The Price of Milk
By I see that people are asking in the comments to Erik’s post about how the price of milk is set. You are in luck!
Kevin Drum has the answer for you!
Kevin has worked out the whole thing – Federal Milk Marketing Orders and all! It’s a trip. Here are the formulas:
The price of milk is constructed from surveys of the price of butter, nonfat dry milk, cheese, and dry whey. Why do they do it this way? I don’t know, and neither does Kevin.
The average farm price for milk this year has been about $22 per hundredweight. There are 11.6 gallons in a hundredweight, so that comes to $1.90 per gallon. The rest of the retail price comes from distribution, processing, packaging, markups, and the regional price differentials.
Now you might wonder: if the USDA price is based on surveys to determine component prices, why go through all this rigamarole? Why not just survey milk prices and be done with it? And if, in the end, they’re just setting prices based on what actual prices are, why bother with any of this?
That I don’t know. The whole thing started during the New Deal and it’s held on ever since with periodic refinements along the way (most recently in 2018). It probably has something to do with pooling and smoothing prices for farmers, but that’s just a guess. It all seems kind of wacky to me.
He does all the math, if you want to work through it.