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. 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. 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. 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. However, in some of the 12  markets, the spread between farm and retail milk prices increased  dramatically and then moderated. Factors That Influence the Price of Milk as It Moves from the Farm to the Consumer

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. Recent increases  in input costs such as labor and energy have been substantial. As a result of depressed farm milk prices during 2002 and 2003, federal  costs associated with MILC payments exceeded original estimates. 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. These options also tend to  be costly for the federal government during periods of low prices. Restricting de-pooling would have mixed effects on farm income. 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. If U.S. prices are at the support price, then imports of dairy  proteins could indirectly affect U.S. market prices. 7. 19. Milk Marketing Orders: Options for Change.
Why GAO Did This Study

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.

What GAO Found

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.