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The Flag of the World

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This here blog is a glimpse or two or three at the condition of the 'fortress of our family' through the eyes Timothy Goddard, a Christian writer with an unhealthy interest in politics living in the Puget Sound area.

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Thursday, August 26, 2004

 
Milkonomics
Buying milk last night got me thinking. Milk prices have been absurdly high recently--the USDA says that Seattle prices are around $4, but it would have been easy to pay $5 last night. This got me thinking about related foods, namely yogurt and cheese, and why their prices are behaving the way they are.

Yogurt prices have stayed the same, while cheese prices have edged up a bit, though not as much as milk.

Curious as to why these prices have behaved that way, I did some amature economic figuring. Milk is a staple--people will buy it no matter what, up to a point. So, its prices can rise substantially before it significantly affects demand. And they have. You would also expect it to increase the prices of milk-based products to a similar extent, which it has not. This is, however, explained with my "staple" theory.

Cheese is a staple, but less so. It can, and has, increased, but not to the extent that milk has--which, following my theory, makes sense. Yogurt isn't a staple at all. If yogurt prices rise, demand drops immediately: thus, yogurt stays the same, and yogurt producers have to figure out other ways to make money.

I'm curious about two things: first, do my theories mesh at all with traditional economic thought? And second, what'd up with soy milk? I looked at it last night, and it appeared to be pretty pricey. Has its prices risen with real milk--and if so, why?--or has it always been this expensive?

In the end, we ended up buying milk at a gas station for $2.50 (which would be illegal in Pennsylvania!). There's a bit of irony in the fact that that gas stations have the cheapest milk, isn't there?
Agree, disagree, have more information on the topic? Please, feel free to leave a comment. No profanity!
Comments:

Well, you intuitively hit on a fundamental concept of supply and demand: Elasticity. When you say that milk is a "staple" you are saying that it is relatively price-inelastic.

And you are correct, milk intuitively would be less elastic than yogurt, but I doubt this explains the price variation. Because of the strict competition in the dairy markets, elasticity will not effect prices, only the reaction of consumers to the price. Then, in turn, producers will react to the price in how much they produce.

It is more helpful, then to think of quantity produced and consumed as a function of price, not the other way around.

I suggest the following difference between yogurt/cheese/milk.

Milk does not store for very long, which means that changes in the milk market will immediately and dramtically affect the price. Cheese, however, not only keeps longer, but many cheeses have an aging process, this would naturally postpone the effect of milk price changes, and would act as a cushion on the price variation. Yogurt would be similar. Also remember that milk is but one input into these other products, thus a market shift of some kind which changes the price of milk might not effect the other products to the same degree.

Finally since the market we deal with is very large (effectively the whole world) there are many possibile circumstances in which the market for yogurt would experience a price decrease, while the market for milk saw an increase, at least in the short term. A long term study would probably show that their prices would vary more consistently.

And now this is too long, so I will stop. But first, I must add that Soy Milk has always been expensive.
 
Yes indeed, soy milk has always been expensive. I doubt, though, that the price has increased recently, although it seems to me that it might over the next year, given the extremely cool summer the upper midwest has experienced (ergo smaller soybean crops, etc).

One theory I heard postulated is that because of the recent popularity of high protein diets, farmers can make more money by slaughtering their cows than by milking them. I don't know that any studies have been done to that end, but it sounds plausible, given that dairy farmers have been losing money for decades on milk.
 
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