When it comes it dairy products and pricing, there are a few perspectives to look at that topic from.
There’s the farmer selling milk who isn’t really able to have a pricing strategy, Andy Novakovic, professor emeritus at Cornell University, said during a March 24 Hoard’s Dairyman webinar on dairy prices at the store compared to the farm.
Then there’s the processor who has to answer the question, “What can I make?” For example, a cheese processing company isn’t going to suddenly switch to chocolate milk because they wouldn’t have the equipment to do that, Novakovic said.
And then, Novakovic said, there’s the retailer, who’s faced with a different question: “What can I buy and sell profitably?”
But not only do retailers want to protect their profits, they also have a pricing strategy that is ultimately customer-focused, Novakovic said.
Retailers don’t want to present a “gotcha” surprise to their customers and are hesitant to change shelf prices because of that, Novakovic said. That leads retailers to practice price smoothing, where unless it’s unavoidable, prices for a specific commodity will be kept level for customers.
That means when farm milk price is high, the retailer’s margin is low, and when the farm milk price is low, their margin is high, Novakovic said. But the shelf price for customers tends to remain the same regardless.
But retailers can still create additional balance through promotions, even if the shelf price is rarely changed, said Mike Brown, dairy supply chain director for Kroger, which owns 2,800 stores and has some dairy manufacturing facilities of its own.
For example, because Kroger was able to line up butter suppliers and get butter cheaper, they’ve been able to run promotions lowering customer price of the butter by about a dollar, but the actual shelf price didn’t change, Brown said. But when cheese costs meant it wasn’t feasible for the company to run its regular 10 for $10 promotion on some of its cheese products, the company adapted the promotion to 4 for $6, still providing a better value for the customer but not at the same cost to the company.
But besides snagging deals during promotions, when it comes to buying cheese, customers often get more than they’re paying for anyway.
Because of weights and measures regulations, cheese processors must be sure that what they’re packing is at least the weight listed, say one pound, for the product, said Jeff Schwager, CEO of Sartori Cheese. Any package could be susceptible to auditing, so processors tend to consistently go above the required weight to assure compliance.
How much overweight a portion of cheese is likely to correlate with the type of processing, with it being easier to get shredded and grated cheeses closer to the exact number being sought, Schwager said.
But in general, due to erring on the high side when packaging cheese, about 5% of cheese in given away, a figure that roughly corresponds with what Sartori Cheese has seen, Schwager said.
When looking at the price spread between farm gate and retail then, that is a 5% cost right there, Schwager.
Having to account for waste from cuts and wraps, even if some of that cheese waste can be recovered can plays a role during the processing that occurs between farm and retail, too, Brown said. Shredded cheeses are again easier to deal with in that respect, producing little to no waste, while processing cheese slices can result in a 15% or more loss.
Ultimately, a lot of factors, including but not limited to processing, go into determining what the prices and price spread are for dairy products, Novakovic said. The channel of distribution, whether retail or wholesale, can have an effect, as can the nature of the product, such as if it’s a high-end product that affords some ability to negotiate prices but has other costs embedded in the product. Transportation costs and storage have roles in pricing, too.
Some of the factors are influenced by who’s buying, Novakovic said, but a lot of them are influenced by who’s buying. In the end, the factors come together to determine the price.