

?

? ?

?

?? ?

?

?

?

?

?

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

LP: Low price scenario

HP: High price scenario

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Short term Long term

Raise support price

Allow CCC to purchase wider range of 

products

Tilt prices based on market

Reflect cost differences in selling to CCC

Eliminate price support program

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costsPrice volatility

Economic

efficiency

Farm income

Consumer prices

Raise support price

Change administration of price support program

Eliminate price support program

HP

LP

HP

LP

HP

LP

HP

LP

HP

LP
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Changes and Alternative Policy Options

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Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

Raise the Level of the Support 

Price

One option for modifying the dairy price support program is to raise the 

support price and the related commodity purchase prices. Many dairy 

experts indicated that the support price has fallen below the costs of 

production for most farmers and, therefore, is not providing an effective 

safety net during periods of low prices. Additionally, sources cited the 

reduction in the support price as a factor in increasingly volatile milk 

prices. For example, one academician we contacted stated that recent 

volatility in milk prices has resulted from the virtual elimination of the 

price support system as an effective price floor during periods of low milk 

prices. The price support program also worked to reduce price volatility 

during periods of high milk prices by releasing CCC stocks of purchased 

dairy commodities when market prices reached 110 percent of the support 

price.63 However, without purchasing sufficient quantities of manufactured 

dairy products, the program does not perform this balancing function.

According to an economist with USDA’s Farm Service Agency (FSA), 

raising the support price would increase farm income and, thus, raw milk 

production. The economist indicated that this option, by raising the floor 

for milk prices, would also reduce price volatility; however, increased 

purchases of dairy products would mean higher federal costs for the price 

support program. Similarly, the American Farm Bureau study found that 

while raising the support price would reduce price volatility, it could create 

a situation in which the CCC purchases surplus dairy products in most 

years. The FSA economist noted that these federal costs might be offset, at 

least in part, by a reduction in payments under the MILC program. The 

economist also said that consumer costs would likely be higher, on 

average, because increasing the support price would limit the fall of prices 

for manufactured products.

The FSA economist also noted that increasing the support price would 

decrease the economic efficiency of federal dairy policies, particularly to 

the extent that a higher support price stimulates increased production. 

Under this scenario, increased production would represent an allocative 

inefficiency because resources would go into producing milk that is not 

63USDA indicated that currently, the price support program allows the CCC to release its 

commodity stocks if the market price for a particular commodity exceeds that commodity’s 

purchase price.
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needed to supply the market. Some sources cited examples of how high 

support prices under the program led to misallocation of resources into 

surplus milk production. For example, from 1977 to 1981, the support price 

for Grade A milk rose from $8.26 to $13.10 per hundredweight, and annual 

government expenditures on dairy price supports increased from a few 

hundred million dollars to over $2 billion.

Change the Administration of the 

Price Support Program

A number of options have been proposed or discussed to change the 

administration of the dairy price support program. These options include 

allowing the CCC to purchase a wider range of products, adjusting 

commodity purchase prices based on market conditions, and setting 

commodity purchase prices to reflect cost differences between selling to 

the CCC and selling in the marketplace.

Allow the CCC to Purchase a Wider Range of Products

One potential modification to the administration of the price support 

program would be to allow the CCC to purchase a wider range of products 

than butter, cheese, and nonfat dry milk. Some dairy experts and studies 

indicated that by focusing on the purchase of a few specific commodities, 

the price support program distorts the market by providing incentives to 

overproduce these commodities, while at the same time dampening 

incentives for innovation in the dairy industry. Manufacturers that develop 

innovative products incur more risk because they will not be able to sell 

their products to the government if they cannot obtain a market price high 

enough to cover their costs. One cooperative representative said that while 

nonfat dry milk contains protein and calcium—both valuable components 

that could be used in other products, such as protein bars—manufacturers 

continue to produce nonfat dry milk in excess quantities because that is 

what the government is buying. A number of other sources, including 

industry representatives, academicians, and a report by the International 

Trade Commission, noted that by purchasing nonfat dry milk, the price 

support program may be impeding development of a domestic milk protein 

concentrate industry by creating disincentives to shift raw milk supplies to 

innovative products.

USDA officials cautioned that in order for a product to function well as a 

price support product, it must (1) represent a major use of milk; (2) have 

enough extra capacity to absorb a substantial amount of milk; (3) be 

storable for long periods; and (4) have an active, liquid wholesale market. 

Given these conditions, it is questionable whether some alternative 

products, such as protein bars, would be effective as price support 
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products. Furthermore, the officials argued that requiring the price support 

program to incur the risk of product innovation through this approach 

would alter the fundamental purpose of the program—supporting farm 

prices.

If the CCC were to purchase a wider range of products, manufacturers 

would have greater incentives to use milk in alternative ways because the 

price support program would decrease the risks of trying to produce and 

market a greater number of products. Consumers could benefit as 

innovative products gained easier access to the market, causing consumer 

prices to fall. However, one FSA economist stated that this option would 

greatly increase the complexity of the price support program, potentially 

increase federal costs, and require new legislation. Moreover, he noted that 

this change would require close coordination between trade policies and 

the price support program. For example, without tariff-rate quotas on some 

products such as milk protein concentrates, the CCC could end up 

supporting additional imports if the purchase prices were set too high. The 

economist stated that this option could reduce production of nonfat dry 

milk but would be less likely to affect price volatility.

Adjust Commodity Purchase Prices Based on Market Conditions

A second potential modification would be to adjust—or tilt—commodity 

purchase prices based on market conditions. Some dairy experts, as well as 

academic studies, reported that because USDA does not tilt CCC purchase 

prices frequently enough to maintain a balance between butter and nonfat 

dry milk purchase prices that is based on current economic conditions, the 

price support program has distorted the market with unclear price signals 

and induced surplus production of certain goods (notably nonfat dry milk). 

Therefore, some experts indicated that tilting prices based on established 

criteria would be better. For example, one dairy processor recommended 

changing the balance of butter and nonfat dry milk purchase prices 

automatically if the ratio of CCC purchases of butter and nonfat dry milk 

falls outside a certain range. Similarly, the American Farm Bureau study 

suggested that to achieve the support program’s objectives without 

distorting the market and increasing government costs, changes to 

commodity purchase prices should be based on market conditions so that 

they would not be subject to political pressure.

Basing the tilt of commodity purchase prices on market conditions would 

increase the economic efficiency of the price support program by reducing 

the price distortions that lead to surplus production of goods that are not 
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required to supply the market. Falling market prices for a particular 

commodity suggest that the quantity supplied temporarily, at least, exceeds 

the quantity demanded. If the CCC continues to buy the commodity in 

significant amounts while the market price remains low, it distorts the 

market by providing an incentive to produce that commodity purely for the 

purpose of selling it to the government. This incentive not only delays a 

market response to the lower commodity price but also prevents that milk 

from going toward a higher-valued use. Moreover, a study by researchers at 

the University of Wisconsin found that tilts make it more likely that fluid 

milk prices will be driven by cheese prices because the price support 

program would no longer be supporting the manufacturing prices of Class 

IV products above market levels.64 This study reported that tightening the 

relationship between cheese prices and Class I prices improves market 

signals to dairy farmers because nationally, as noted earlier, a greater 

percentage of raw milk is used in Class III products (cheese) than in Class 

IV products (butter and nonfat dry milk).

According to one FSA economist, lowering the purchase price of a 

particular commodity in the short term could reduce farm income; 

however, by encouraging production levels to respond more quickly to low 

price periods, tilting CCC purchase prices to reflect market conditions 

could maintain higher farm prices over the long term. The economist also 

indicated that this change could decrease federal costs for purchasing and 

storing dairy products. The consumer price effects of market-based tilts are 

less clear. For example, if market butter prices are high and market nonfat 

dry milk prices are low, a market-based response would indicate that USDA 

should raise the CCC butter price and lower the CCC nonfat dry milk price. 

However, further price adjustments could result in the CCC purchase price 

for butter exceeding the market price, which could trigger CCC purchases 

of butter and raise the market price even higher. In such cases, assuming 

that price changes at the wholesale level are passed on through the retail 

level, consumers would benefit from lower prices on some commodities, 

while potentially experiencing higher prices on others. The net effect to 

consumers would then depend on the relative price changes for these 

products and the quantities of each that were purchased.

64Bob Cropp and Ed Jesse, “The Butter-Powder Tilt,” Marketing and Policy Briefing Paper 

Number 72, Department of Agricultural and Applied Economics, University of Wisconsin–

Madison, June 2004.
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Reflect Cost Differences in Selling to the CCC

A third option to change the administration of the price support program 

would be to set CCC purchase prices to reflect cost differences in selling to 

the CCC versus selling in the marketplace. In recent years market prices 

have fallen below the support price level in some months. For instance, 

between July 2002 and June 2003, the Class III milk price was below the 

$9.90 target level in 9 months. Although FSA officials indicated that USDA 

is required to set product purchase prices in such a way that only the 

average annual farm milk price, not the monthly price, is at the support 

price, the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) 

simply states that the price of milk should be supported at $9.90 per 

hundredweight.65 Concerns over USDA’s management of the price support 

program led to language in the Consolidated Appropriations Act, 2004 

requiring the Secretary of Agriculture to more diligently support the farm 

price of milk.66 Some dairy experts and studies indicated that one reason 

that market prices sometimes fall below the CCC support price is because 

there are additional costs of selling to the government that are not reflected 

in the commodity purchase prices. Therefore, the effective support price is 

actually below $9.90 because with higher costs of selling to the 

government, the market price has to fall below the CCC purchase price 

before processors are better off selling to the CCC than to the market. 

Some of these additional costs include packaging for longer-term storage, 

meeting stricter grading standards, and a time lag between when the 

product is made and when it is approved for sale to the federal government. 

An FSA economist estimated that these cost differences amount to about 

$0.04 to $0.05 per pound for cheese.67

One option for reflecting the differences in cost between selling dairy 

products to the government and selling in the marketplace would be to 

raise the CCC purchase prices of these products to reflect the additional 

65USDA also averages the Class III and Class IV prices in determining if the $9.90 per 

hundredweight support price has been met.

66The Consolidated Appropriations Act, 2004 required the Secretary of Agriculture to more 

diligently support the farm price of milk at the farm bill-mandated support price of $9.90 per 

hundredweight or lose funding for the administration of the program. Pub. L. No. 108-199 

§780.

67The FSA economist also stated that there are minimal cost differences for Class IV 

products (butter and nonfat dry milk). An academic expert indicated that with the exception 

of April to June 2003, the Class IV price has not dropped below the support price.
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costs of manufacturing product for sale to the government.68 This would 

help ensure that manufacturers receive a price for their products that 

allows them to return at least $9.90 per hundredweight (the support price) 

to farmers. One FSA economist indicated that this change could cause 

farmers to marginally increase production, leading to increased CCC 

purchases. Increased CCC purchases, in addition to higher purchase prices, 

would increase the federal costs of the price support program and, at the 

same time, higher manufactured product prices could translate into higher 

consumer prices. However, it is difficult to estimate the added costs of 

selling to the CCC because these costs are likely to vary widely among 

different manufacturers. Thus, raising the product purchase prices could 

provide unwarranted benefits to some manufacturers while still being 

insufficient to induce sales to the government by some others. In addition, 

according to one academic study, there is no clear evidence that higher 

selling costs are the major barrier in selling to the government. Some 

experts have put forth the possibility that fixed contracts between dairy 

product manufacturers and their buyers may prevent manufacturers from 

selling to the government.

An alternative way to reflect the differences in cost between selling dairy 

products to the government and selling them in the market place would be 

to require the CCC to alter product specifications and payment terms to 

conform to those used on the Chicago Mercantile Exchange (the 

Exchange).69 An FSA economist stated that some changes to product 

specifications are already being considered and have been put out for 

comment to the dairy industry.70 The economist stated that while these 

proposed changes will help bring CCC product specifications into greater 

conformance with market standards, some differences would remain. Most 

notably, the CCC requires that products be storable for up to 3 years, a 

longer period than is generally required in the market. To the extent that 

this proposal reduces additional costs of selling manufactured dairy 

68The National Milk Producers Federation has asked the CCC to increase its purchase prices 

for cheese by $0.056 per pound.

69The Chicago Mercantile Exchange is a central marketplace with established rules and 

regulations where buyers and sellers trade agreements known as futures contracts to, for 

example, buy or sell a commodity at a future date.

70USDA put the proposed draft Announcement Dairy 6 out to the dairy industry for comment 

on April 5, 2004. The proposal includes a number of changes such as increasing lot 

quantities for manufactured dairy product purchases, as well as changing commodity, 

packaging, and marking specifications.
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products to the CCC by more closely aligning product specifications with 

market standards, it could induce greater manufactured product sales to 

the CCC and would keep market prices higher. Therefore, aligning these 

specifications could increase farm income, provide a marginal production 

stimulus, and raise federal costs related to additional CCC purchases. Also, 

this option would not necessarily prevent the Exchange prices from falling 

below CCC purchase prices because if there are barriers other than costs 

(such as contractual obligations) that prevent manufacturers from selling 

to the government, these barriers would still exist.71

Eliminate Dairy Price Supports Another policy option would be to eliminate the price support program 

altogether and rely on alternatives available to farmers to assist them in 

managing risk of low and/or highly volatile prices for their milk. A number 

of dairy experts have argued that the support price has been set so low at 

$9.90 per hundredweight that it is not having significant impacts. Thus 

some academicians, as well as USDA, have studied the potential effects of 

eliminating the program.

In the short term, eliminating the program would have a greater impact if 

market prices were at or below the level of the support price. The May 2004 

USDA study estimated that eliminating the price support program would 

cause wholesale prices of nonfat dry milk to decline by 15 to 20 percent 

over the first couple of years.72 For subsequent years, the study estimated 

that prices would recover somewhat to 10 percent below baseline levels. 

Further, the study estimated that the decline in nonfat dry milk prices 

would encourage diversion of this milk to alternative uses, leading to lower 

prices for these alternative uses. Generally, lower prices would reduce farm 

income and potentially lead to lower consumer prices. Farmers would 

likely respond to these lower prices by producing less milk.

71Another proposed alternative would be to have the CCC place bids for commodity 

purchases on the Exchange as a better way to provide a price floor for manufactured 

products. However, because the CCC cannot entirely change its product standards to 

conform to industry requirements, an FSA economist indicated that this alternative is not 

feasible.

72The study established a baseline assumption whereby CCC purchases of nonfat dry milk 

averaged approximately 17 percent of total U.S. production over the period 2002 through 

2007. Purchases of other commodities were assumed to be minimal. However, this 

assumption was based on a nonfat dry milk purchase price of $1.01 per pound. The actual 

purchase price was lowered to $0.80 per pound and, thus, the study may overstate the 

effects of eliminating this program.
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According to an FSA economist, eliminating the price support program 

would increase economic efficiency by allowing market price signals to be 

transmitted more clearly. The economist also stated that volatility in milk 

prices would increase. He noted that the combination of increased 

volatility and reduced farm income would force less efficient farmers to 

exit production. This exit would increase the economic efficiency of 

national resource allocation by enhancing current shifts in production to 

more efficient dairy farms. He added that in the absence of a price support 

program, new entrants to dairy production would likely be larger, more 

efficient operations. The FSA economist also said that eliminating the price 

support program would provide a cost savings for the federal government 

because the CCC would no longer have to purchase or store dairy 

commodities. These savings would be greater during periods when farm 

prices are low because when they are high, even if the program remains in 

effect, the government purchases fewer dairy products and incurs less cost. 

However, when farm milk prices are low, savings from eliminating the price 

support program could be partially offset by increased payments under the 

MILC program for as long as that program continues.

Over the long term, reduced production would mitigate some of the 

impacts of eliminating the price support program, because reduced 

supplies lead to increased prices (assuming demand stays the same). 

However, the USDA study estimated that even with the positive price 

effects resulting from reduced production, farm income would still 

decrease by approximately $3.5 billion over the long term. Additionally, 

without CCC purchases of dairy commodities, USDA would be unable to 

balance high market prices by releasing these stocks, thereby contributing 

to increased price volatility over the long term.

Extend the Milk Income 

Loss Contract Program

The MILC program has benefited many smaller dairy farmers during the 

most recent period of low farm prices by providing them income support. 

However, by providing support to some farmers who otherwise might have 

exited the dairy industry, the program has slowed the normal downward 

supply response to lower farm prices and kept aggregate production higher 

during this period than it otherwise would have been. The MILC program is 

scheduled to expire at the end of fiscal year 2005. If it is not extended in 

some form, aggregate production is likely to respond more rapidly to future 

low-price periods because smaller farmers are likely to exit production at 

greater rates than they did during the most recent period of low farm 

prices. With this more rapid production response, farm prices would likely 

start rising again sooner than in the recent past when the MILC program 
Appendix VII

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Changes and Alternative Policy Options

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has been in place. However, although production levels in the short term 

would likely decrease more during low-price periods, in the long term 

aggregate production might not decrease substantially because higher 

average farm prices would stimulate additional production from the dairy 

farmers that stay in business. In addition, by allowing the MILC program to 

expire, the government can avoid the costs of the payments to farmers that 

the program provides.

There are several options to maintain the benefits of the MILC program to 

some dairy farmers by extending it beyond 2005. One option is to extend 

MILC at its current target price and eligible production limit. A second 

option, a proposal introduced in the Senate in the 108th Congress, would 

extend MILC through fiscal year 2007 with an increase in the eligible 

production cap from 2.4 million pounds to 4.8 million pounds.73 A third 

option would extend MILC with a lower target price but a higher or no 

eligible production limit. Figure 38 shows the effects of various policy 

options to extend the MILC program under low- and high-price scenarios 

over the short and long terms.

73The draft legislation is known as the Milk Income Loss Contract Extension, S. 2609 (2004). 

A bill that would extend authorization for the MILC program to 2007, but would not increase 

the eligible production cap, has been introduced in the House, H.R. 3990 (2004). 

Additionally, a separate bill, S. 2825 (2004), was introduced in the Senate. Section 426 of this 

proposed legislation would extend authorization for the MILC program to 2007, increase the 

target price for the MILC program from $16.94 per hundredweight to $17.10, and eliminate a 

provision for determining whether producers are on separate dairy operations for purposes 

of determining payment eligibility. However, the bill would not change the MILC program’s 

eligible production cap of 2.4 million pounds.
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Figure 38: Potential Effects of Options to Extend MILC on Various Policy Considerations

Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

Extend MILC in Its Current Form One analysis conducted by a researcher at the University of Missouri 

estimated that compared to a baseline estimate in which the MILC program 

expires in 2005, extending the MILC program through 2012 in its current 

form would result in greater milk production and lower farm prices.74

?

? ?

?

?

?

? ?

?

?

?

?

? ? ?

?

?

?

?

? ??

?

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

LP: Low price scenario

HP: High price scenario

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Extend MILC

Extend MILC with higher cap

Extend with lower target price and higher cap

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

LP

HP

LP

HP

LP

HP

Short term Long term

74Scott Brown, “The Effect on the United States Dairy Industry of Removing Current Federal 

Regulations,” Report Number 03-03, Food and Agricultural Policy Research Institute, 

University of Missouri, April 2003. Both the baseline estimate and the estimate for the MILC 

extension scenario are based on the assumption that the price support program, federal 

milk marketing orders, import restrictions, and the Dairy Export Incentive Program remain 

in effect.
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Production was estimated to be 0.8 billion pounds higher in 2006 and to 

average 1.4 billion pounds per year higher from 2008 through 2012. The 

estimated price difference was also greater in the longer term than 

initially.75 Greater production and lower farm prices are consistent with the 

expectation that extending the MILC program would keep some smaller 

dairy farmers in the industry who otherwise might exit after 2005 if the 

MILC program is allowed to expire then. This study also estimated that due 

to the MILC payments, farm income would increase if the program were 

extended, despite lower farm prices. Initially, in 2006, the estimated 

increase in farm income was $0.43 per hundredweight, and even in 2012, 

when the estimated farm price was $0.50 per hundredweight below what it 

would be if MILC expires after 2005, the estimated increase in farm income 

was $0.08 per hundredweight. In addition, extending MILC in its current 

form would increase federal costs. This study estimated that, on average, 

annual government costs from 2006 through 2012 would be about $1.2 

billion higher than if the MILC program expires after 2005.76

According to an FSA economist, lower farm prices resulting from 

extending MILC in its current form could be passed on as lower retail 

prices for consumers. However, the economist indicated that the effects on 

price volatility are less clear. He added that the extension of the MILC 

program as currently designed would continue to favor smaller farmers 

over larger farmers, because a greater percentage of smaller farmers’ 

production is eligible for MILC payments. Thus, in general, the MILC 

program would continue to benefit farmers in the eastern and upper 

midwestern states over farmers in the western states. Therefore, for a given 

level of milk production and to the extent that larger farmers in the West 

are more efficient than smaller farmers in the East, extension of the MILC 

program as currently designed would reduce the economic efficiency of the 

allocation of dairy production resources nationally compared to the 

allocation that would occur if MILC expires.

75Although, as discussed above, one might expect that the price and production differences 

would become smaller over time, according to the author of this study the model assumes 

competitive markets and, therefore, does not fully capture long-term adjustments.

76However, the baseline assumption for farm milk prices was lower than the prevailing 

prices of the past few months and, according to the study’s author, with higher assumed 

farm prices, the effect on government costs of extending the MILC program would be less. 

The accuracy of the other estimates also depends on the accuracy of the market prices 

assumed in the baseline.
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Extend MILC with a Higher Cap 

or with No Cap

An alternative proposal has been introduced in the Senate in the 108th

Congress that would extend the MILC program at its current target price 

but increase the cap on eligible production. The University of Missouri 

study examined the impacts of a similar option in which the cap on eligible 

production is removed in 2003 and MILC is extended through 2012 without 

a cap.77 This study estimated that extending MILC without a cap would 

result in a larger increase in production and a larger decrease in farm prices 

than extending MILC with a cap. For example, production in 2006 was 

estimated to be 2.3 billion pounds per year higher than if MILC is allowed to 

expire or 1.5 billion pounds greater than if MILC is continued in its current 

form. Greater production and lower farm prices are consistent with the 

expectation that making all milk eligible for MILC payments would provide 

farmers who might otherwise exit the industry after 2005 (if MILC is 

allowed to expire) an even greater incentive not to leave than is provided 

by extending MILC in its current form. As with the previous option, this 

study estimated that due to MILC payments, farm income would increase if 

MILC were extended without a cap despite lower farm prices. Initially, in 

2006, the estimated increase in farm income would be $0.63 per 

hundredweight, and even in 2012, when the farm price was estimated to be 

$1.05 per hundredweight below what it would be if MILC expires after 2005, 

the estimated increase would be $0.18 per hundredweight. Moreover, this 

study estimated that farm income would be higher with this option than 

with extending MILC in its current form because the additional payments 

to farmers due to eliminating the cap would more than offset the additional 

farm price reduction resulting from greater production. Extending MILC 

without a cap would increase federal costs even more than extending MILC 

in its current form. This study estimated that, on average, annual 

government costs from 2006 through 2012 would be about $2.5 billion 

higher than if the MILC program expires after 2005, more than $1 billion per 

year more than was estimated if MILC is extended in its current form.78

77Because the University of Missouri study’s baseline included a MILC program through 

2005, its results can only be used as estimates of the impact of extending MILC with a higher 

cap compared to letting MILC expire for years beyond 2005. The study’s results comparing 

this option with the study’s baseline for 2003 through 2005 are estimates of the difference 

between having a MILC program with no cap and one with the current cap.

78However, the baseline assumption for farm prices was lower than the prevailing prices of 

the past few months and, according to the study’s author, with higher assumed farm milk 

prices, the effect on government costs of extending the MILC program would be less. The 

accuracy of the other estimates also depends on the accuracy of the market prices assumed 

in the baseline.
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An FSA economist indicated that consumers would likely benefit from 

reduced retail prices under this scenario. Additionally, without the cap on 

eligible production levels, the equity concerns about MILC would be 

eliminated because the program would no longer favor smaller farmers 

over larger farmers. However, the FSA economist also indicated that in 

addition to the inefficiencies of increased surplus milk production, this 

alternative would reduce economic efficiency of milk production 

compared to allowing MILC to expire after 2005 to the extent that it 

provided incentives for production by smaller producers with higher costs 

of production.

Extend with Lower Target Price 

and Higher or No Cap

A third alternative, considered in the American Farm Bureau study, is to 

extend MILC with a lower target price and a higher or no cap on eligible 

production. The study argued that the $16.94 per hundredweight target 

price is too high because MILC payments are triggered any time the Class I 

mover is less than $13.69 per hundredweight; at this target price, MILC 

payments could be expected in most months given that from 1990 through 

1999 the Class I mover averaged $12.28 per hundredweight and was below 

the $13.69 threshold in 104 of 120 months. The analysis concluded that a 

target level for MILC payments of a Class I mover at $12.00 per 

hundredweight or lower would help to make the program more 

marketbased. Further, expanding the cap or eliminating it completely 

would help to make the program more equitable among farmers of different 

sizes.

The effects of extending MILC in the absence of a cap on eligible 

production depend significantly on the level of the target price. If the target 

price were set too high, it would stimulate surplus production. During 

periods of low prices, the government would have to contribute additional 

MILC payments to counteract the effects of lower prices. Additional 

production would also decrease manufactured product prices, potentially 

increasing the costs of the dairy price support program because these 

prices would be more likely to reach the support level. At the same time, 

these lower prices could provide benefits for consumers. While a lower 

target price without a cap would treat farmers with different sized herds 

the same way, it might not provide enough payments to keep farmers in 

areas with high costs of production from exiting during periods of low 

prices. Therefore, this option could increase the economic efficiency of 

national dairy production, while also accelerating shifts in dairy production 

to the West.
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Introduce a New Target 

Price Deficiency Payment 

Program

Some dairy experts indicated that in lieu of maintaining both the dairy price 

support and MILC programs, operating one new target price deficiency 

payment program could be a better alternative.79 USDA and other dairy 

experts stated that having both the price support and MILC programs is 

problematic, particularly during periods of low prices. As noted in the 

American Farm Bureau study, the idea behind establishing a target price 

deficiency payment program is to allow markets to work to clear dairy 

products at market prices and then, when the market price is below the 

target price, to pay farmers based on the difference between these prices. 

But with both dairy programs in force, MILC maintains and encourages 

surplus milk production that must then be purchased by the CCC under the 

price support program. This market distortion adds to the costs of both 

programs.

Under a new target price deficiency payment program, dairy farmers would 

receive a payment when the market price of Class III milk products drops 

below a specific target level. Thus, the program would establish a floor on 

farm income through a countercyclical payment to dairy farmers instead of 

a floor on manufactured product prices with purchases by the CCC.80

Instead of providing an incentive for manufacturers to continue producing 

a particular product that the CCC is purchasing, the program would allow 

the market to clear a wholesale product price and then pay farmers the 

difference if the price were too low. This option would provide 

manufacturers the incentive to shift raw milk supplies to their highestvalued use, further promoting the development of new and innovative 

products. This option could also potentially reduce federal costs, 

depending on the level of the target price; one expert estimated that with a 

target price of $10.50 per hundredweight for Class III milk, the government 

would have spent $300 million less than under the MILC program since its 

inception in December 2001. With a target price of $10.00 per 

hundredweight for Class III milk, these savings would have reached $1.2 

billion.

Notwithstanding these potential benefits, dairy experts indicated that a 

new target price deficiency payment program could have its own 

challenges depending upon how it is designed. In particular, such a 

program would require some key decisions regarding price level and 

79The MILC program is a target price deficiency payment program.

80A countercyclical payment is a payment provided during periods of low prices.
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regional differences, and whether to cap program benefits based on 

payments or quantities of production.

Set Price Level and Consider 

Regional Differences

Some dairy experts said that a problem with the target price deficiency 

payment approach is that it would be hard to determine the appropriate 

target price without creating distortions in production incentives. If the 

target price were set too high, it would have the same effect as setting the 

support price too high: it would lead to excess production by supporting 

farm income at higher levels than would be available if farmers received 

market prices. Long-term overproduction would place additional 

downward pressure on market prices and increase federal costs for the 

program. If the target price were set at a low level to avoid stimulating 

production and increasing government costs, it might not maintain 

adequate support for farm income, and could increase price volatility. 

Additionally, by influencing domestic production levels, which in turn 

influence U.S. market prices, the level of the target price can affect the 

incentives of other countries to export manufactured products to the 

United States. However, these incentives are also affected by the export 

subsidies and lower production costs of some other countries.

The difficulty in setting the appropriate target price is exacerbated by 

regional differences in costs of production. A certain Class III target price 

might provide adequate support during periods of low prices based on the 

costs of production in one region, but not in another. However, increasing 

the target price to provide adequate support for higher-cost regions would 

not only support production in areas where it is less economically efficient 

to do so, but would also provide greater benefits to farmers in lower-cost 

regions. These higher benefits would increase the incentives to 

overproduce in those areas. Given current trends in the United States, this 

scenario would encourage the western shift in dairy production.

Place Cap on Payments or 

Production

Another challenge in designing a target price deficiency payment program 

would be to determine whether to cap the program’s benefits either by 

limiting the payment a farmer could receive or by limiting the quantity of 

milk production on which a farmer would be eligible to receive payments. 

The MILC program calls for payments equal to 45 percent of the difference 

between $16.94 and the Boston Class I per hundredweight price and has a 

production cap (2.4 million pounds of production per dairy operation each 

fiscal year). These controls have helped to keep federal costs lower than 

they otherwise would have been during periods of depressed prices by 

limiting incentives for overproduction. However, the production cap has 
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targeted the program’s benefits primarily to smaller farmers, raising 

questions of equity.

If a target price deficiency payment program were implemented without 

any controls, the risk of market distortions and increased federal costs 

from establishing a target price level that is too high could increase 

substantially. At the same time, a couple of researchers noted that 

establishing the target price deficiency payment program without a 

production cap could encourage farmers to enhance the efficiency of their 

dairy operations. With a cap limiting eligible production, farmers have less 

incentive to adopt new technologies that would increase production. 

However, whether or not a cap is placed on eligible production, the 

program is likely to confer benefits to farmers in varying degrees. If the 

program did not cap eligible production, farmers who could increase their 

production efficiency with new technology might have more of an incentive 

to do so. But the farmers who would be most likely to take advantage of 

this incentive would be larger farmers who may be more efficient, and 

might have the resources and access to capital to undertake such an 

investment. Conversely, capping eligible production would target benefits 

to smaller farmers in the same way as MILC.

Adopt the National Dairy 

Equity Act

To address concerns about the pending expiration of the MILC program 

and provide additional support to dairy farmers, the National Dairy Equity 

Act of 2004 (NDEA) has been introduced in the House and the Senate.81

This proposed legislation would change the federal regulation of milk 

marketing through the establishment of regional dairy marketing areas in 

which boards created to administer these areas would set minimum prices 

that processors would have to pay for raw milk used to make fluid milk 

products sold in those areas.82 The NDEA would have a similar effect as the 

MILC program in that it might lead to higher incomes for some dairy 

farmers. However, concerns have been raised about its impact on farm 

81This proposed legislation was introduced in the 108th Congress as S. 2525 and H.R. 4597.

82In earlier legislation, the Federal Agriculture Improvement and Reform Act of 1996, 

Congress authorized the six New England states to enter into an agreement called the 

Northeast Interstate Dairy Compact, which was implemented in July 1997. The Compact 

functioned similarly to the proposed dairy marketing boards of the NDEA in that it 

supplemented the FMMOs and state programs by setting the monthly minimum price to be 

paid for raw milk used for fluid milk marketed in the six-state area. The authorization for the 

Compact expired on September 30, 2001.
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incomes in some regions, retail fluid milk prices, coordination of milk 

prices across regions, and existing trade agreements. Figure 39 shows the 

effects of adopting the NDEA over the short and long terms.

Figure 39: Potential Effects of Adopting the NDEA on Various Policy Considerations

Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

? ?

?

Adopt NDEA

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costsPrice volatility

Economic

efficiency

Farm income

Consumer prices

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Short term Long term
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Elements of the NDEA The NDEA would create five marketing areas that together would 

encompass the entire nation. States in the Northeast,83 Southern,84 and 

Upper Midwest85 regions would automatically be participating in the 

marketing area program established by the NDEA upon enactment of the 

legislation. States in the Intermountain86 and Pacific87 regions could 

become participating states by providing written notice to the Secretary of 

Agriculture. The NDEA would authorize each region’s board to set an “overorder” minimum price for Class I sales that exceeded the FMMO Class I 

price in that region, with an initial maximum of $17.50 per hundredweight, 

subject to approval by farmers within the region in a referendum.88

Although the boards would have discretion in setting the over-order price, 

the legislation directs the boards to consider several factors including the

• balance between production and consumption of milk and milk 

products in the regulated area;

• costs of milk production in the regulated area;

• prevailing price for milk outside the regulated area;

• purchasing power of the public; and

• price necessary to yield a reasonable return to an eligible farmer.

The NDEA would establish a fund in the U.S. Treasury to carry out the 

program. During months in which a region’s over-order price exceeded the 

83States in this region include Connecticut, Delaware, Maine, Maryland, Massachusetts, New 

Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Vermont.

84States in this region include Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky, 

Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, 

Texas, Tennessee, Virginia, and West Virginia.

85States in this region include Illinois, Indiana, Iowa, Michigan, Minnesota, North Dakota, 

South Dakota, and Wisconsin.

86States in this region include Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, 

Utah, and Wyoming.

87States in this region include Alaska, California, Hawaii, Oregon, and Washington.

88The NDEA would allow the maximum to increase over time in accordance with changes in 

the Consumer Price Index for All Urban Consumers published by the Bureau of Labor 

Statistics in the Department of Labor.
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FMMO Class I minimum price in Boston, processors would be required to 

pay the Secretary of Agriculture an amount equal to the difference between 

those two prices, known as the over-order premium, times the quantity of 

milk purchased for use in Class I products. The Secretary would deposit 

these amounts into the U.S. Treasury fund, and the fund would make 

payments to each board, which would distribute the payments to eligible 

farmers in its region.89 Each month the board would receive at a minimum 

an amount equal to the over-order premium times 50 percent of the milk 

produced in that region.90 The proposed legislation would require CCC 

funds to be transferred to the fund when necessary to allow the fund to 

make the required payments; according to one analysis, such contributions 

would typically be necessary because only one of the proposed dairy 

marketing areas has a Class I utilization rate equal to 50 percent or higher.

The NDEA also would require boards to compensate the CCC for any 

additional costs of CCC purchases of milk products resulting from 

increases in milk production that exceed the national average growth rate. 

To manage overproduction of milk that could result from the NDEA, the 

NDEA would authorize boards to take action, including developing and 

implementing incentive-based supply management programs.

In addition, the NDEA would link participation in the dairy marketing areas 

with participation in the current MILC program. Farmers who participate in 

the new program would not be able to continue to receive MILC payments. 

If states in the Intermountain and Pacific regions chose not to participate in 

the NDEA program, farmers in those states could continue to receive MILC 

payments, and the NDEA would extend the authorization period for the 

MILC program until the end of September 2007. States in the other regions, 

which would become participants upon enactment of the NDEA, could 

withdraw their participation. If they did, farmers in those states could also 

continue their MILC payments through the end of September 2007. 

Individual farmers in states that participated in the NDEA program could 

89Other payments from the fund would include compensation for administrative costs that 

USDA or the boards incur in carrying out the program, increased costs of specified federal 

nutrition programs that might result from the program, and increased costs that the states 

might occur due to the program in carrying out the Child Nutrition Act of 1996. Boards could 

also collect assessments from processors in their region not to exceed $0.03 per 

hundredweight to cover the boards’ administrative costs.

90Each month the board would receive the greater of (1) this amount or (2) the amount of 

payments made by processors to the fund for purchases of Class I milk that will be sold in 

the region during the month.
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choose not to participate in the new program and would then be able to 

continue receiving MILC payments. However, those farmers would not be 

able to extend their payments beyond September 2005 and would not be 

eligible for subsequent participation in the NDEA program.

Impacts of the NDEA Although the NDEA may lead to higher incomes for some dairy farmers, 

academicians and industry participants have raised many concerns about 

the proposed legislation’s impacts. These concerns include regional 

divisiveness due to lower incomes for dairy farmers in some regions, higher 

retail prices, reduced coordination of dairy prices across regions, and 

potential conflict with World Trade Organization (WTO) rules.

The NDEA could lead to higher incomes for farmers in participating states 

when milk prices are relatively low because processors would have to pay 

the over-order prices set by the boards for Class I milk; however, the total 

effect on farmers would depend on what happens to the price of milk used 

for manufacturing purposes as well.91 To the extent that higher blend prices 

stemming from higher Class I prices lead farmers to increase milk 

production, the result could be lower prices for Class III and IV milk both in 

participating and nonparticipating states. Even if all states participated in 

the dairy marketing areas, the large differences in Class I utilization rates 

across regions imply that different regions would be affected differently by 

the combination of higher Class I prices and lower Class III and IV prices, 

and farmers in regions with low Class I utilization rates might see a decline 

in their incomes. If some states do not participate, their farmers would be 

even worse off because unless these farmers pool milk in states that are 

included in the marketing areas, they would not receive any benefits of 

higher Class I prices. In a report that we issued in September 200192 in 

which we analyzed the inter-regional impacts of various scenarios in which 

some states were grouped in dairy compacts that functioned like the 

NDEA’s dairy marketing areas, we reported that one effect of compacts was 

to reduce farm income in noncompact regions. We estimated this effect to 

be minimal when we examined the impact of the Northeast Interstate Dairy 

Compact because the six New England states included in that Compact 

91Even the extent to which income from Class I sales might rise from the NDEA is hard to 

estimate because it is unclear to what extent the over-order premiums that processors 

would be required to pay for Class I milk might be replacements for market-driven overorder premiums that would exist without the NDEA.

92GAO, Dairy Industry: Estimated Economic Impacts of Dairy Compacts, GAO-01-866

(Washington, D.C.: Sept. 14, 2001).
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produced only 3 percent of the nation’s milk. However, we estimated that 

the effect was somewhat greater in a scenario in which states producing 27 

percent of the nation’s milk supply were included in compacts.

To the extent that the NDEA would result in fluid milk processors paying 

more to buy their milk from farmers, the NDEA would also lead to 

increases in retail fluid milk prices. In our report on compacts, we reported 

that several studies concluded that the Northeast Interstate Dairy Compact 

resulted in higher retail prices for fluid milk in New England, with 

estimated impacts ranging from $0.03 to $0.20 per gallon. Higher retail 

prices could have a greater effect on retail sales in upcoming years than 

occurred in the past, as some dairy experts believe that the demand for 

fluid milk has become more responsive to price changes, given the 

increasing number of beverages that are considered substitutes for fluid 

milk, among other reasons. Consequently, retailers with whom we spoke 

generally opposed the NDEA. Furthermore, declines in fluid milk sales 

would cause more milk to be available for manufacturing purposes, which 

would further depress the prices for Class III and IV milk.

Several academicians told us that they believed the NDEA would also 

create regional distortions because price-setting in each dairy marketing 

area would be controlled by its board, and prices for raw milk used in fluid 

products would no longer be closely linked to prices for raw milk used in 

manufactured products. This would be a major change from the current 

system in which Class I prices are set based on differentials added to the 

“higher of” the advanced Class III or IV skim milk values, with the 

differentials still somewhat reflective of the costs of transporting milk from 

the Upper Midwest, a key dairy surplus region. Before the 1960s, Class I 

prices in different orders were not coordinated, and the resulting 

disorderly marketing system led to the coordinated system that we now 

have. Adopting the decentralized price-setting system of the NDEA risks 

losing the advantage of more orderly marketing that the coordination of the 

1960s brought to the dairy industry.

Concerns about whether the NDEA would make U.S. dairy policy less 

consistent with existing agreements under the WTO arise because of the 

effects of the NDEA on milk production and, hence, U.S. milk prices. As 

indicated previously, recent U.S. commitments under the General 

Agreement on Tariffs and Trade are leaning in the direction of more 

liberalized trade. To the extent that the NDEA provides a subsidy for U.S. 

milk production and reduces the prices of manufactured dairy products, 

the act would reduce the competitiveness of imported products.
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We identified one study that estimates the effects of the NDEA on milk 

production, farm prices, and government costs compared to a baseline 

scenario that did not include the NDEA.93 This study estimated that the 

NDEA would increase milk production compared to the baseline by an 

average of about 7.6 billion pounds per year during the period from 2006 

through 2013. The increased production would result in estimated declines 

in Class III and IV prices from the baseline such that average milk prices 

would be $1.17 per hundredweight below the baseline estimate. The 

estimated annual average increase in federal costs for payments to the 

boards was $1.7 billion.94

Change Trade Restrictions 

and Export Incentives

Recent concerns about the effects of imported dairy products, most 

notably milk protein concentrates, on U.S. dairy prices have highlighted the 

importance of U.S. trade policy—trade restrictions and subsidy 

programs—as a foundation for domestic dairy policies. Several policy 

options related to international trade in dairy products have been 

suggested. As noted previously, current international trade agreements and 

ongoing negotiations can have implications for certain policy options that 

have been suggested. These options include (1) increasing trade 

restrictions, specifically for imports of milk protein concentrates;95 (2) 

relaxing trade restrictions; (3) introducing domestic subsidies for products 

significantly affected by international trade competition, specifically 

establishing a subsidy program for domestic production of milk protein 

concentrates; and (4) changing the Dairy Export Incentive Program 

(DEIP), either by using it more effectively or by eliminating it. Those 

options that succeed in limiting imports or encouraging exports of 

manufactured dairy products could support higher farm income, 

production levels, and consumer prices. These options may also reduce 

93Scott Brown, “An Introductory Examination of the National Dairy Equity Act,” in Dairy 

Policy and Product Innovation, 11th Annual Workshop for Dairy Economists and Policy 

Analysts, April 15-16, 2004.

94These estimates were developed under a particular set of assumptions, including that all 

states would participate in the NDEA and that over-order prices were set relatively high. 

These estimates, as acknowledged in the study, are likely to cause the estimated effects of 

the NDEA to be larger than if, alternatively, it had been assumed that few states participated 

and the over-order prices were relatively low.

95Milk protein concentrate is a concentrated milk protein product that contains both of the 

major forms of protein found in milk: casein and whey. The protein content of this product 

can vary considerably from 42 to over 90 percent.
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federal costs if higher farm prices reduce costs to the price support 

program to a greater degree than the cost of these trade options. Figure 40 

shows the effects of options to change trade restrictions and export 

incentives over the short and long terms.

Figure 40: Potential Effects of Changing Trade Restrictions and Export Incentives on Various Policy Considerations

Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

Increase Trade 

Restrictions/Establish a TariffRate Quota for Milk Protein 

Concentrates

One international trade policy that has been proposed is to increase trade 

restrictions within the constraints of existing international trade 

agreements. More specifically, a bill entitled the Milk Import Tariff Equity 

?? ?

?

?

?

?

?

?

?

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

LP: Low price scenario

HP: High price scenario

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Increase trade restrictions

Relax trade restrictions

Subsidize domestic protein production

Use DEIP more effectively

Eliminate DEIP

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

LP

HP

Short term Long term
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Act96 has been introduced in the Congress that would impose tariff-rate 

quotas on dairy protein products such as milk protein concentrates and 

certain casein products. Import quotas prior to the WTO Uruguay Round 

Agreement on Agriculture did not cover milk protein concentrates and 

casein.97 Therefore, no tariff-rate quota was established for these products 

after the agreement was implemented. The May 2004 report by the 

International Trade Commission showed that U.S. imports of some dairy 

proteins increased significantly from 1998 through 2000 and then declined. 

Some of these protein imports displaced domestic dairy proteins, 

particularly those used in making processed cheese products not covered 

by the Food and Drug Administration’s standards of identity.98

The International Trade Commission report concluded that imports of milk 

protein concentrates to the United States have the effect of lowering U.S. 

farm prices either directly or indirectly, depending upon whether U.S. 

market prices for manufactured dairy products are above or at the level of 

the support price. If U.S. prices are above the support price, then imports of 

dairy proteins could directly lower the market prices of nonfat dry milk, 

butter, and cheese to the extent these proteins can be imported at lower 

prices than proteins available in the domestic market. In turn, lower 

product prices could reduce the prices received by U.S. farmers for their 

raw milk. If U.S. prices are at the support price, then imports of dairy 

proteins could indirectly affect U.S. market prices. Increasing imports of 

proteins when U.S. market prices for manufactured dairy products are at 

the support price will cause the CCC to purchase more nonfat dry milk as 

this alternative protein source is displaced in the market. Eventually, these 

increasing stocks could cause USDA to lower the purchase price of nonfat 

dry milk in an attempt to reduce federal costs. This adjustment 

96This proposed legislation was introduced in the 108th Congress as S. 560 and H.R. 1160.

97As a result of the agreement, the United States committed to convert quotas and fees that 

had been established pursuant to section 22 of the Agricultural Adjustment Act of 1933 into 

tariffs in the form of tariff-rate quotas. Further, the United States agreed not to use section 

22 in the future against imports from other WTO members. Virtually all section 22 quotas 

were converted to tariff-rate quotas in 1995.

98Standards of identity were introduced under the 1938 Federal Food, Drug, and Cosmetic 

Act and are enforced by the Food and Drug Administration. Standards of identity define 

food products by establishing what ingredients must or may be used in the food 

manufacturing process, as well as the quantity of such ingredients. In most cases, milk 

protein concentrate is not accepted for use in cheeses covered by the standards of identity.
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would then lower prices for manufactured dairy products, in turn 

decreasing the prices received by U.S. farmers for their raw milk.99

Because introducing tariff-rate quotas on milk protein concentrate and 

casein would likely reduce imports of these products, federal costs due to 

CCC purchases and storage of nonfat dry milk under the price support 

program would likely decrease. When U.S. market prices are above the 

purchase prices established by the price support program, a reduction in 

imports could maintain prices of some products, such as cheese, at higher 

levels due to reduced domestic supply of dairy proteins used in these 

products. Higher product prices could increase farm prices and thus 

stimulate additional production. These effects could be more significant in 

regions of the United States where raw milk is used to a greater extent in 

the manufacturing of Class III products. (If U.S. trading partners 

successfully challenge tariff-rate quotas on dairy proteins, compensation 

such as increased market access for other products could be required, 

reducing the benefits to U.S. dairy farmers.) Because production 

adjustments tend to lag behind price changes, this additional production 

could delay adjustments to lower market prices in the future. Therefore, to 

the extent that the exclusion of imports masks market price signals that 

would exist without the exclusion, this policy option would decrease 

economic efficiency. Additionally, to the extent that changes in the 

manufacturing prices of dairy products are passed on through the retail 

level, consumers could experience higher prices for some products (such 

as cheese) and lower prices for other products (such as butter).100

Relax Trade Restrictions A second option is to relax trade restrictions by reducing or eliminating 

tariffs on dairy products. Trade restrictions such as tariff-rate quotas 

support domestic programs such as the FMMO classified pricing system 

and the dairy price support program by limiting the available supply of 

dairy products to take advantage of higher U.S. market prices. Unilaterally 

99Despite its conclusion that imports of dairy proteins to the United States could lower 

manufactured product prices, the International Trade Commission was unable to conclude 

that these imports actually caused USDA to tilt commodity purchase prices in May 2001 and 

November 2002. The International Trade Commission found that between 1996 and 2002, 

CCC stocks of nonfat dry milk grew from zero to 1 billion pounds. However, of this amount, 

the commission estimated that only 25 to 35 percent of the stocks came from nonfat dry 

milk that had been displaced by imports of dairy proteins. Therefore, 66 percent of the 

increase in CCC stocks was due to factors other than imports.

100Butter prices could decrease as higher production levels, among other things, increase the 

supply of butterfat.
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relaxing U.S. trade restrictions would likely increase imports of 

manufactured products as foreign producers seek to take advantage of the 

higher prices available in the U.S. market. Despite higher transportation 

costs for imported products, some manufacturers might be able to import 

certain dairy products from U.S. trading partners at prices below U.S. 

market prices either because those partners provide export subsidies (as 

the European Union does) or because they have lower milk production 

costs (as Australia and New Zealand do). Relaxing trade restrictions such 

as tariff-rate quotas is unlikely to increase imports of fluid milk products 

because of health restrictions, transportation costs, and the perishable 

nature of these products.

Increased imports could put pressure on the CCC to purchase larger 

quantities of manufactured dairy products, thereby increasing federal 

costs.101 At some point these pressures could become unsustainable, 

leading to a reduction in the support price or the end of the price support 

program and to a decline in the price of milk used for manufacturing 

purposes. Moreover, because the price of milk used in fluid milk products 

is based on the price of milk used in manufactured products, a decline in 

the prices of manufactured products from increased imports could lower 

average farm prices. As long as MILC is authorized, these lower prices 

could trigger additional MILC payments to farmers, further increasing 

government costs.

In the short term, increased imports could cause U.S. prices to fall, 

resulting in a decline in farm income for U.S. dairy farmers. With reduced 

farm income, production would also decrease as less efficient farmers exit 

production. Over the long term, the decline in production could cause farm 

prices to rebound toward the levels that existed before trade restrictions 

were relaxed. Similarly, in the short term, lower farm prices are likely to 

lead to lower consumer prices for fluid milk and other dairy products, but 

as farm prices rise toward their previous levels due to production 

decreases, consumer prices for fluid milk and other dairy products would 

likely rise as well. Economic efficiency will increase with relaxed trade 

restrictions because such relaxation will allow market price signals to be 

more visible than with restrictions in place. These signals will lead to 

increased imports when it is cheaper to substitute increased imports for 

101The extent to which increased imports put pressure on the CCC to increase its purchases 

depends on the extent to which increased imports replace commercial sales of domestically 

produced dairy products.
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some domestic dairy production. Additionally, the economic efficiency of 

U.S. dairy production resource allocation could increase with relaxed trade 

restrictions as the reduction in domestic production is more likely to come 

from less efficient domestic farmers.

Subsidize Domestic Milk Protein 

Concentrate Production

Another proposed option is to support the development of domestic casein 

and milk protein concentrate production. Under the proposed U.S. Dairy 

Proteins Incentive Program, the CCC would make subsidy payments, on a 

bid basis, to entities that produce and market dairy proteins from skim 

milk.102 The proposed legislation would provide, among other things, that 

receipt of a payment is contingent upon the end use of the dairy proteins 

produced; that no applicant receives a payment if the contract submitted 

for review would undercut domestic prices for milk, nonfat dry milk, or 

dairy proteins; and that the sale of the dairy proteins represents a new use 

of domestically produced dairy proteins.

This program’s potential impact on domestic dairy protein production 

depends on the relative profitability of these proteins, which, in turn 

depends on production costs and demand. The International Trade 

Commission’s May 2004 study on milk protein products found that, given 

disincentives inherent in the price support program and constraints on U.S. 

demand for dairy proteins other than nonfat dry milk, the profitability of 

domestic protein production could be limited. For example, the study 

reported that the price support program creates a disincentive for U.S. 

processors to produce dairy proteins other than nonfat dry milk because by 

purchasing nonfat dry milk the price support program reduces the financial 

risk of manufacturing that product. Processors of other proteins would 

need to invest in production facilities and then market their product 

without the benefit of a standing government offer of support. The study 

found that only under the most favorable conditions (high skim milk 

protein yield103 and low variable costs) would it be beneficial for U.S. 

processors to begin producing milk protein concentrate instead of nonfat 

102A bill to create this program was introduced in the U.S. House of Representatives as H.R. 

4223 on April 27, 2004. The bill defines dairy proteins as whey, whey protein concentrate, 

casein, or milk protein concentrate.

103The protein content of raw milk can change with the age of the cow, seasonally, and with 

feeding and management practices.
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dry milk. Even then, positive returns were only for milk protein 

concentrates with protein concentrations above 70 or 80 percent.104

The classified pricing system could create an impediment to the 

development of a domestic protein industry depending upon how milk 

protein concentrate is classified. Based on analysis presented in the 

International Trade Commission’s report, classification under a highervalued class would require producers of milk protein concentrate to pay 

more for their raw milk supplies, thus reducing their profits.105 In addition, 

the report noted that since May 2002, the CCC has had a program to 

provide incentives to convert nonfat dry milk held in its stocks to casein. 

Under this program, the CCC accepts competitive bids for CCC-owned 

nonfat dry milk stocks for the manufacture of casein. However, while 

USDA has accepted some bids, in many cases processors’ bids have been 

so low that USDA has rejected them.

Finally, the International Trade Commission’s report found that while milk 

protein concentrate is considered a useful additive to standardize protein 

content, the limitation on its use inherent in the Food and Drug 

Administration’s standards of identity further restrict domestic milk 

protein concentrate production. This limitation keeps the market for milk 

protein concentrates relatively small in comparison to the market for other 

dairy proteins. Given these restrictions, the International Trade 

Commission estimated that the total U.S. market for milk protein 

concentrate is 40,000 to 50,000 metric tons per year. A new production 

facility in New Mexico reportedly is capable of producing 16,000 tons 

annually. Therefore, barring a large drop in imports or changes to the 

standards of identity, the demand for milk protein concentrate would have 

to increase substantially to induce additional domestic production.

To the extent that the proposed program can overcome these challenges, it 

could provide incentives for manufacturers to produce alternative dairy 

proteins domestically. Should these proteins replace some nonfat dry milk 

production, they could reduce federal costs for the price support program. 

104The International Trade Commission reached these conclusions by estimating the price, 

cost, and returns for U.S. producers who produce nonfat dry milk and sell it to the CCC. The 

Commission then compared the result with what producers in its survey had earned from 

producing and selling milk protein concentrate.

105However, USDA officials noted that this may be a moot issue because they believe milk 

protein concentrates will be classified as Class IV products.
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However, the overall impact on federal costs would depend on whether 

these reductions are offset by the cost of the subsidy program itself. 

Various dairy experts disagree as to whether subsidizing domestic dairy 

protein production would result in a net increase or decrease in federal 

costs. For example, a study that was published in May 2004 by researchers 

at Cornell University concluded that reduced costs to the price support 

program would not be great enough to offset the cost of the subsidy 

program.106 Conversely, an analysis by the National Milk Producers 

Federation found that a protein subsidy program providing assistance up to 

$2.30 per hundredweight of skim milk would result in a net cost savings for 

the federal government. The study by Cornell University researchers also 

estimated that a subsidy program for casein and milk protein concentrate 

would raise average milk prices by $0.40 per hundredweight, yielding an 

increase in farm income of $913 million. These increases would have 

greater impacts on farm income and milk production in areas of the 

country with higher Class IV utilization, such as the West.

Also, should these proteins replace some nonfat dry milk production, the 

resulting effects on the prices that consumers pay for products made with 

dairy proteins could be mixed. If dairy protein prices increase with reduced 

imports, consumer prices for those products for which they are an 

ingredient (such as cheese), could also increase to the extent that these 

price changes are passed through. However, additional production 

resulting from higher farm prices could lower consumer prices for butter. 

Over the long term, increased domestic production of casein and milk 

protein concentrate could lower their production costs and also the costs 

of other products for which they are ingredients. With the subsidy program 

in place, the economic efficiency of resource allocation would likely 

decrease as the government provides incentives for the production of 

proteins that could potentially be supplied more cheaply through imports.

Change the Dairy Export 

Incentive Program

Some dairy experts indicated that DEIP can help reduce government 

expenditures by allowing USDA to subsidize exports rather than purchase 

products and maintain high stock levels through the price support 

program. However, in some cases, academic experts indicated that under 

current market conditions the impact of DEIP on U.S. prices is limited. For 

106Phillip M. Bishop and Charles F. Nicholson, “Dairy Market Impacts of U.S. Milk Protein 

Imports and Trade Policy Alternatives,” Department of Applied Economics and 

Management, Cornell Program on Dairy Markets and Policy, R.B. 2004-08, Cornell 

University, Ithaca, N.Y. (May 2004).
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example, one source noted that with CCC purchases of nonfat dry milk at 

over 800 million pounds in 2002, and with over 1 billion pounds of CCC 

stocks on hand, DEIP currently has no impact on U.S. prices. Also, WTO 

commitments have limited the scope of DEIP. For example, in the Uruguay 

Round Agreement on Agriculture the United States committed to reducing 

the quantity of subsidized exports by 21 percent and the value of these 

exports by 36 percent over the period from 1995 to 2000. Therefore, a 

couple of alternative policy options have been discussed with regard to 

DEIP, using it more effectively or eliminating it entirely.

Use DEIP More Effectively

Some dairy experts suggested that the government could make greater use 

of DEIP.107 The American Farm Bureau study concluded that DEIP may be 

underutilized, noting that it is difficult to develop foreign markets unless a 

commitment is made to serving the market. Such a commitment is more 

difficult if a given product is made available only when it is in surplus. The 

study criticized USDA for (1) being slow to invite and accept bids and (2) 

concentrating on products in surplus. Other dairy experts indicated that 

invitations for DEIP bids may be announced too late in the year for 

potential exporters to participate in the program due to seasonal sales 

patterns. To improve the effectiveness of DEIP, the American Farm Bureau 

study recommended three potential changes:

• Exporters should be encouraged to submit bids for products and 

countries that offer the greatest potential for longer-term market 

development. USDA should use DEIP in conjunction with the Foreign 

Agricultural Service to coordinate export assistance programs to fully 

develop markets.

• USDA should consider DEIP bids for any eligible products and not base 

acceptance primarily on removing surplus products from the domestic 

market. Bids should be accepted for products that may have the greatest 

market development potential and do not violate WTO subsidization 

volume limits.

107As an alternative to government export subsidies, the National Milk Producers 

Federation’s Cooperatives Working Together program includes, among other things, an 

export subsidy element.
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• USDA needs to act under shorter time frames in reviewing and 

accepting DEIP bids to maximize the volume allowable under WTO 

rules.

USDA indicated that it has announced and awarded subsidies under the 

DEIP program up to the limits allowed by WTO rules for nonfat dry milk 

and cheese and that DEIP-assisted exports of butterfat have varied 

depending on market conditions. USDA also noted that the Foreign 

Agricultural Service has worked closely with the dairy industry to ensure 

that national and annual DEIP assistance optimizes longer-term market 

development prospects and minimizes any potential detrimental effects on 

the U.S. market. For example, a Foreign Agricultural Service official stated 

that the Service generally tries to wait until the market for a particular 

product, such as butterfat, is in surplus before inviting bids for DEIP export 

subsidies. The official said that if the market is not in surplus, subsidized 

exports would increase U.S. market prices for products manufactured with 

butterfat, such as ice cream. USDA further indicated that expanding the use 

of DEIP is not possible as the program is bound by quantitative and 

monetary caps under WTO rules. Finally, USDA noted that the bid review 

and acceptance process occurs within a time span equivalent to less than 

one working day. Specifically, another Foreign Agricultural Service official 

stated that USDA responds to all bid proposals by 10:00 a.m. on the next 

business day after the proposals are submitted.

To the extent that USDA could identify ways to make greater use of DEIP, 

the effects on the dairy industry of increased exports of U.S. dairy products 

could be similar to the effects of an increase in demand.108 In the short 

term, greater demand for dairy products would increase wholesale prices, 

raising farm prices and, to the extent that these changes are passed on to 

consumers, retail prices. While higher retail prices could cause marginal 

declines in domestic consumption, higher farm prices over the long term 

could stimulate additional production, which could put downward 

pressure on wholesale and retail prices. Under such a scenario, price 

volatility could decrease as the government balances swings in domestic 

manufactured product prices by adjusting its level of support for DEIP. 

However, economic efficiency would decrease to the extent that increased 

use of DEIP induces additional production that would not have occurred 

108As is the case with other export subsidy programs, the degree to which demand is 

increased under a program such as DEIP depends on the degree to which the exports under 

the program are additional to those that would have occurred in the absence of the program.
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without the government program. Finally, in relation to federal costs, while 

increased use of DEIP could increase federal costs for the program, these 

increases might be offset by decreases in the costs of purchasing and 

storing commodities under the price support program. Further, greater 

competition for milk supplies used in manufactured products could 

increase Class I prices, decreasing MILC payments while the MILC program 

remains in existence.

Eliminate DEIP

Eliminating DEIP could lower U.S. market prices and increase government 

costs, specifically for nonfat dry milk.109 For example, the May 2004 USDA 

study estimated that exports of nonfat dry milk under DEIP account for 

approximately 9 percent of total U.S. production. The study further found 

that in comparison to just eliminating the price support program, 

eliminating DEIP as well would reduce wholesale nonfat dry milk prices 

another 5 percent below baseline levels. Under this scenario, the study 

reported that for 2002 through 2007, farm income would decline by 

approximately $5.3 billion and payments required under the MILC program 

would increase by approximately $900 million. Therefore, while ending 

DEIP would eliminate the costs of the subsidies provided by the program, 

these cost savings could be offset by increased MILC expenditures. Also, 

should DEIP be eliminated without eliminating the price support program, 

there would be an increase in federal costs for purchases of commodities 

that would otherwise have been exported.

The American Farm Bureau study reported that in the short term 

eliminating DEIP would cause dairy products formerly exported under the 

program to be commercially exported. However, the study found that over 

the long term dairy product prices in the U.S. market would be too high 

relative to world prices to allow formerly subsidized products to move as 

commercially exported products. In the short term, a decline in the prices 

of some manufactured products formerly exported under DEIP, such as 

nonfat dry milk and cheese, would lower the blend prices farmers receive 

which, in turn, would cause a decline in milk production. This reduced 

production could cause butter prices to increase. However, the overall 

effect is a decrease in both average milk prices and milk supplies. With 

lower prices for some manufactured dairy products and higher prices for 

109The degree to which the U.S. market would be affected depends on the degree to which 

the exports under DEIP would be eliminated if the program were eliminated.
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others, consumer prices may rise or fall depending on the extent to which 

these price changes are passed on by retailers. In other respects, the 

elimination of DEIP could increase price volatility because USDA would 

lose an outlet to help balance surplus production. However, the supply 

adjustment could marginally increase economic efficiency as excess supply 

is wrung out of the market. Further, to the extent that DEIP is providing 

incentives for nonfat dry milk production rather than production of other 

dairy products, elimination of these incentives would also marginally 

increase economic efficiency.

Facilitate Risk Management 

for Dairy Farmers

The increased volatility in farm milk prices has increased dairy farmers’ 

interest in managing the risk that low prices will reduce farm incomes. Risk 

management alternatives to stabilize dairy farmers’ incomes can take many 

forms. These include, among others, increased use of forward contracting 

to guarantee prices, such as through USDA’s Dairy Forward Pricing Pilot 

Program;110 revenue insurance policies that pay farmers when dairy 

proceeds fall below specified levels; and tax-deferred savings incentives 

that encourage setting money aside during higher income years that could 

be withdrawn during lower income years. Figure 41 shows the effects of 

options to facilitate risk management under low- and high-price scenarios 

over the short and long terms.

110Trading in milk futures and options represents another alternative for farmers to reduce 

the risks associated with price volatility by locking in prices, or setting price floors, for 

future production. This alternative would remain available to farmers even if some dairy 

programs, such as the dairy price support program, were eliminated.
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Figure 41: Potential Effects of Options to Facilitate Risk Management on Various Policy Considerations

Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

Continue Dairy Forward Pricing 

Program

Forward contracting of milk—entering into a contract with a processor or 

cooperative to sell milk in the future at a guaranteed price—is one way for 

farmers to manage the risk that volatile prices create for their income. 

Although forward contracting may prevent farmers from benefiting from 

price increases, this risk management tool stabilizes their income and 

ensures that the price they receive does not fall below the contracted price. 

In this respect, forward contracting, like the MILC program, limits the 

decline in farm income from a fall in farm milk prices.

Most, but not all, dairy cooperatives offer their members the ability to enter 

into forward contracts to guarantee the prices members will receive for 

?

? ?

? ?

? ?

?

? ?

? ?

? ?

? ?

? ??

?

?

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Dairy forward pricing program

Revenue insurance

Tax-deferred savings

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

LP

HP

LP

HP

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

LP: Low price scenario

HP: High price scenario

Short term Long term
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their milk. One option that could allow dairy farmers to make more use of 

forward contracting to manage their price risk would be to extend and 

expand the Dairy Forward Pricing Pilot Program to cover Class I milk. The 

program was mandated by the Congress in 1999 and is scheduled to expire 

at the end of 2004.111 Under the pilot program, farmers are not allowed to 

enter into forward contracts for Class I milk. However, if the program were 

extended or made permanent, it could also be expanded to allow forward 

contracting on all classes of milk.

The forward contracting pilot program offers farmers who sell to 

proprietary processors an option to enter into fixed-price forward 

contracts by providing processors with an exemption from paying the 

otherwise required FMMO minimum prices. (Dairy cooperatives are 

already exempt from paying the FMMO minimum prices.)112 Normally, 

when either cooperatives or proprietary processors buy milk from farmers 

under forward contracts, they can offset their risk that farm prices might 

be lower at the end of the contract period (in which case they would pay 

more for milk than their competitors who buy later at the lower price) with 

a futures market transaction in which they would gain an amount 

equivalent to the decrease in the farm price of milk.113 However, when 

prices rise during the contract, the cooperatives or processors will lose 

money on the futures market transactions and cannot afford to pay farmers 

more than the contracted price. The pilot program encourages proprietary 

processors to enter into forward contracts with farmers by exempting 

these processors from having to pay farmers the relevant order minimum 

111Legislation has been introduced in the U.S. House of Representatives and the U.S. Senate 

to make permanent the authority for the Dairy Forward Pricing program, H.R. 3308 (2003) 

and S. 2565 (2004).

112As a practical matter, it could be difficult for cooperatives to continue paying their 

members less than the regulated minimum price for an extended period of time because 

farmers could choose to market their milk with a different cooperative. However, farmers’ 

ability to switch cooperatives could be limited by the extent to which individual 

cooperatives dominate milk marketing over a wide area.

113Most forward contracts for milk are for a base Class III price, which in multiple 

component pricing orders, is the sum of milk component values per hundredweight of milk 

at standardized test. Class III milk futures and options contracts are actively traded on the 

Chicago Mercantile Exchange. To offset their price risk from the forward contracts to buy 

milk, proprietary processors and cooperatives can take an equal but opposite position in the 

futures market by selling futures contracts for an equivalent amount of Class III or IV milk. 

Then, if the price of farm milk falls during the life of the contract, when the contract period 

ends, their gain in the futures market will equal their loss from buying milk under a fixedprice forward contract rather than buying after the price fell.
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price for the portion of their milk that is under forward contract. Without 

this program, proprietary firms might not readily enter into forward 

contracts because if they offset their risk of a price decline in the futures 

market and the prices were to rise above the contract price, they might 

have insufficient funds—including their futures market loss—to pay their 

forward-contracted farmers the minimum price.

Some cooperatives have opposed proposed legislation that would make 

permanent the authority for forward contracting by proprietary processors 

on the grounds that allowing those processors to pay farmers less than the 

minimum price could undermine the federal order pricing system. 

However, one academic analysis of options to address price volatility 

indicated that this exemption would not undermine the federal order 

pricing system because while proprietary processors could pay farmers 

less than the minimum price, these processors would still have to pay 

minimum class prices into their federal order pools.114 Another 

academician told us that even if allowing forward contracting on Class I 

milk caused farmers to receive lower minimum prices in return for reduced 

risk, neither that price reduction nor any other rationale would be a good 

reason for not making fluid milk eligible for forward contracting by those 

farmers who want to enter into such contracts.

In October 2002,115 USDA released a report that examined the performance 

of the pilot program from its inception, in September 2000, through March 

2002. The report found that the average monthly price received for milk 

sold under forward contracts authorized by the pilot program was lower 

than the average monthly price that would have been received for that 

same milk if it had not been under contract by about $0.50 per 

hundredweight, but that the variation in price for milk sold under forward 

contracts was much less. At times the contract price exceeded the price 

that would have been received without the contracts, and at times it was 

lower. More recent USDA data show that the contract price exceeded the 

price that would have been received without the contracts in each month 

114Bob Cropp, “Innovations To Address Price Risk Management and Price Volatility” in 

Dairy Policy and Product Innovation, 11th Annual Workshop for Dairy Economists and 

Policy Analysts, April 15-16, 2004.

115“A Study of the Dairy Forward Pricing Pilot Program and Its Effect on Prices Paid 

Producers for Milk,” prepared for the Senate Committee on Agriculture, Nutrition and 

Forestry and the House Committee on Agriculture by Dairy Programs, Agricultural 

Marketing Service, U.S. Department of Agriculture.
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from April 2002 through July 2003, but for the remainder of 2003 the 

contract price was lower. On average, for the entire period from April 2002 

through December 2003, the contract price was about $1.40 per 

hundredweight higher.

Participation in the program during the period covered by the USDA report 

was relatively small and was concentrated most heavily in the Upper 

Midwest Order, which has a low Class I utilization rate. More recent USDA 

data show that participation remained relatively low through the end of 

2003. Farmers in orders with high Class I utilization rates had less 

opportunity to participate because Class I milk was ineligible, so it is 

uncertain whether participation rates in those orders would have been 

higher if farmers were allowed to enter into forward contracts for Class I 

milk. One academic source also noted that even if the program were 

expanded to include Class I milk, fluid milk processors might be reluctant 

to engage in forward contracting for this milk because there is no good 

hedge in the futures market for Class I prices. In addition, the USDA study 

reported that participating farmers were generally more accustomed to 

using risk management tools than were nonparticipants. Farmer education 

on using forward contracting may be important to increase participation.

Provide Revenue Insurance Another option to help dairy farmers manage their price risk is revenue 

insurance. Revenue insurance allows farmers to protect themselves against 

loss of revenue from, for example, low market prices, high feed prices, or 

reduced production due to natural disasters. Revenue insurance can 

stabilize farm income, reducing the need for direct payments such as under 

the MILC program, during periods of low prices. Whether there would be a 

savings to the government would depend on whether the subsidies required 

to induce farmers to participate in the insurance program would offset the 

savings from reduced direct income support. Overall production could 

increase with this type of option because the revenue insurance would step 

in when prices are low representing in effect, a countercyclical payment. 

With this type of income support, downward supply adjustments during 

periods of low prices might not happen as quickly. Consumers would then 

benefit from prolonged periods of low prices to the extent that price 

changes are passed through the retail level.

USDA’s Risk Management Agency currently operates several pilot 

programs in selected states, using three different approaches to revenue 

insurance. Although none of these programs applies to dairy farming, they 

could, in theory, be extended to cover dairy farmers. Doing so could be 

difficult, however, because the complexity of the dairy industry and the 
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variation in management expertise among farmers would make it hard to 

estimate the probability of losses, a calculation that is necessary for pricing 

the insurance.

Institute Tax-Deferred Savings Tax-deferred savings accounts allow farmers to manage fluctuations in 

farm income by accumulating cash reserves during higher income years 

with deferral of some tax liability. Farmers could then withdraw from these 

accounts in lower income years and, in essence, receive tax benefits if they 

accumulated funds in these accounts. One study suggested that farmers 

might be more comfortable with this risk management tool than with 

forward contracting because these accounts resemble individual 

retirement accounts and other familiar tax-deferred savings vehicles.

Similar to revenue insurance, this option has the potential for reducing 

direct income support payments from the government, such as MILC 

payments, by stabilizing farm income during periods of low prices. 

However, whether these accounts worked as a risk management tool 

would depend on whether the authorization of these new accounts—with 

their tax benefits—led to substantial additional savings by farmers in 

higher income years, or whether the new accounts were simply funded 

with savings that would have been made anyway in other, not tax-favored, 

accounts. Also, like revenue insurance, withdrawals from tax-deferred 

savings would represent, in effect, countercyclical payments during 

periods of low prices. Thus withdrawals from tax-deferred savings 

accounts could maintain overall production by dampening supply 

adjustments during periods of low prices. Similarly, consumers would 

benefit from the prolonged periods of low prices to the extent that price 

changes are passed through the retail level.

Many issues would have to be resolved to start this type of account, such as 

the amount that farmers would be allowed to deposit in any year, whether 

the government would match any funds deposited, and whether there 

would be restrictions on farmers’ ability to withdraw funds from the 

accounts based on price drops or income losses. Canada and Australia both 

offer these accounts, and they were first proposed in the United States in 

1996. Since then, there have been several proposals to adopt them here, but 

none has been implemented.

Manage Raw Milk Supplies According to one dairy expert, given the long-term declining demand for 

fluid milk as well as the increasing productivity of dairy farmers, the best 

way to maintain farm income is through some form of effective supply 
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management. Following periods of excess supply in the 1980s, the U.S. 

government introduced supply management initiatives, such as the Dairy 

Termination Program.116 Other options, such as production quota systems, 

have been tried by different dairy-producing nations. Thus, a number of 

options have been discussed to try to manage dairy supplies, including 

reintroducing a program similar to the earlier Dairy Termination Program, 

or establishing mandatory supply controls through quota allocations, as 

has been done in other countries. Figure 42 shows the effects of options to 

manage raw milk supplies under low- and high-price scenarios over the 

short and long terms.

Figure 42: Potential Effects of Options to Manage Raw Milk Supplies on Various Policy Considerations

Note: The figure does not indicate the degree of increase or decrease for each policy consideration as 

it relates to a policy option. In addition, as discussed in this appendix, limitations affecting some policy 

options could affect the degree of an option’s potential impact on a policy consideration.

116Another initiative was the Milk Diversion Program. Both of these programs were in effect 

for only a short time.

? ?

?

 Increase

 Decrease

 Mixed impacts

 No/unclear impacts

Source: GAO analysis based on interviews with dairy experts and reviews of relevant studies.

Reintroduce Dairy Termination Program

Establish a production quota system

Production

Federal costs

Price volatility

Economic

efficiency

Farm income

Consumer prices

Production

Federal costsPrice volatility

Economic

efficiency

Farm income

Consumer prices

Short term Long term
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Reintroduce the Dairy 

Termination Program

One option that has been discussed to manage milk supplies is to 

reintroduce the Dairy Termination Program.117 This program was first tried 

as part of the Food Security Act of 1985. Under the Dairy Termination 

Program, farmers submitted competitive bids for the minimum raw milk 

price per hundredweight for which they would be willing to comply with 

the program requirements. If their bids were accepted, farmers were 

required to sell for slaughter or export their entire herds and not participate 

in dairying for the next 5 years. The program was in effect from April 1986 

through September 1987 and resulted in the removal of more than 1 million 

cows, or about 9 percent of the national dairy herd in 1985. In total, this 

culling of the national dairy herd was estimated to decrease milk supplies 

by about 39.4 billion pounds between 1986 and 1990 at a cost of more than 

$1.8 billion.118 California farmers accounted for the largest portion of this 

reduced production, but farmers in southeastern states had the highest 

rates of participation.

In a 1989 report looking at the effects of the Dairy Termination Program, 

we indicated that it was unlikely to have a lasting effect on milk 

production, given that some participants would likely return to production 

after the 5-year waiting period.119 In the short term, high market prices 

resulting from lower levels of production reduced federal purchases of 

surplus dairy products. In 1989, we estimated that these reduced purchases 

provided a net cost savings to the government of $2.4 billion for fiscal years 

1986 through 1990. However, over the long term, we predicted that 

increased production would bring the return of excess milk supply.

The effects of reintroducing this supply management alternative would 

depend on a variety of factors. In particular, the effects on federal costs and 

milk production would depend heavily on how much farmers needed to be 

paid to terminate their herds and agree not to produce for a specific period 

of time. Farmers’ decisions about whether to participate in a new Dairy 

Termination Program at a certain price would rest on the individual 

profitability of dairy farms, the long-term production outlook of the 

117The National Milk Producers Federation’s Cooperatives Working Together program, 

started in July 2003, is an industry-led supply management initiative. Among other things, it 

includes a herd retirement element similar to the Dairy Termination Program.

118Over one-third of this cost was funded by an industry assessment.

119GAO, Dairy Termination Program: An Estimate of Its Impact and Cost-Effectiveness, 

GAO/RCED-89-96 (Washington, D.C.: July 6, 1989).
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individual farmer, and the expectation of certain market conditions. For 

example, with today’s high market prices, farmers may be unlikely to agree 

to stop production except at payment levels that could make the program 

prohibitively expensive. During low-price periods, the program could 

potentially reduce supply to a level that reduces overall government costs 

for both the price support program and the MILC program, as long as the 

latter program remains in existence. In either case, the program would 

likely increase price volatility and consumer prices, although higher 

consumer prices for manufactured products could be mitigated by 

additional imports. Given the fact that farmers in southeastern states had 

the highest rate of participation in the Dairy Termination Program, a 

reintroduction of this program is likely to strengthen western shifts in 

production. As compared to western farmers, eastern farmers tend to have 

lower profitability and higher costs of production. Consequently, they are 

more likely to participate in this kind of program and less likely to return to 

production after the program, because their re-entry costs are higher. Thus, 

a new Dairy Termination Program could have disparate regional effects.

Establish a Production Quota 

System

A second option that has been discussed for supply management is to 

implement a quota system, as has been done in Canada and in the 

European Community.120 Under this option, production would be 

controlled by allocating production shares, or quota shares, limiting how 

much milk each dairy farmer could market. Such quota shares could be set 

based on a farmer’s historical marketing level. Any milk marketed over the 

allocated quota shares would be priced far below the cost of production. 

Quota shares could be traded and increased over time as additional 

supplies are needed.

A quota system would help manage supply by taking away incentives to 

increase production based on the benefits provided by government 

120California also has a quota system; however, it does not function as a supply management 

program. In California, milk receipts are pooled, and those farmers who own quota shares 

get $1.70 per hundredweight more than the California butter/nonfat dry milk/cheese price 

for the number of quota shares they own. The original allocation of quota shares was made 

in 1969 based on Class I sales, and because not many additional quota shares have been 

allocated, quota shares currently cover about 25 percent of California’s milk production. 

Most farmers have some quota shares, but some larger newer operations have come into the 

system without a quota. While the California quota shares are traded through brokers, 

people are not allowed to purchase them for investment purposes. Purchasers have to be 

farmers, and the quota shares come with minimum shipping requirements. One 

representative of a major California dairy cooperative said that the effect of the quota 

system is purely a way to distribute the proceeds of California’s classified pricing system.
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programs, such as MILC or the price support program. Moreover, 

compared to other supply management alternatives, a quota system has a 

greater likelihood of achieving long-term supply management, because 

production incentives would continue to be limited by the number of quota 

shares available in the system. With more effective supply management, 

federal costs for other programs such as MILC and the price support 

program would be reduced. Additionally, federal costs for administering a 

quota system are relatively low. In the short term, price volatility might 

increase, but as the market adjusts to a stabilized production level, longterm price volatility could be reduced.

Nonetheless, there are some drawbacks to implementing a quota system. 

As quota shares reduced production, consumer prices could increase. 

While demand for fluid milk products is relatively price inelastic, higher 

prices could reduce long-term consumption by providing incentives to 

purchase substitute goods. Also, the distribution of quotas would provide a 

substantial benefit to current farmers to the detriment of farmers who 

might try to enter the system in the future, entrenching geographical 

production patterns and stifling incentives for technological 

enhancements. Given the high production costs in some areas and the 

greater efficiency of larger, newer dairy operations, this would represent an 

economic inefficiency because milk would not be produced and marketed 

as cheaply as possible. However, this drawback could be limited to the 

extent that a well-functioning market is established to trade quota shares. If 

participation costs in this market were kept low, farmers would still realize 

incentives to adopt technology enhancements. The most efficient dairy 

farmers’ willingness to pay for additional quota shares would represent 

their cost advantage over less efficient farmers plus some assessment of 

risk. To the extent that this willingness to pay was greater than the profits 

realized by less efficient farmers, these less efficient farmers would have an 

incentive to sell their quota shares to more efficient farmers. Thus, in the 

long term, the quota system might not hamper increased economic 

efficiency if trade is relatively easy.
Page 237 GAO-05-50 Dairy Industry

Appendix VIII

Comments from the U.S. Department of 

Agriculture ApendxiVI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 238 GAO-05-50 Dairy Industry

See comment 5.

See comment 6.

See comment 7.

See comment 8.

See comment 9.

See comment 10.
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 239 GAO-05-50 Dairy Industry

See comment 11.

See comment 12.

See comment 13.

See comment 14.
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 240 GAO-05-50 Dairy Industry

See comment 15.

See comment 16.

See comment 17.

See comment 18.
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 241 GAO-05-50 Dairy Industry

See comment 19.
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 242 GAO-05-50 Dairy Industry

The following are GAO’s comments on the Department of Agriculture’s 

letter dated October 22, 2004.

GAO Comments 1. We revised the report to reflect that farm prices during 2002 and 2003 

were the lowest since 1979.

2. We revised the report to reflect that USDA has estimated that average 

2004 farm prices will be more than $3 per hundredweight higher than 

they were in 2003.

3. We agree that there are limitations on the use of commissary data as a 

proxy for proprietary wholesale data. However, as noted in USDA’s 

comments, there seems to be no viable alternative. We revised the 

report to further discuss the limitations of using these data.

4. During the course of our work, USDA declined to provide us with a 

draft of its study. Although USDA indicates that it submitted its study to 

the Congress on September 10, 2004, we were unable to obtain a copy 

until early October 2004, well after we had provided a draft of our 

report to USDA for review and comment. Because of this timing, we 

were unable to fully consider and analyze the results of USDA’s study 

and related documents. Furthermore, although USDA notes that it 

developed quantitative estimates of the effects on producers (dairy 

farmers) and consumers and the cost of various federal programs 

under various policy scenarios, the scope of USDA’s analysis was more 

limited than the range of policy options discussed in our report.

5. We agree that the potential effects of various policy options in appendix 

VII are examined independently and qualitatively within the existing 

program structure. Our discussion of dairy policy options are not policy 

recommendations. As stated in the report, to identify these policy 

options and their potential impacts we relied heavily on a synthesis of 

the views of leading dairy experts and the results of an extensive 

literature search, including our review of more than 50 studies and 

other publications. Time and resource constraints for completing our 

work precluded us from developing or contracting for the use of an 

economic model that would have provided quantitative estimates of 

these potential impacts. In addition, some of the policy options would 

have been difficult to model and quantify, such as the potential impacts 

of accelerating USDA’s hearing and rulemaking process for amending 

FMMOs. The report also notes that we compared the policy options 
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 243 GAO-05-50 Dairy Industry

identified against a baseline scenario of policies in place as of August 

2004. This baseline scenario existed at the start of our work and was 

needed to provide a consistent context for our analysis.

6. Regarding caveats, as noted in the report, we examined the impact of 

federal dairy program changes and policy options on six policy 

considerations: farm income, milk production, federal costs, price 

volatility, economic efficiency, and consumer prices. We acknowledge 

in the report that other stakeholders may have different views on the 

importance of these policy considerations or other considerations that 

we did not include in our analysis. The report also states that the 

potential effects of policy options on these considerations could vary 

depending upon economic conditions and other policy decisions. In 

this regard, we did not assess the options’ overall economic or 

budgetary impacts, or their consistency with U.S. international trade 

commitments or positions in ongoing negotiations. As indicated in the 

report, each option has varying potential impacts on the policy 

considerations used in our analysis. Despite these caveats, we believe 

this analysis is informative and helpful to congressional decision 

makers who must weigh competing interests in determining dairy 

policy.

7. We have made some technical corrections and clarifications in light of 

USDA’s comments, but we do not agree that we mischaracterized the 

operation of current programs or the effects that changes to current 

programs or the introduction of new programs would have on program 

outlays, producers (dairy farmers), and consumers. See also our 

responses in comments 8 through 19 below.

8. Although during the course of our work, USDA officials suggested that 

it was possible that dairy farmers might divide their holdings to make 

more of their milk eligible for compensation through the MILC 

program, we deleted this discussion from the report in light of USDA’s 

comment that it has no evidence that farmers have done this.

9. We correctly state in the report that farmers may choose the month that 

they begin accepting their payments. However, in response to USDA’s 

comment we revised the report to clarify that farmers’ discretion on 

when they receive MILC payments is limited by USDA’s regulations for 

implementing this program. Specifically, these regulations prohibit a 

farmer from selecting a month to receive payments if the month has 

already begun, if the month has already passed, or during which no 
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 244 GAO-05-50 Dairy Industry

milk was produced. A farmer also cannot change a previously selected 

start month after the 15th of the month before the month selected. Once 

monthly payments begin, a farmer has no discretion in determining in 

which month or months to receive payments.

10. The discussion of expanding the use of DEIP in the draft report did not 

suggest that WTO rules, including quantitative and monetary caps and 

product-specific restrictions, be violated. Rather, this discussion 

identified ways in which dairy experts suggested that DEIP might be 

used more effectively as a marketing tool. However, we have revised 

the language in the report to more fully reflect USDA’s views and to 

minimize confusion as to what we mean by increasing the use of DEIP 

as a marketing tool without exceeding WTO caps.

11. We revised the language in the report to clarify that USDA has not 

proposed or considered any proposal to eliminate the Dairy Price 

Support Program. However, USDA analyzed the potential effects of 

eliminating this program in the study it prepared in response to the 

2002 Farm Bill mandate.

12. We agree with USDA that ensuring an adequate level of milk production 

is not an objective of the FMMO program. We revised the report 

accordingly and added language suggested by USDA to better describe 

the FMMO program’s objectives.

13. We agree that price volatility contributes to disorderly market 

conditions, and we revised the report to better explain the potential 

causes of price volatility. We also agree that FMMOs cannot directly 

address price volatility in wholesale dairy markets. However, by setting 

minimum prices that must be paid to farmers for raw milk, the FMMOs 

can affect the extent to which price volatility is reflected in the prices 

that farmers receive.

14. We revised the report to reflect that cooperatives owning the capacity 

to produce multiple products may still have an incentive to shift milk to 

the higher-valued use, in order to provide greater returns to their 

members. We also expanded our discussion of other factors that might 

influence how milk is used, such as transportation costs and changes in 

processing technology.

15. We acknowledge that the report does not explain how a competitive 

pay price series could be created for use in the FMMO program. 
Appendix VIII

Comments from the U.S. Department of 

Agriculture

Page 245 GAO-05-50 Dairy Industry

However, this option was identified by stakeholders during the course 

of our work. Other options discussed in the report also may present 

challenging implementation issues and in many cases the report 

discusses those issues. Nonetheless, we revised the report to reflect 

that USDA and a panel of academicians attempted to devise a 

competitive pay price series but ultimately were unsuccessful. We also 

revised the report to note that a key difficulty in developing a 

competitive pay price series is the need for data that are not already 

influenced by the FMMO classified pricing system.

16. We acknowledge that the report does not explain how, after combining 

Class III and Class IV, milk would be priced in the expanded class. 

However, this option was identified by stakeholders during the course 

of our work. Other options discussed in the report also may present 

challenging implementation issues and in many cases the report 

discusses those issues. Nonetheless, we revised the report to reflect 

that a barrier to combining Class III and IV is identifying an appropriate 

pricing formula that considers the products in an expanded class.

17. We revised the report to reflect this clarification and added language 

suggested by USDA to better describe the FMMO program’s objectives.

18. We agree with USDA that any area’s supply of fluid milk can come from 

local or distant farmers. USDA noted that the Class I price surface, 

generated from different minimum Class I prices in different locations, 

reflects the cost of moving milk from surplus to deficit markets. 

However, as we pointed out in a 1988 report, when the price surface 

does not also account for regional differences in production costs, it 

can result in incentives for overproduction in certain regions. 

Furthermore, the Class I price surface that resulted from the 2000 

federal order reform differs from USDA’s recommended option.

19. The report accurately reflects the views of some stakeholders that the 

slowness of USDA’s hearing and rulemaking process used to modify 

FMMOs inhibits the agency’s ability to respond to changing market 

conditions or the marketing of new products. The report also discusses 

challenges USDA faces to improving this process while ensuring the 

promulgation of economically sound regulation. Further, the report 

notes that USDA has made efforts to improve the hearing process, 

particularly in the way it evaluates its contracts for hearing transcripts.
Page 246 GAO-05-50 Dairy Industry

Appendix IX

GAO Contacts and Staff Acknowledgments ApendxiIX

Contacts Lawrence J. Dyckman, (202) 512-3841

James R. Jones, Jr., (202) 512-9839

Acknowledgments In addition to the individuals named above, Jay Cherlow, Barbara El Osta, 

Joshua Habib, Eileen Harrity, Christopher Murray, and Cynthia Norris made 

key contributions to this report. Important contributions were also made 

by Beverly Ross, Jena Sinkfield, and Amy Webbink.
Page 247 GAO-05-50 Dairy Industry

Related GAO Products

Dairy Industry: Estimated Economic Impacts of Dairy Compacts. GAO01-866. Washington, D.C.: September 14, 2001.

Dairy Industry: Information on Milk Prices and Changing Market 

Structure. GAO-01-561. Washington, D.C.: June 15, 2001.

Fluid Milk: Farm and Retail Prices and the Factors That Influence Them. 

GAO-01-730T. Washington, D.C.: May 14, 2001.

Dairy Products: Imports, Domestic Production, and Regulation of Ultrafiltered Milk. GAO-01-326. Washington, D.C.: March 5, 2001.

Dairy Industry: Information on Prices for Fluid Milk and the Factors 

That Influence Them. GAO/RCED-99-4. Washington, D.C.: October 8, 1998.

Dairy Industry: Information on Marketing Channels and Prices for 

Fluid Milk. GAO/RCED-98-70. Washington, D.C.: March 16, 1998.

Dairy Programs: Effects of the Dairy Termination Program and Support 

Price Reductions. GAO/OCE-93-1. Washington, D.C.: June 15, 1993.

Federal Dairy Programs: Insights Into Their Past Provide Perspectives 

on Their Future. GAO/RCED-90-88. Washington, D.C.: February 28, 1990.

Milk Pricing: New Method for Setting Farm Milk Prices Needs to Be 

Developed. GAO/RCED-90-8. Washington, D.C.: November 3, 1989.

Dairy Termination Program: An Estimate of Its Impact and CostEffectiveness. GAO/RCED-89-96. Washington, D.C.: July 6, 1989.

Milk Marketing Orders: Options for Change. GAO/RCED-88-9. 

Washington, D.C.: March 21, 1988.

Overview of the Dairy Surplus Issue—Policy Options for Congressional 

Consideration. GAO/RCED-85-132. Washington, D.C.: September 18, 1985.

Effects and Administration of the 1984 Milk Diversion Program. 

GAO/RCED-85-126. Washington, D.C.: July 29, 1985.

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