Study examines types of fluid milk purchases in changing economies

Many studies have shown the elasticity of milk prices and consumer purchasing decisions: In general, when retail milk prices go up, consumption goes down.

A new report from USDA’s Economic Research Service (ERS) evaluates fluid milk purchasing decisions during the peak of the most recent recession, 2007-2009. The study found the relationship between retail prices and household incomes impacted the type of fluid products purchased, but had less impact on stifling overall volume.

This study, by USDA Economic Research Service (ERS) researchers Diansheng Dong and Hayden Stewart, examined household purchases of fluid milk products in response to declining personal incomes and higher retail price changes. It focused on types of fluid milk based on three levels of fat content, two package sizes, and organic vs. conventional milk.

According to the report, the median U.S. household made 3.6% less money in 2008 than it did in 2007, and 0.7% less in 2009 than 2008. During the same period, prices for fluid milk at retail food stores rose 11.6% in 2007 and 6% in 2008, before ultimately falling 13.2% in 2009. 

Previous research by Andreyeva et al. (2010) identified 26 studies that estimated the price elasticity of demand for milk. The average estimate was a 6% decline in consumption for each 10% increase in the retail price of milk, and vice versa, Dong and Stewart noted.

However, during 2007-2009, per capita consumption of fluid milk products was fairly stable, despite the rise of milk prices and declining incomes. According to USDA data, U.S. fluid milk consumption averaged 207 lbs. in 2007; 204 lbs. in 2008; and 206 lbs. in 2009.

Overall, when substantial price and income shocks occurred, households switched from more expensive to less expensive products. For instance, households saved money by choosing fluid milk products with a lower fat content, or by switching from organic to conventional milk.

Changes in retail prices affected a household’s choice among different milk products:

• A small (1%) increase in prices for all milk products had only a small effect on the division of sales among products with different levels of fat content and in different package sizes, as well as division of sales between milk produced using conventional and organic methods.

• A large ($1/gallon or approximately 25%) increase in retail milk prices is large enough to curb growth in sales of organic milk.

• A large increase in prices for all milk products also increases the probability – from 47% to 53.9% – of purchasing low-fat milk.

• Even large price shocks had little effect on households’ choice between package sizes. The probability of

purchasing milk in a container smaller than 1 gallon decreased from 42% to 40.2%.

Households with an increase in income, however, do not always buy more expensive products. A 10% increase in household income:

• raised the probability of purchasing organic milk from 3% to 3.7%;

• raised the probability of buying skim or 2% milk from 47% to 48.6%;

• lowered the probability of purchasing whole milk (at least 3.25% fat) from 17% to 15.9%;

• lowered the probability of choosing reduced-fat milk (between 2% and 3.25% fat) from 36% to 35.5%; and

• had only a small effect on households’ choice among products in different container sizes.


pdf.gif

pdf.gif

In general, the researchers said, demand for organic milk was more sensitive than demand for conventional milk to swings in income and food prices.

Fluid milk topic of MilkPEP webinar, IDFA conference 

The Milk Processor Education Program (MilkPEP) is hosting a processor webinar, April 24, to provide an overview of research results and insights into how the industry can increase milk consumption at breakfast. For registration information, contact Donna Armstrong, MilkPEP senior communications manager, at darmstrong@milkpep.org or phone 202.220.3518. 

In addition, the International Dairy Foods Association (IDFA) will address fluid milk sales and promotion at its Milk and Cultured Dairy Conference, May 22-23 in Indianapolis, Ind.

MilkPEP CEO Vivien Godfrey will provide updates on research and MilkPEP’s two newest campaigns: “Breakfast at Home” and “Refuel.” Both programs provide processors with insights that can help guide product development, inform marketing and drive sales. 

In a second session, Madlyn Daley, Sr., vice president for strategy, insight and planning with the Innovation Center for U.S. Dairy, will show processors how to leverage billions of dollars’ worth of opportunities to compete in this new and demanding marketplace. For more information, contact Maria Velasco, IDFA meetings assistant, at mvelasco@idfa.org