Establishing a new record performance at the Olympic Games is wonderful, but setting new record high milk and dairy product prices is not.

Jerry Dryer, Market Analyst
Establishing a new record performance at the Olympic Games is wonderful, but setting new record high milk and dairy product prices is not.

The record-shattering wholesale and retail price surges this past spring drove milk and dairy product sales sharply lower. Some markets will recover. Other sales opportunities will be lost forever.

During the second quarter, milk prices spiked sharply higher. Farm milk prices were 15 to 20% above the previous high. Milk prices during the second quarter had doubled since the abnormally low prices of the first half of 2003.

Headlines ranted and raved about the huge increase in milk prices at the supermarket. Sticker shock meant plummeting milk sales in the grocery store. Starbuck's even blamed milk for an 11-cent increase in the price of a latte.

Federal order data indicated that fluid milk sales were 4.3% below a year ago during May and 3% lower during June. It wasn't just the headlines that did it. Too many families in this country are living on a budget that can't readily accommodate sudden food price increases.

The Yuppies sipping lattes are one market, and a nice market for milk, but they aren't buying two, three or four gallons of milk a week to nourish several offspring. Hopefully, these markets will recover; however, we all know too well: The beverage milk business has been flat at best and typically shrinking year after year.

Higher farm prices translate into higher retail prices very quickly on the beverage side of the business. It takes awhile for higher wholesales prices to get passed through for retail cheese and butter. But when sharply higher prices do hit the retail shelf, sales take a hit.

Because Easter and Passover occur anytime between late March and late April, it becomes a little tricky to access the sales impact. But it was there. Sales have been running 4, 5 and 6% ahead of year-earlier levels. In the wake of the retail price surge, cheese and butter sales were below year-earlier levels.

These products take a double whammy. Higher prices, in and of themselves, turn consumers away. Higher prices also mean fewer promotions. More than one-third of the cheese sold at retail is sold as part of some promotion - a sale, a coupon, a feature in the weekly advertising insert.

Higher product prices have an impact on sales far beyond the retail shelf. Foodservice operators are much less likely to promote items with a cheese component, i.e. the almighty cheese burger and pizza.

Higher cheese prices sent some processed cheese customers looking for a blend of cheese and alternative fats and proteins. If they were already using a blend, they looked at lower the percentage of cheese in their formulations. Ditto for pizza makers.

Retail consumers will return to the cheese case, but users of blends are probably lost customers forever.

I've only exposed the tip of the iceberg. Countless other changes in consumer and customer behavior have a lasting effect on dairy sales when prices spike like they did this spring.

Marketing milk and dairy products is not a Game. Many of our consumers and customers take no prisoners. We need to work hard to counter the negatives of sticker shock.