Last week I sat listening to a panel of experts at the Dairy Conference at SUNY Morrisville try to explain the intricacies of milk pricing. I say “try” because, despite my economics degree, much of it still sounded like Greek to my ears.
As every student learns in their high school econ class, one of the most basic principles of economics is that of supply and demand. Here, I’ll give you a little refresher using “widgets,” which is what one of my favorite college professors, Dr. Abdulahad, always as his example.
The premise is that the price of widgets is set by the interaction of buyers and sellers in the marketplace. As supply of widgets increases, the price in the marketplace decreases. If the supply decreases, creating scarcity, the price will increase. The opposite is true for demand shifts. With greater demand, the price will rise. If demand drops off for widgets, the price will fall. Seems logical enough, right?
While outside factors may cause fluctuations, over time markets tend to reach an equilibrium. If the price is higher, more producers will be willing to make widgets, while less consumers will buy at the higher price. The surplus will cause the price to drop, as sellers compete for buyers. And while the lower price will make widgets more attractive to buyers, producing them will be less attractive. You get the picture.
Or at least you would if I hadn’t put you to sleep with all that mumbo-jumbo.
In general, the principle is the same whether you are looking at a micro level (think of your own buying habits) or on a macro level. It’s true on the stock exchange and even in commodities markets.
But all that sound economic theory seems to get thrown out the window when you look at milk pricing. Dairy farmers are struggling to survive on milk checks half of what they were last year, while at the same time, the price of dairy products at the grocery store are higher than ever.
Hmmmm. I wish Dr. Abdulahad was around to explain that one to me.
According to John Bunting, who presented his whitepaper on the crisis in the dairy industry during the conference, one of the biggest problems is that the price of fluid milk is determined on the Chicago Mercantile Exchange, where it is tied to the price at which block cheddar cheese is traded. Bunting described it as an “oligopsony,” a term which even I had to look up.
Basically it boils down to the fact that the market where milk prices are determined is fatally flawed. There are so few buyers on the market, that any one can cause huge fluctuations based on their behavior. They control the price, and the sellers have to go along with it.
